GASB proposes changes to debt disclosures

By Ken Tysiac

Debt-related disclosures in notes to state and local government financial statements would change under a new proposal issued by GASB.

Notes addressing direct borrowings and direct placements are among the debt-related disclosures addressed in the exposure draft, Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements.

With the proposal, GASB is seeking to provide financial statement users better information on the effects of debt on a government’s future resource flows. Information about resources to liquidate debt and the risks associated with changes in terms associated with debt would be disclosed under the proposal.

The proposal would clarify which liabilities governments should include in their note disclosures related to debt. For purposes of note disclosure, the proposal defines debt 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 definition of debt for purposes of note disclosure would exclude leases, which are covered by Statement No. 87, Leases, which was issued in June. Trade accounts payable also would be excluded from the definition.

Concerns have arisen over the potential risks of debt, including bank loans, other forms of direct borrowings, and private placements of bonds that may affect a government’s credit profile, according to GASB Chairman David Vaudt.

The proposal attempts to address those concerns in part by requiring direct borrowings and direct placements of debt to be presented separately from other debt. Other debt-related disclosures the proposal would require include:

  • Amounts of unused lines of credit.
  • Collateral pledged as security for debt.
  • Terms specified in debt agreements related to significant events of default with finance-related consequences and significant termination events with finance-related consequences.
  • Subjective acceleration clauses.

Comments on the proposal can be emailed to director@gasb.org by Sept. 15.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.

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