Governmental Accounting Standards Update: 7/9/19

The Governmental Accounting Standards Board (GASB) has issued Statement No. 91, Conduit Debt Obligations, to improve the existing standards by providing a single method for government issuers to report conduit debt obligations and related commitments and to eliminate diversity in practice associated with reporting conduit debt obligations.

Prior to Statement No. 91, government issuers followed the guidance of Interpretation No. 2, Disclosure of Conduit Debt Obligations. Interpretation No. 2 allowed variances in reporting, adversely affecting the comparability of financial statement information. The variation primarily arose from the option for government issuers either to recognize conduit debt obligations as their own liabilities or to only disclose the obligations in the footnotes.

Definition of a Conduit Debt Obligation

Statement No. 91 clarifies the definition of a conduit debt obligation as a debt instrument issued in the name of a state or local government that is for the benefit of a third party primarily liable for the repayment of the debt. These obligations include all of the following characteristics:

• There are at least three parties involved: 1) an issuer, 2) a third-party obligor, and 3) a debt holder or a debt trustee.
• The issuer and the third-party obligor are not within the same financial reporting entity.
• The debt obligation is not a parity bond of the issuer, nor is it cross-collateralized with other debt of the issuer.
• The third-party obligor or its agent, not the issuer, ultimately receives the proceeds from the debt issuance.
• The third-party obligor, not the issuer, is primarily obligated for the payment of all amounts associated with the debt obligation.

Recognition and Disclosure

The revised standards clearly state that a government issuer should not recognize conduit debt obligations as liabilities but should disclose information about its conduit debt obligations in the notes to the financial statements.

A government issuer should recognize a liability in the financial statements associated with an additional commitment or a voluntary commitment to support debt service if certain recognition criteria are met. Statement No. 91 requires government issuers to recognize a liability if qualitative factors indicate that it is more likely than not that it will support one or more debt service payments for a conduit debt obligation.

Statement No. 91 requires government issuers to disclose general information about their conduit debt obligations, which should be organized by type of commitment. The disclosure should include the aggregate outstanding principal amount of the issuers’ conduit debt obligations and a description of each type of commitment. A government issuer that recognizes a liability related to supporting the debt service of conduit debt obligations should also disclose information about the amount recognized and how the liability changed during the reporting period.

Arrangements Associated with Conduit Debt Obligations

Statement No. 91 also addresses arrangements – often characterized as leases – that are associated with conduit debt obligations. In such arrangements, capital assets are constructed or acquired with the proceeds of a conduit debt obligation and are used by third-party obligors in the course of their normal activities. Payments from third-party obligors are intended to cover and coincide with debt service payments. The issuer retains the titles to the capital assets. Those titles may or may not pass to the obligors at the end of the arrangements. Issuers should not report those arrangements as leases, nor should they recognize a liability for the related conduit debt obligations or a receivable for the payments related to those arrangements.

In addition, the following provisions apply:

• If the title passes to the third-party obligor at the end of the arrangement, an issuer should not recognize a capital asset.
• If the title does not pass to the third-party obligor and the third party has exclusive use of the entire capital asset during the arrangement, the issuer should not recognize a capital asset until the arrangement ends.
• If the title does not pass to the third-party obligor and the third party has exclusive use of only portions of the capital asset during the arrangement, the issuer, at the inception of the arrangement, should recognize the entire capital asset and a deferred inflow of resources. The deferred inflow of resources should be reduced, and an inflow recognized, in a systematic and rational manner over the term of the arrangement.

Effective Date and Transition

Statement No. 91 is effective for reporting periods beginning after Dec. 15, 2020. Early adoption is encouraged. Statement No. 91 should be applied retrospectively by restating prior period financial statements, if practical, for all periods presented. If prior periods are not restated, then the cumulative effect of applying Statement No. 91 should be reported as a restatement of beginning net assets for the earliest period restated. In addition, the reason for not restating the prior periods should be disclosed in the notes to the financial statements.