GASB provides guidance for nonexchange guarantees

BY KEN TYSIAC

GASB on Monday approved a new standard designed to help state and local governments report on nonexchange financial guarantees they have offered, and to help governments properly report on guarantees they have received on their obligations.

GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, spells out the provisions. A nonexchange financial guarantee is a credit enhancement or assurance a guarantor offers without receiving value in exchange that is equal or approximately equal.

The guarantor agrees to pay an obligation holder if the issuer of the obligation is not able to pay the obligation holder, as required. Examples of nonexchange financial guarantees include guarantees by a state for bonds issued by local governments within that state, and guarantees of mortgage loans to individuals, if equal or approximately equal value is not received in exchange.

A state or local government guarantor will be required to recognize a liability on its financial statement when it is more likely than not that the guarantor will be required to make a payment to the obligation holder under the agreement.

Because nonfinancial guarantees are typically given without payment in return, they often are not reflected in financial statements of the government guarantor or the government issuer of the obligation. But guarantees represent potential liabilities for a guarantor and potential obligations for the issuer.

According to Statement No. 70:

  • Qualitative factors are required to be considered when a government guarantor is determining if payment on its guarantee is more likely than not to be required. These factors can include whether the issuer is experiencing financial difficulty or entering into bankruptcy or reorganization.
  • An issuer government that is required to pay a guarantor for guarantee payments must continue to report a liability unless it is legally released from the agreement. Upon release, the government would recognize revenue as a result of being relieved of the obligation.
  • The amounts and nature of nonexchange financial guarantees are required to be disclosed by government guarantors and issuers.


“In the current economic environment, investors are increasingly seeking credit enhancements and assurances, including financial guarantees, to minimize the possibility of nonpayment,” GASB Chairman Robert Attmore said in a news release. “Statement 70 responds to the need for consistent recognition and disclosure guidance for nonexchange financial guarantees.”

The standard takes effect for reporting periods beginning after June 15, 2013. Statement 70 will be available at the GASB website in May.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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