New Accounting Rules Issued for Certain Debt Extinguishment

The GASB (Governmental Accounting Standards Board) has issued a new standard Monday for state and local government to apply when accounting for extinguishment of debt prior to its maturity.

In Statement No. 86, Certain Debt Extinguishment Issues, GASB establishes rules for accounting for transactions in which cash and other monetary assets acquired with only existing resources are place in an irrevocable trust for the sole purpose of extinguishing debt.

Currently GASB standards already provide guidance for accounting and reporting when cash and other monetary assets acquired with the proceeds of refunding bonds are placed in a trust for the future repayment of outstanding debt.

However, the guidance GASB issued Monday addresses situations in which only existing resources (and no bond proceeds) are used to acquire cash and other monetary assets placed in a trust for the future repayment of outstanding debt.

The debt, cash, and other monetary assets placed in trust are no longer reported on the financial statements when debt is defeased(Nullified) in substance. But governments are required to disclose information in the notes to the financial statements about debt that has been defeased in substance.

In addition, Statement No. 86 provides guidance related to prepaid insurance on debt that is extinguished and notes to the financial statements for defeased debt.