Project Pages

Conduit Debt—Reexamination of Interpretation 2

Project Description: The objective of this project is to address certain issues related to accounting and financial reporting for conduit debt obligations. The project will consider improvements to the existing guidance in Interpretation No. 2, Disclosure of Conduit Debt Obligations, related to: (1) diversity in current reporting that adversely affects comparability between governments, (2) whether conduit debt obligations are liabilities as defined in the GASB’s conceptual framework and, therefore, should be reported in government-issuers’ financial statements, and (3) the usefulness of required notes to government-issuers’ financial statements decision-making and assessing accountability.

Status:
Added to Current Agenda: August 2017

Conduit Debt—Reexamination of Interpretation 2—Project Plan


Background: The GASB addressed conduit obligations in Interpretation 2, issued in 1995. Interpretation 2 describes conduit debt obligations as follows:
 
The term conduit debt obligations refers to certain limited-obligation revenue bonds, certificates of participation, or similar debt instruments issued by a state or local governmental entity for the express purpose of providing capital financing for a specific third party that is not a part of the issuer’s financial reporting entity. Although conduit debt obligations bear the name of the governmental issuer, the issuer has no obligation for such debt beyond the resources provided by a lease or loan with the third party on whose behalf they are issued. [Paragraph 2, footnote omitted.]
 
Conduit obligations generally are tax exempt, provided that they conform to relevant portions of the Internal Revenue Code. Thus, these financings are a way for not-for- profit organizations—for example, hospitals, nursing facilities, and educational institutions—to secure financings at tax-exempt rates. Third-party borrowers also may be other governments. This structure is popular when the issuer is considered to have financing expertise and economies of scale (for example, a state bond bank). Finally, some borrowers may be for-profit corporations. Many issuers receive a fee for arranging conduit financings and some are government agencies organized solely to issue conduit debt. A third-party borrower generally is identified in bond documents, such as offering statements and bond indentures. Based on the GASB’s pre-agenda research, users generally consider information about conduit debt obligations to be important.

Interpretation 2 requires that conduit debt obligations be disclosed in the notes to the financial statements of the government issuer, including: (1) a general description of the conduit debt transactions, (2) the aggregate amount of all conduit debt obligations outstanding at the balance sheet date, and (3) a clear indication that the issuer has no obligation for the debt beyond the resources provided by related leases or loans. For those conduit issuers that currently report their conduit debt obligations as liabilities on their balance sheets along with related assets, Interpretation 2 does not alter that reporting or the reporting of future conduit debt obligations that are substantially the same as those already reported.

Accounting and Financial Reporting Issues: Major issues that will be addressed by this project, presented in order of their relative significance, are as follows:
  1. What is the definition of a conduit debt obligation? In the event of a third-party borrower’s default, some government-issuers make commitments to cover debt service as a moral obligation or to make appropriations. How do those commitments affect the definition of a conduit debt obligation?
  2. Given the definition of a liability in Concepts Statement 4, when should a conduit debt obligation be reported as a liability by a government-issuer, if ever?
  3. Given the criteria for notes to financial statements in Concepts Statement 3 and the needs of users, what information should government-issuers disclose?
  4. Are commitments by third-party borrowers to cover debt service or lease payments assets of government-issuers?
  5. Some conduit debt obligations are structured as leases. How do such financings affect the definition of a conduit debt obligation and its reporting?
  6. Conduit debt obligations may be refunded. Should that occur, what effect should it have on reporting conduit debt obligations, if any?
Project History:
  • Pre-agenda research approved: December 2016
  • Research results reported to the Board: July 2017
  • Proposed for addition to current technical agenda: August 2017
  • Deliberations began: September 2017
Current Developments: At the September and October 2017 meetings, the Board considered a definition of a conduit debt obligation. At the December 2017 meeting, the Board studied potential guidance for the recognition and measurement of conduit debt obligations.

Work Plan:
 

Board Meetings

Topics to Be Considered

January 2018: Discuss leases and related asset and liability recognition; financings associated with housing finance agencies.
March 2018: Discuss remaining recognition issues.
April 2018: Discuss note disclosures; effective date and transition provisions.
May 2018: Review first draft of a standards section of an Exposure Draft.
July 2018: Review preballot draft of an Exposure Draft.
July 2018 T/C: Review ballot draft and consider an Exposure Draft for approval.
August–October 2018: Comment period.
November 2018–January 2019: Redeliberations.
March 2019: Review preballot draft of a final Statement.
April 2019: Review ballot draft and consider a final Statement for approval.
 

Conduit Debt—Reexamination of Interpretation 2—Recent Minutes


Minutes of Meetings, December 12 −14, 2017
 
The Board continued discussion of conduit debt obligations for the purpose of developing an Exposure Draft of a proposed Statement. The Board tentatively decided to propose that a conduit debt obligation not be recognized as a liability because it does not meet the definition of a liability. The Board then tentatively agreed that the alternatives for recognition of loss contingencies in a conduit debt obligation should be those found either in the contingencies literature in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, or in the nonexchange financial guarantee literature in Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. For all categories of a conduit debt obligation, the Board tentatively decided to propose that the recognition criteria for loss contingencies in conduit debt obligations be when a payment is more likely than not, as in Statement 70. Following that, for financial statements prepared using the economic resources measurement focus, the Board tentatively decided to propose that liabilities resulting from issuers’ commitments be measured consistent with the literature that is used for recognition—Statement 70.
 
Next, the Board considered liability recognition for financial statements prepared using the current financial resources measurement focus. The Board tentatively agreed that the guidance found in Statement 70 for such financial statements should be included in a proposed Statement, with conforming edits. Finally, the Board tentatively decided that the proposed Statement should provide qualitative factors and refer to historical data, similar to those in Statement 70, when evaluating whether a liability should be recognized for issuers’ commitments in a conduit debt obligation.
 
Minutes of Meetings, October 31 - November 2, 2017

The Board continued discussion of the definition of a conduit debt obligation for the purpose of developing a proposed Statement. The Board tentatively decided to propose that a third-party borrower and an issuer not be within the same financial reporting entity and that exclusion be included as another key characteristic of a conduit debt obligation. The Board then tentatively decided that the purpose of a conduit debt obligation should not be limited to capital financing. The Board also tentatively decided that the terms revenue bonds, limited obligation, and limited-obligation revenue bonds should not be included in the definition of a conduit debt obligation. The Board then tentatively decided that whether a government-issuer is the recipient of debt proceeds or the provider of debt service payments should not be a defining characteristic of a conduit debt obligation. The Board also discussed a proposed definition but agreed to continue its discussion of the definition at a future meeting.

Minutes of Meetings, September 27 and 28, 2017

In its initial deliberations of the project, the Board discussed the definition of a conduit debt obligation. The Board tentatively decided to propose that the key characteristic of a conduit debt obligation be that there are three participants: the government-issuer, the third-party borrower, and the bondholder. The Board then tentatively decided to propose that the definition of a conduit debt obligation be expanded to include all issuers’ commitments.
 

Conduit Debt—Reexamination of Interpretation 2—Tentative Board Decisions to Date


With respect to developing a definition of conduit debt obligations, the Board tentatively decided to propose the following provisions in an Exposure Draft:
  • The key characteristic of a conduit debt obligation should be that there are at least three participants: the government-issuer, the third-party borrower, and the bondholder.
  • The definition of a conduit debt obligation should include all issuers’ commitments.
  • A third-party borrower and an issuer should not be within the same financial reporting entity.
  • The purpose of conduit debt obligations should not be limited to capital financing.
  • The terms revenue bonds, limited obligation, and limited-obligation revenue bonds should not be included in the definition of a conduit debt obligation.
  • Whether a government-issuer is the recipient of debt proceeds or the provider of debt service payments should not be a defining characteristic of a conduit debt obligation.
  • Issuers should not recognize conduit debt obligations as liabilities.
  • The recognition criteria for loss contingencies in conduit debt obligations should be when a payment is more likely than not, as in Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees.
  • For financial statements prepared using the economic resources measurement focus, liabilities resulting from issuers’ commitments should be measured consistent with the literature that is used for recognition—Statement 70.
  • Liability recognition for financial statements prepared using the current financial resources measurement focus should be consistent with the guidance found in Statement 70, with conforming edits.
  • When evaluating whether a liability should be recognized for issuers’ commitments in a conduit debt obligation, provisions will include references to qualitative factors and to historical data similar to provisions established in Statement 70.