GASB on Monday proposed a new standard demonstrating how state and local governments should recognize nonexchange financial guarantees on their financial statements.
A nonexchange financial guarantee is a credit enhancement or assurance offered by a guarantor that is provided without receiving consideration of equal value. The guarantor agrees to repay the obligation holder if the debt issuer cannot make timely payments to the obligation holder. Financial guarantees represent potential claims on a government’s resources when it is the guarantor, and a potential reduction of a government’s obligations when it issues the debt.
GASB’s proposals are contained in an exposure draft, Accounting and Financial Reporting for Nonexchange Financial Guarantee Transactions. The ED is open for comment until Sept 28.
The proposed standard would require a state or local government guarantor that offers a nonexchange financial guarantee to recognize a liability on its financial statements when it is more likely than not that the guarantor will actually make a payment to the obligation holders under the agreement. In addition, the standard would require:
- A government guarantor to consider qualitative factors when determining whether a payment on its guarantee is more likely than not to be paid. Those factors may include financial difficulties, initiation of bankruptcy proceedings, or financial reorganization on the part of the issuer of the guaranteed obligation.
- Continued reporting of a liability by an issuer government that is required to repay a guarantor, unless legally released. Upon legal release, the government would recognize revenue as a result of the relief from the obligation.
- A government guarantor or issuer to disclose information about the amounts and nature of nonexchange financial guarantees.
The amendments would be effective for periods beginning after June 15, 2013, and early application would be encouraged.
GASB Chairman Robert Attmore said in a statement that consistent recognition and disclosure guidance is needed because of increased evidence of financial guarantees between governments and their potential to result in payments by the guarantor.
“This statement would enable financial statement users to better understand risk exposures of guarantors from financial guarantees that are issued, and credit enhancements received by state and local government debt issuers,” Attmore said. “This proposal also would help statement users to assess the probability that governments will repay obligation holders.”
—Ken Tysiac (email@example.com) is a JofA senior editor.