The Governmental Accounting Standards Board is proposing new guidance to provide a single method for government issuers to report conduit debt obligations and related obligations, with the goal of eliminating differences in practice.
Conduit debt obligations are debt instruments offered by a state or local government to provide financing for a specific third party that’s primarily liable for repaying the debt instrument. Third parties sometimes use this type of financing for projects such as nonprofit hospitals and universities, in addition to qualifying private businesses.
GASB’s review of the existing standards — Interpretation No. 2, "Disclosure of Conduit Debt Obligations" — found differences in practice among governments that issue conduit debt obligations, and those variations can negatively affects the comparability of financial statement information. The variations came from an option in the standards that permitted government issuers to recognize conduit debt obligations as their own debt or simply disclose the transactions, and diversity in how extra commitments associated with these transactions are reported by state and local governments.
In its new exposure draft, "Conduit Debt Obligations," GASB proposes addressing the differences in practice by:
- Clarifying exactly what a conduit debt obligation is;
- Eliminating the option for government issuers to recognize conduit debt obligations, thus dictating a single method of reporting;
- Clarifying accounting and financial reporting guidance for additional commitments extended by government issuers, and for arrangements — typically characterized in practice as leases — associated with conduit debt obligations; and,
- Improving note disclosures.
GASB is asking interested parties to read the proposal and offer comments by Nov. 2, 2018.
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