GASB Issues New Guidance with Regards to Accounting for Debt Extinguishment

Monday, May 22, 2017 Print Email

The Governmental Accounting Standards Board (GASB) recently issued a new standard which provides guidance with regards to accounting for extinguishment of debt prior to its maturity.

The new standard issued by GASB provides guidance with regards to dealing with transactions in which cash and other monetary assets acquired only with existing resources (resources other than the proceeds of refunding debt) are placed in an irrevocable trust only for the purpose of extinguishing debt.

The already existing GASB standards provides guidance with regards to accounting for transactions where cash and other monetary asset acquired only with existing resources (resources including the proceeds of refunding bonds) are placed in an irrevocable trust with regards to the future repayment of debt that is still outstanding.

The recently released guidance by the GASB basically addresses the circumstances where only the existing resources (and no proceeds from issuance of bonds) are used to buy cash and other monetary assets and these are placed in a trust in relation to the repayment of debt in the future.

When a government’s debt is defeased in substance then in such a scenario the cash, other monetary assets and debt placed in a trust should not be reported in the government’s financial statements but still the government is required to disclose information regarding the debt that has been defeased in substance in its annual reports.

According to GASB, governments that defease debt using only existing resources are required to provide general information with regards to the transaction in the notes to the financial statements for the period in which the defeasance has taken place. In the periods after the period in which an in-substance defeasance of debt using existing resources has taken place, the amount of outstanding debt at each period end should also be disclosed in the government’s financial statements.     

The new standard also provides guidance with regards to prepaid insurance on debt that is already extinguished and notes to the financial statements in case of debt that has been defeased.

The requirements of the new standard go into effect for reporting periods beginning after 15 June 2017 but GASB has encouraged governments with regards to the earlier application of the standard.
Source: ReadyRatios

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