Project Pages

Certain Debt Extinguishments Using Existing Resources

Project Description: This project addresses certain issues identified during the pre-agenda research that evaluated the effectiveness of Statements No. 7, Advance Refundings Resulting in Defeasance of Debt, and No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, and relevant sections of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. The project will consider improvements to the existing guidance related to debt extinguishments using existing resources. Debt extinguishments connected with troubled debt restructurings and bankruptcy, which are addressed in other pronouncements, are not included.

Added to Research Agenda: May 2014
Added to Current Agenda: September 2015

Certain Debt Extinguishments Using Existing Resources—PROJECT PLAN

Background: Statement 62 provides guidance for each of the following circumstances:

  1. Debt is extinguished using exclusively a government’s existing resources (resources that did not arise from debt proceeds)
  2. The debtor is legally released from being the primary obligor under the debt.
Statements 7 and 23 provide guidance for debt refundings. In a debt refunding, new debt is issued and the proceeds are used to repay old debt. Debt refundings are divided into two broad categories:
  • Current refundings—proceeds of new debt immediately repay old debt
  • Advance refundings—proceeds of new debt are placed into an irrevocable trust with an escrow agent and invested until they are used to pay the government’s old debt at a future time; the amount of new debt proceeds invested in escrow must be sufficient to meet the interest and principal payments on old debt.
Advance refundings generally result in the in-substance defeasance of debt, in which debt is considered defeased for accounting and financial reporting purposes even though a legal defeasance has not occurred. Defeased debt—both legal and in-substance—is no longer reported as a liability on the face of the financial statements.

The research staff’s review of state and local government financial reports prepared following generally accepted accounting principles (GAAP) found that a large majority of the governments examined had participated in a refunding transaction in either the reporting year or in prior years. Almost half of the governments examined had a refunding in the reporting year. Advance refundings were about twice as prevalent as current refundings in the periods studied.

Issues identified by preparers, auditors, and users in interviews were explored in subsequent surveys. The majority of respondents to those surveys did not identify significant issues with the existing guidance for debt extinguishments and debt refundings. Most respondents answered that the guidance generally enabled information to be reported reliably and achieves the objective of reporting the economic substance of the transaction.

A variety of users benefit from information related to debt extinguishments, including debt refundings. Information about debt generally is used by a variety of financial statement users to assess the economic condition and accountability of a government. Respondents to the user survey indicated that they rely on information about debt extinguishments, including debt refundings, presented in the financial statements under existing guidance.

Nearly all users surveyed indicated that they had at least some familiarity with information about debt extinguishments. User survey respondents of all types found the information reported in the financial statements useful. They did not raise major concerns about the information they currently receive. The majority of the respondents believe that the information presented in the financial statements is understandable and results in reporting the economic substance of refundings.
When presented with a list of potential additional disclosures, the majority of respondents indicated that those disclosures would be useful for analysis or decision making. The potential disclosures presented in the survey included:
  • Amount of debt that was legally defeased during the year
  • Debt covenants that remain in effect after debt has been defeased in-substance
  • Types of resources held in trust by the escrow agent.
User respondents of all types were split about whether debt that had been advance refunded using only existing resources should be derecognized or continue to be reported in the financial statements.

Accounting and Financial Reporting Issues: The major issues to be addressed by this project are as follows:
  1. Current guidance does not allow for defeasance when a government places only existing resources with an escrow agent for the purpose of an early extinguishment of debt. Should the old debt be derecognized as in a refunding? Should the difference between the net carrying value of the old debt and the reacquisition price be deferred?
  2. Current guidance allows governments to defer in entirety the difference between the net carrying value of the old debt and its reacquisition price, irrespective of what portion of the refunding was completed with the government’s existing resources. Should the government continue to be allowed to use this form of accounting for the proportion refunded with existing resources?
  3. Should additional information be disclosed when debt is extinguished?
Project History:
  • Pre-agenda research approved: April 2014
  • Research results reported to the Board: July 2015
  • Added to current technical agenda: September 2015
Current Developments: The Board will begin deliberations in January 2016.

Work Plan:

Board Meetings

Topics to be considered

January 2016: Discussion of existing recognition guidance for refunding transactions.
February 2016: Assessment of whether the use of existing resources meets the definition of a debt refunding.
March 2016: Deferral accounting—impact of using existing resources.
May 2016: Continuation of recognition and measurement issues; disclosures related to existing resources and the impact on calculation of economic gain/loss.
June 2016: Review of draft standards section of an Exposure Draft.
August 2016: Review preballot draft of an Exposure Draft.
August 2016 (T/C): Review ballot draft and issue Exposure Draft.
September–November 2016: Comment period.
December 2016–March 2017: Redeliberations.
April 2017: Review preballot draft of a final Statement.
May 2017 (T/C): Review ballot draft and issue final Statement.