GASB ED on debt refundings.

The Governmental Accounting Standards Board issued an exposure draft specifying how state and local governments should account for current refundings or advance refundings that result in defeasance of debt reported in proprietary funds. If adopted as a final statement, the proposal will be effective for periods beginning after June 15, 1994.

According to Philip T. Calder, a partner of Ernst & Young in New York City, the ED basically allows governments refinancing debt at lower interest rates to avoid treating refinancing costs as a current loss.

"Thousands of people in the United States are refinancing mortgages on housing because they realize they'll wind up paying less aggregate principal and interest if they refinance," explained Calder. "Governments are in exactly the same situation. They're replacing old debt with new debt to achieve savings."

Advocates of the ED say it makes no sense to recognize a loss today and a gain over a long period of time, Calder said. "Since governments entered into refinancing deals to achieve a savings, they view any additional first-year cost as part of the net savings they're going to achieve." As a result, Calder said, governments "achieve an economic benefit over the life of the refunded debt." From this perspective, he concluded, "there is no real loss and there should be no loss recognized currently."

Put in technical language, the proposed statement requires that, for current and advance refundings resulting in debt defeasance reported by proprietary activities, the difference between the reacquisition price and the net carrying amount of the old debt be deferred and amortized. This should be done in a systematic and rational manner over the remaining life of the old debt or the life of the new debt, whichever is shorter. The deferred amount should be reported as a deduction from or an addition to the new debt liability.

Comments on the ED, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, are due by September 22. One copy of the proposal is available gratis until that date from the GASB order department, 401 Merritt 7, P.O. Box 5116, Norwalk Connecticut 06856; phone [phone], ext. 10.