Academic journal article Journal of Accountancy

GASB Issues Statement on Debt Refundings

Academic journal article Journal of Accountancy

GASB Issues Statement on Debt Refundings

Article excerpt

The Governmental Accounting Standards Board issued a statement affecting how governments account for refinancing long-term debt. Statement no. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, concerns accounting and reporting procedures when new debt is issued and its proceeds are used to pay off old debt (see "GASB ED on Debt Refundings," JofA, Sept.93, page 24).

In the past, explained George Scott, chairman of the American Institute of CPAs government accounting and auditing committee (GAAC), when debt was defeased or refunded an irrevocable trust was created. Governments recognized the gain or loss immediately as an extraordinary item in the proprietary fund activities. Under the new statement, governments will amortize the gain or loss over the life of either the new debt or the old debt--whichever is shorter.

"Basically, the GASB was trying to show that governments are acting like you or I when we refinance our mortgages, trading old debt for new debt at a lower interest rate and recognizing the difference over a period of time rather than as a one-time event," said Scott, a partner of Deloitte & Touche in Fort Worth, Texas.

Specifically, the new statement requires that, for current refundings and advance refundings resulting in debt defeasance reported by proprietary activities, the difference between the reacquisition price and the net carrying amount of the old debt be deferred and amortized as a component of interest expense in a systematic and rational manner over the remaining life of either the old or new debt, whichever is shorter. The deferred amount should be reported as a deduction from or an addition to the new debt liability. …

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