New Government Accounting Standards Board Standards
July 26, 2019
By: Mike Spilker
GASB 88—Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements
This new standard clarifies the meaning of debt for financial statement disclosure purposes and establishes additional financial statement note disclosure requirements related to debt obligations of governments. Amends GASB 34 & 38.
Debt for purposes of disclosures in the financial statement, as defined by GASB, is any liability arising from a contractual obligation to make one or more payments to settle a fixed amount. Payments may be cash or of other assets in lieu of cash. Debt has a settlement amount that is fixed as of the date the contractual obligation was established. Leases (except those contracts reported as a financed purchase) and trade payables are specifically excluded.
Debt disclosures are to be separated into the following two categories:
- Combined direct borrowings and direct placements of debt
- Other debt
Direct borrowings: government enters into a loan agreement with a lender
Direct placements: a government issues a debt security directly to an investor
Both direct borrowings and direct placements have terms negotiated directly with the investor or lender and are not offered for public sale.
In preparation for this year’s audit, consider reviewing your debt agreements in order to determine whether or not you have any direct borrowings or direct placements so that this type of debt can be split out from your other long-term debt for disclosure in your financial statements. You will also need to provide your auditor with information regarding the following disclosures required by GASB 88:
- Amounts of unused lines of credit
- Collateral pledged to secure debt
- Contractual debt terms, including significant: events of default with financial consequences – termination events with financial consequences – subjective acceleration clauses
Appendix C of GASB 88 illustrates the required disclosures.
GASB 83—Certain Asset Retirement Obligations
This new standard addresses accounting and financial reporting for certain asset retirement obligations (AROs). A couple of examples of when this would be applicable are: assets that may require decommissioning (power or sewer treatment plants), assets in specialized industries (x-ray machine with radioactive material)
An asset retirement obligation (ARO) is a legally enforceable liability associated with the retirement of a tangible capital asset. Retirement capital assets are considered permanently removed from service (may include sale, abandonment, recycling or other disposal). This does not apply to temporary idling of an asset.
The ARO liability will be recognized when there is a law or regulation to take certain actions to retire assets at the conclusion of their useful lives or when triggered by contracts or court judgments. Also when there are internal events, such as a contamination event requiring clean-up or a new asset placed into operation that will ultimately require outlays at retirement.
There are financial statement disclosures required for each ARO, including:
- Description of the ARO and associated assets
- Basis of the obligation (e.g. law, regulation, contract or court judgment)
- Methods and assumptions used to estimate the ARO liability
- Estimated useful life of the associated assets
- How legally required funding and assurance provisions are being met, such as insurance policies
- Amount of any assets restricted for payment of AROs, if the restricted assets are not separately displayed in the financial statements
This Statement does not apply to the following:
- Obligations that arise from a plan to sell or otherwise dispose of a tangible capital asset
- Obligations associated with the preparation of a tangible capital asset for an alternative use
- Obligations associated with maintenance, rather than retirement, of a tangible capital asset
- Landfill closure and postclosure care obligations, including those not covered by GASB No. 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs
This new standard may not be applicable for many local governments but it would be wise to review your capital asset listing now to determine if there is any possibility of related retirement obligations for specific assets.
Keep in mind that GASB 84, Fiduciary Activities and GASB 90, Majority Equity Interests will also be effective for the December 31, 2019 reporting year.
Please contact one of our audit partners: Chad Atkinson, McKay Hall, Steve Palmer or Mike Spilker, if you have any questions about any of these new standards.