GASB issues statement on debt refundings.

The Governmental Accounting Standards Board issued a statement affecting how governments account for refinancing long-term debt. Statement no. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, concerns accounting and reporting procedures when new debt is issued and its proceeds are used to pay off old debt (see "GASB ED on Debt Refundings," JofA, Sept.93, page 24).

In the past, explained George Scott, chairman of the American Institute of CPAs government accounting and auditing committee (GAAC), when debt was defeased or refunded an irrevocable trust was created. Governments recognized the gain or loss immediately as an extraordinary item in the proprietary fund activities. Under the new statement, governments will amortize the gain or loss over the life of either the new debt or the old debt--whichever is shorter.

"Basically, the GASB was trying to show that governments are acting like you or I when we refinance our mortgages, trading old debt for new debt at a lower interest rate and recognizing the difference over a period of time rather than as a one-time event," said Scott, a partner of Deloitte & Touche in Fort Worth, Texas.

Specifically, the new statement requires that, for current refundings 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 as a component of interest expense in a systematic and rational manner over the remaining life of either the old or new debt, whichever is shorter. The deferred amount should be reported as a deduction from or an addition to the new debt liability.

GAAC vs. AcS'EC. While GAAC supported the proposal, the Institute accounting standards executive committee (AcSEC) voted unanimously to oppose it, arguing in a comment letter that government entities that report debt refundings by proprietary activities should follow Accounting Principles Board Opinion no. 26, Early Extinguishment of Debt.

"AcSEC believes government proprietary activities are similar to, and in many cases the same as, private-sector commercial activities and should not have different accounting and reporting requirements," the comment letter said. In addition, AcSEC argued that it was more appropriate to recognize a gain or loss at the time of a refunding transaction than to defer it and that GASB should minimize differences between private-sector and government accounting and reporting standards for similar activities.

In its comments, however, GAAC concurred with GASB, favoring the proposed deferral and amortization method. Scott said that unlike private companies, governments can raise capital only by issuing bonds or debt. "GAAC thinks the proposal accurately reflects the environment that governments operate in," Scott said, "whereas recognizing a huge loss as a one-time event distorts an entity's financial condition."

Explained AcSEC chairman Norman Strauss, "Although we normally don't like to have conflicting views expressed by GAAC and AcSEC, we reached different conclusions in this case. We thought it might be useful for GASB to hear both sides of the issue."

Copies of the statement are available for $9 each by calling the GASB order department at [phone], ext. 555.