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.

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

Certain Debt Extinguishments—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.

Additionally, at the January 2016 Board meeting, the treatment of prepaid bond insurance related to debt that has been defeased in substance was added to the scope of the project.

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?
  4. How should prepaid insurance be treated when the related debt is defeased in-substance?
Project History:
  • Pre-agenda research approved: April 2014
  • Research results reported to the Board: July 2015
  • Added to current technical agenda: September 2015
  • Deliberations began: January 2016
  • Board to vote on issuing an Exposure Draft: August 2016
Current Developments: In May, the Board discussed disclosure requirements related to extinguished debt, including debt that is defeased in substance, and transition guidance for the proposed Statement. At its June meeting, the Board discussed cost-benefit considerations and a draft of the standards section of a proposed Statement. In August, the Board reviewed preballot and ballot drafts of a proposed Statement.

Work Plan:

Board Meetings

Topics to be considered

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 consider a issue final Statement for approval.

Certain Debt Extinguishments—Recent Minutes


Minutes of Teleconference, August 22, 2016


The Board reviewed a ballot draft of an Exposure Draft of a proposed Statement, Certain Debt Extinguishment Issues, and provided clarifying edits on the draft document. The Board then voted unanimously to approve the issuance of the Exposure Draft.

Minutes of Meetings, August 10-12, 2016

The Board reviewed a preballot draft of the proposed Exposure Draft and provided clarifying edits on the draft document. The Board then agreed to move forward with a ballot draft of a proposed Statement, Certain Debt Extinguishment Issues.

Minutes of Meetings, June 22-23, 2016

The Board discussed the characteristics of the financial information that would be provided as a result of the proposed standard. The Board tentatively agreed that the accounting and financial reporting requirements to be proposed in the Exposure Draft would produce financial information that meets the needs of users, results from economic or financial events affecting the assessment of the governmental reporting entity, is relevant to reporting objectives, and falls within an appropriate information category in general purpose external financial reports.

The Board then discussed whether the expected benefits of information to users and other stakeholders from the Exposure Draft exceed the anticipated costs to preparers and other stakeholders. The Board tentatively agreed that the expected benefits associated with the requirements to be proposed in the Exposure Draft outweigh the perceived implementation and ongoing costs.

The Board reviewed a draft Standards section of a proposed Exposure Draft. The Board discussed clarifying edits on the proposed guidance.

Minutes of Meetings, May 10-11, 2016


The Board began deliberations of the Certain Debt Extinguishments project by discussing notes to financial statements. The Board tentatively decided to propose that when debt is defeased in substance using existing resources in conjunction with refunding bond proceeds, the current disclosures for refunding transactions as described in paragraphs 11–14 of Statement No. 7, Advance Refundings Resulting in Defeasance of Debt, be required.

The Board tentatively decided to propose that when debt is defeased in substance using only existing resources, a general description of the transaction be disclosed in the period the debt is defeased in substance and the amount of defeased debt that remains outstanding be disclosed in subsequent periods. The Board also tentatively agreed that the proposed guidance should provide the following examples of what may be included in the general disclosure requirement for debt that is defeased in substance using only existing resources: (a) amount of old debt, (b) amount of existing resources placed with the escrow agent, (c) management’s explanation of the reasons for the defeasance, and (d) cash requirements to service the old debt. The Board tentatively decided to propose that when debt is defeased in substance using only existing resources, the disclosure of the amount of debt defeased in substance using only existing resources that remains outstanding could be combined with the amount of debt that is defeased in substance using refunding bond proceeds.

When debt is defeased in substance, either through a refunding transaction or through the use of only existing resources, the Board tentatively decided to propose that governments disclose in the year of the defeasance whether the investments held by the trust can be substituted for non-risk-free assets. And, if applicable, the aggregate amount of the related defeased debt covered by investments that can be substituted for non-risk-free assets should be disclosed in periods in which debt defeased in substance remains outstanding.

The Board then discussed the transition and the effective date of the proposed guidance and the comment period for the Exposure Draft. The Board tentatively decided that the proposed transition provisions should allow early application. The Board tentatively agreed that the Exposure Draft should propose retroactive application of all provisions. The Board tentatively agreed to propose that the effective date be for periods beginning after June 15, 2017. The Board tentatively agreed to provide a 90-day comment period for the Exposure Draft.

Minutes of Meetings, March 29-31, 2016

The Board discussed how a government should account for the difference between the reacquisition price and the net carrying amount of the old debt that is refunded using existing resources in conjunction with refunding bond proceeds. The Board tentatively decided that the portion of the difference between the reacquisition price and the net carrying amount of the old debt attributable to existing resources should continue to be deferred as a whole as provided in current guidance.

The Board then discussed how a government should account for the difference between the reacquisition price and the net carrying amount of the old debt when only existing resources are placed in escrow for the repayment of debt when certain criteria are met. The Board tentatively decided that the difference between the reacquisition price and the net carrying amount of the old debt when only existing resources are used to defease debt should be recognized immediately in the period the transaction takes place.

The Board discussed how the immediate recognition of the difference should be presented. The Board tentatively decided that the recognition of the difference should be presented as a separate gain or loss in the flows statements.

The Board also discussed how a government should account for prepaid bond insurance on a debt issuance when the related debt is defeased in substance using only existing resources. The Board tentatively decided that the remaining prepaid insurance should be included in the calculation of the net carrying amount of the old debt, and therefore, recognized immediately when the difference between the reacquisition price and the net carrying amount of the old debt is recognized.

Minutes of Meetings, February 16-18, 2016

The Board discussed whether the placement of only existing resources in an irrevocable trust for the purpose of extinguishing debt qualifies as an in-substance defeasance. The Board tentatively decided that in-substance defeasance treatment should be applied when only existing resources are placed with an escrow in a trust for the purpose of extinguishing debt in accordance with paragraph 4 of Statement No. 7, Advance Refundings Resulting in Defeasance of Debt.

The Board discussed the treatment of prepaid bond insurance when the related debt is refunded. The Board tentatively decided that the prepaid insurance should be included in the net carrying amount of the old debt for the purpose of calculating the difference between the reacquisition price and the net carrying amount of the old debt under Statement No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, as amended.

Minutes of Meetings, January 5-6, 2016

The Board discussed the scope of the project and tentatively decided that it should include consideration of (a) whether the use of solely existing resources placed into an irrevocable trust to retire a bond warrants defeasance accounting as provided in Statement No. 7, Advance Refundings Resulting in Defeasance of Debt, (b) the deferral treatment of the difference between the reacquisition price and the net carrying amount of the debt when existing resources are used in conjunction with refunding bond proceeds and when only existing resources are placed into an irrevocable trust to retire bonds, (c) disclosure requirements related to items (a) and (b), and (d) the treatment of prepaid insurance related to a refunded bond.

Certain Debt Extinguishments—Tentative Board Decisions to Date


The Exposure Draft, Certain Debt Extinguishment Issues, was approved in August 2016.