Now Is the Time to Implement GASB-88

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:

• All types of bonds, notes, loans, variable rate, synthetically fixed or fixed rate, general, revenue or special and other obligations.
• Zero-coupon bonds, demand bonds, term bonds, certificates of participation and others.

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.

Updated 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]:

• Principal and interest requirements to maturity, presented separately for each of the five subsequent fiscal years and in five-year increments thereafter.
• Interest requirements for variable-rate debt using the rate in effect at the financial statement date.
• The terms and conditions of when variable-rate debt adjusts continue to be required disclosure.

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]:

• Amount of unused lines of credit (not letters of credit)
• Assets pledged as collateral for debt (revenue is already required to be disclosed)
• Terms specified in debt agreements related to significant:
• Events of default with finance-related consequences
• Termination events with finance-related consequences
• Subjective acceleration clauses

As introduced above, the long-term liabilities table was also updated. The following are not required to be included:

• Defined benefit pensions and OPEB
• Asset retirement obligations, pollution remediation and landfill closure and post-closure obligations
• Unstructured claims and judgments

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:

1. Beginning and end-of-year balances (regardless of whether prior-year data is presented on the face of the government-wide financial statements)
2. Increases and decreases (separately presented)
3. The portions of each item that are due within one year of the statement date
4. Which governmental funds typically have been used to liquidate other long-term liabilities (such as compensated absences) in prior years [GASB Cod. Sec. 2300.120].

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:

• Bonds and other debt, including loans (in accordance with GASB-88)
• Compensated absences
• Structured claims and judgments
• Leases payable (that are financings)

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:

• Summarized information on debt limitations, legal provisions
• Summarized information on new debt issuances
• Defeasances and refunding transactions, including balances remaining on defeased debt
• Outstanding debt for governmental activities, business-type activities, direct borrowings, direct placements, premiums and discounts (some governments insert final maturities and interest rates)
• Debt service requirements for principal and interest for the first five years and every five years after (in the aggregate) to maturity, presented by governmental activities, business-type activities, direct borrowings and direct placements
• The requirements of 1500.130, discussed previously, as applicable

Should you have any questions on these updates, please contact your Eide Bailly professional.