GASB Proposes Guidance on Extinguishing Debt

The Governmental Accounting Standards Board released on exposure draft proposing guidance on extinguishing debt prior to maturity.

The exposure draft, Certain Debt Extinguishment Issues, would apply to state and local government transactions in which only existing resources are placed in a trust for the purpose of extinguishing debt.

Current standards for the treatment of when the proceeds of refunding bonds are placed in trust for the repayment of a debt do not apply when only existing resources (that is, not the proceeds of the bond) are placed in trust. “Consequently, governments could account for what is essentially the same transaction in two ways,” GASB noted in a statement releasing the proposal.

The exposure draft proposes uniform accounting and financial guidance for both situations.

“Whether you borrow the money to extinguish the debt or use cash you already have, the treatment ought to be the same because the economic substance of the transaction is the same,” said GASB Chair David Vaudt in a statement. “From a government’s perspective, the source of the money that is being used to refund debt should not matter as long as the requirements for in-substance defeasance are met.”

Comments are due by Oct. 28, 2016.