GASB proposes new rules for reporting conduit debt obligations

State and local government issuers would use a single method to report conduit debt obligations and related obligations under a proposal published Monday by GASB.

GASB is proposing revisions after reviewing the existing rules under Interpretation No. 2, Disclosure of Conduit Debt Obligations, and finding variation in practice that diminishes the comparability of financial statements.

Conduit debt obligations are debt instruments issued by a state or local government to provide funding for a specific third party that is primarily liable for repaying the debt instrument. Not-for-profit hospitals and universities are examples of third parties that sometimes seek this kind of financing for projects.

One reason for the variation in practice arose from the option in the standards that allows government issuers to either recognize conduit debt obligations as their own debt or just disclose the transactions. Variation also resulted from diversity in how additional commitments associated with these transactions are reported by governments.

The exposure draft, Conduit Debt Obligations, proposes to address the variations in practice by:

• Clarifying the characteristics that define a conduit debt obligation.
• Requiring issuers to recognize liabilities associated with additional commitments they have extended, and requiring issuers to recognize assets and deferred inflows of resources related to certain arrangements associated with conduit debt obligations.
• Clarifying accounting and financial reporting guidance for additional commitments extended by government issuers, and for arrangements — often characterized in practice as leases — associated with conduit debt obligations.
• Revising disclosure requirements to provide financial statement users with better information.

Comments can be emailed to director@gasb.org by Nov. 2.

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