NEWS RELEASE 06/25/12
GASB Proposal Addresses Financial Guarantees for State and Local GovernmentsNorwalk, CT, June 25, 2012—The Governmental Accounting Standards Board (GASB) today issued for public comment a proposed Statement that provides guidance to state and local governments that offer nonexchange financial guarantees and for governments that receive guarantees on their obligations. The GASB is seeking public comment on its proposals, which are contained in its Exposure Draft, Accounting and Financial Reporting for Nonexchange Financial Guarantee Transactions.
A nonexchange financial guarantee is a credit enhancement or assurance offered by a guarantor (the government or organization that offers the guarantee) that is provided without receiving consideration of equal value. The guarantor agrees to repay an obligation holder in the event that the debt issuer is not able to fulfill the contractual obligation to make timely payments to the obligation holder. Financial guarantees represent potential claims on a government’s resources when it is the guarantor, and a potential reduction of a government’s obligations when it is the debt issuer.
The proposed Statement requires a state and local government guarantor that offers a nonexchange financial guarantee to another organization or government to recognize a liability on its financial statements when it is “more likely than not” that the guarantor will actually make a payment to the obligation holders under the agreement. Additionally, the proposed Statement would require:
- A government guarantor to consider qualitative factors when determining if a payment on its guarantee is more likely than not to be paid. Such factors may include whether the issuer of the guaranteed obligation is experiencing significant financial difficulty or initiating the process of entering into bankruptcy or financial reorganization.
- An issuer government that is required to repay a guarantor to continue to report a liability unless legally released. When a government is released, the government would recognize revenue as a result of being relieved of the obligation.
- A government guarantor or issuer to disclose information about the amounts and nature of nonexchange financial guarantees.
The amendments in this proposal would be effective for periods beginning after June 15, 2013. Early application of the standards would be encouraged. Disclosures related to cumulative amounts paid or received in relation to a financial guarantee could be applied prospectively and other provisions would be required to be applied retroactively.
The Exposure Draft is open for comment until September 28, 2012, and is available for review at www.gasb.org.
Comments should be addressed to the Director of Research and Technical Activities, Project No. 19-18 and emailed to firstname.lastname@example.org or mailed to the following address:
Governmental Accounting Standards Board
401 Merritt 7
PO Box 5116
Norwalk, CT 06856
About the Governmental Accounting Standards Board
The GASB is the independent, not-for-profit organization formed in 1984 that establishes and improves financial accounting and reporting standards for state and local governments. Its seven members are drawn from the Board’s diverse constituency, including preparers and auditors of government financial statements, users of those statements, and members of the academic community. More information about the GASB can be found at its website, www.gasb.org.