The Governmental Accounting Standards Board (GASB) has issued GASB 86 Certain Debt Extinguishment Issues (Statement). The objective of the Statement is to improve consistency in accounting and financial reporting for in-substance defeasance of debt. This Statement provides guidance for transactions in which cash and other monetary assets acquired with only existing resources (resources other than the proceeds of refunding debt) are placed in an irrevocable trust for the sole purpose of extinguishing debt. This Statement also improves accounting and financial reporting for prepaid insurance on debt that is extinguished and the notes to the financial statements for defeased in substance debt.
When is GASB 86 Effective?
The requirements of this Statement are effective for reporting periods beginning after June 15, 2017.
How Will This Impact Your Financial Statements?
The Statement reaffirms the same requirements to defease debt in-substance through an advance refunding debt issuance.
● For the in-substance defeasance of debt using only existing resources, the debtor irrevocably places cash or other monetary assets acquired in a trust to be used solely for satisfying scheduled payments of both principal and interest. The possibility that the government will be required to make future payments is remote in this circumstance. The presentation on both the fund and government-wide statements is that same as that of an advance refunding. Payments to an escrow agent are to be displayed on the fund statements and the removal of liability of the old debt and the calculation for the gain/loss on the refunding are to be shown on the government-wide statements. Governments should also provide a general description of the transaction in the notes to the financial statements in the period of the defeasance. In all periods, the amount of debt remaining outstanding at period-end should also be disclosed.
● For governments with prepaid insurance related to extinguishing debt, they will be required to show any remaining prepaid insurance related to the extinguished debt in the net carrying amount of that debt for the purpose of calculating the gain/loss on the in-substance debt defeasance.
●An additional disclosure is now required for all in-substance defeasance transactions regardless of the source of the assets placed into the irrevocable trust.
One of the criteria for determining an in-substance defeasance is that the trust holds only monetary assets that are essentially risk-free. Examples of essentially risk-free monetary assets are Direct Obligations and Obligations Guaranteed by the U.S. Government. If the substitution of essentially risk free monetary assets with monetary assets that are not essentially risk-free is allowed, governments should disclose this in the period in which the debt is defeased in substance. In subsequent periods, governments should disclose the amount of debt defeased in substance that remains outstanding for which that risk of substitution exists.