GASB has issued numerous delays on a number of statements in the wake of COVID-19.
Most of the annual financial reports have been issued by now for both June 30, 2018, state and local governments and some December 31, 2018, governments. It’s time to turn the page to what needs to be implemented for the 2019 fiscal year. The biggest change for governments that do not have Asset Retirement Obligations and that require implementation of GASB Statement No. 83 is the implementation of GASB Statement No. 88, Certain Disclosures Related to Debt Including Direct Borrowings and Direct Placements [GASB Cod. Secs. 1500.129-130]. Nearly every government has some form of long-term liabilities, so it’s important to understand what’s ahead.
Definition of Debt
GASB Cod. Sec. 1500.129 as updated by GASB-88, defines “debt” for note disclosure as:
[A] liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established.
The word “fixed” in the above sentence also includes disclosure for interest to be accrued and subsequently paid. The paragraph’s footnote provides examples such as interest on variable-rate debt or interest on capital appreciation bonds. Therefore, “debt” could include:
Direct Borrowings and Direct Placements
GASB-88 introduces state and local governments to consistent reporting of direct borrowings and direct placements. But what are these contractual obligations? A direct borrowing is when a government engages in a loan with a lender for funding (e.g. bank, credit union, private mortgage company, etc.). A direct placement is when a government issues a debt security directly to an investor. These obligations are issued for many programs of a government ranging from housing to school construction to even solar energy.
Government issuers of direct borrowing contracts need to be especially careful. The language in the agreement can cause a default on other forms of debt should the government default on the direct borrowing contract. In other words, the direct borrowing default may cause a “house of cards.” Not only will the borrowing be in default, but all other forms of debt may potentially be in default as well.
Direct placements are similar, often involving a tax-exempt mutual fund or an accredited investor. Both types of agreements commonly include cross-collateralization provisions. In a cross-collateralization, one series of debt is used as collateral for another (or many other) debts.
Preparers of financial statements need to gather this information, potentially from bond counsel, treasurers (or chief financial officers) and other entities within the primary government that issue debt to properly prepare the updated disclosures. Completeness is as important as the presentation and disclosure.
GASB’s definition of debt does not include leases (except for contracts reported as a financed purchase of the underlying asset) or accounts payable. Therefore, leases and accounts payable are not included in the debt disclosures. Continued disclosures include [see GASB Cod. Sec. 1500.129]:
Direct borrowings and direct placements are presented separately from other forms of debt in the debt service tables and the table of changes in long-term liabilities.
A government will now be required to disclose summarized information of the following items (separating information regarding direct borrowings and direct placements from other forms of debt) in the notes to the basic financial statements [GASB Cod. Sec. 1500.130]:
As introduced above, the long-term liabilities table was also updated. The following are not required to be included:
Structured claims and judgments may fit the updated definition, as they have specified payment terms. Unstructured claims and judgments would be unlikely to meet the definition. Compensated absences will continue to be disclosed as liabilities.
GASB-88 adjusted the long-term liabilities table to only require long-term debt (bonds, notes and loans) and other long-term liabilities (compensated absences, leases payable that are financings, claims and judgments). The format of the table remains the same:
The existing format for the table is retained (beginning, increases, decreases, ending, due within one year), separated between governmental and business-type activities, with the following information:
The only time information regarding payables to cost sharing defined benefit plans should be included in the table would be for separately financed specific liabilities (long-term payables to the plan).
Additional disclosures on long-term debt should include, as applicable: