The first article of our GASB-91 series discussed what a Conduit Debt Obligation (CDO) is, which is vitally important for governments to understand. Once a debt is identified as a CDO by the issuer, other arrangements may be present.
CDOs, Leases and Service Concession Arrangements
Issuers of CDOs may also be involved with construction of capital assets at obligors. These contracts are often characterized as leases. Service Concession Arrangements (SCA) guidance was recently incorporated into GASB Statement No. 94, Public – Private and Public – Public Partnerships and Availability Payment Arrangements (GASB-94) (P3s). GASB-94 became effective for periods beginning after June 15, 2022.
As a reminder, P3s are an SCA with all the following criteria:
- The transferor conveys to the operator the right and related obligation to provide public services through the use and operation of an underlying P3 asset in exchange for significant consideration, such as an up-front payment, installment payments, a new facility, or improvements to an existing facility.
- The operator collects and is compensated by fees from third parties (This excludes custodial relationships - that is, an arrangement in which an operator accepts payments from third parties and remits those payments to the transferor for an established fee.)
- The transferor determines or can modify or approve which services the operator is required to provide, to whom the operator is required to provide the services, and the prices or rates that can be charged for the services, assuming the fees are reasonable.
- The transferor is entitled to significant residual interest in the service utility of the underlying PPP asset at the end of the arrangement.
If existing assets are involved in a P3 and improvements are not required to the existing assets, nor is an SCA in place, then GASB-87, Leases may apply.
New Assets Acquired or Constructed Financed by CDOs
If an issuer has a CDO, and the CDO is used to finance acquisition or construction of new capital assets, then the following elements may trigger additional reporting:
|Required Element||Does Meet the Definition of an SCA||Does Not Meet the Definition of an SCA|
|The construction or acquisition of the capital asset is financed with the proceeds from the CDO.||Apply guidance formerly contained in GASB Statement No. 60, Service Concession Arrangements. For periods beginning after June 15, 2022, apply GASB Statement No. 94, Public – Private and Public-Public Partnerships and Availability Payment Arrangements.||Do NOT report as a lease (even if labelled as a lease). (See next paragraph).|
|The CDO issuer retains the title to the capital asset from the beginning of the arrangement.|
|The payments from the obligor are to cover the debt service payments.|
|The payment schedule of the arrangement coincides with the debt service repayment schedule.|
If not an SCA, three scenarios may change the reporting of the related capital asset(s) acquired or constructed:
|Scenario||CDO Issuer Reporting|
|The CDO issuer relinquishes the title to the capital asset at the end of the arrangement, at which time the CDO generally has been paid off.||The CDO issuer has no reporting of the liability, the related capital asset or receivable.|
|The CDO does not relinquish the title to the capital asset. The third-party obligor has exclusive use of the entire capital asset until the end of the arrangement.||The CDO issuer has no reporting of the liability, capital asset or receivable during the arrangement. When the arrangement ends, the capital asset is reported at acquisition value, which in some cases, may be $0.|
|The CDO issuer does not relinquish the title to the capital asset. The third-party obligor has exclusive use of only portions of the capital asset until the end of the arrangement.||The CDO issuer reports the capital asset at inception at acquisition value. The related liability and receivable are not reported. A deferred inflow of resources is recognized at the same amount and amortized systematically and rationally over the arrangement term.|
CDOs and the acquisition or construction of capital assets can be extremely difficult to understand. First, the issuer must identify that a CDO is in place. Once a CDO is identified, then the accounting and financial reporting of the new capital asset may have reporting alternatives.
Despite the complexities, our team of advisors can help you understand GASB-91 Conduit Debt Obligations and how it affects your government entity.