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Proposed changes in enterprise fund accounting.

Governments often use enterprise funds to account for many of their business-type activities (e.g., utilities, transit districts). The Governmental Accounting Standards Board (GASB) is now considering changes that could affect the accounting and financial reporting used by those funds. Specifically, the GASB is currently addressing the following issues.

* To what degree should private-sector accounting and financial reporting standards continue to apply to activities reported in enterprise funds?

* Should enterprise funds continue to report an extraordinary gain or loss when debt is refinanced?

Applicability of Private-sector Standards

The authoritative accounting and financial reporting standards for private-sector enterprises are set by the Financial Accounting Standards Board (FASB). The FASB, like the GASB, is under the oversight of the Financial Accounting Foundation. Current GASB standards call for the enterprise funds of governments to use the same generally accepted accounting principles (GAAP) applicable to their private-sector counterparts. Accordingly, FASB pronouncements have applied automatically to enterprise funds, barring GASB guidance to the contrary.

To date, the GASB has twice explicitly rejected the applicability of specific FASB guidance to enterprise funds. The first instance involved FASB Statement No. 87, Employers' Accounting for Pensions. The GASB believed it was inappropriate to initiate major changes in pension accounting for enterprise funds prior to the completion of the GASB's own pension project. The board, therefore, issued GASB Statement No. 4, Applicability of FASB Statement No. 87, "Employers' Accounting for Pensions," to State and Local Governmental Employers, which prohibited enterprise funds from implementing the guidance contained in FASB Statement No. 87. Similarly, GASB Statement No. 12, Disclosure of Information on Postemployment Benefits Other Than Pension Benefits by State and Local Governmental Employers, effectively precluded the automatic implementation of FASB Statement No. 106, Employers' Accounting for Postemployment Benefits Other Than Pensions, pending completion of the GASB's own work on other postemployment benefits.

In April, the GASB issued a proposed statement on Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting. In that proposed statement, the GASB announced that it intends to continue to require that enterprise funds conform to FASB pronouncements issued on or before November 30, 1989, (the date of the reaffirmation of the GASB's jurisdiction following the board's five-year review) unless they contravene GASB guidance. At the same time, the GASB is now recommending that preparers of enterprise fund financial statements be allowed the option of either following or not following FASB guidance issued subsequent to that date. If enterprise funds do, in fact, elect to follow FASB guidance issued subsequent to November 30, 1989, they would need to do so consistently (i.e., they would have to apply all future FASB pronouncements that did not contravene GASB guidance).

The comment deadline on the GASB proposal was July 23, 1993. Free copies of the proposed statement can be obtained by contacting the GASB order department at 203/847-0700, extension 10.


Enterprise funds often refinance debt. Sometimes the refinancing takes the form of an "advance refunding" (i.e., the proceeds of refunding bonds are placed in escrow pending the advent of call date or maturity). In other situations, the proceeds of refunding debt are used to pay off obligations that have either matured or reached their call date.

Under current GAAP, the difference between the acquisition price of refunded debt and its carrying value is reported as an "extraordinary" gain or loss in the enterprise fund's operating statement. Assume, for example, that an enterprise fund has debt of $9,000,000 (carrying value). Further assume that the cost of extinguishing this debt will be $9,110,000. In that case, the enterprise fund would report $110,000 extraordinary loss on its operating statement.

Many have criticized current GAAP for refinancings. They point out that in the case of "high to low" refundings, governments normally save themselves significant future interest costs by undertaking the refinancing but nonetheless often are required to report an extraordinary loss in their operating statement. Critics have argued that this extraordinary loss is potentially misleading and could discourage some governments from undertaking economically advantageous refinancings. Indeed, it was in response to this concern that the GASB decided to mandate the reporting of an economic gain/loss in the notes to the financial statements for advance refundings.

The GASB now has decided that the current accounting and financial reporting for debt extinguishments in enterprise funds should be significantly changed. Rather than report an extraordinary gain or loss in the year of the refunding, the GASB now plans to propose that the difference between the acquisition price of refunded debt and its carrying value henceforth be deferred and amortized over the shorter of the life of the refunding or the refunded debt. The following example should help to illustrate the proposed change.

Assume that $10,000,000 of existing debt (carrying value) is to be refunded in an enterprise fund. Also assume that the acquisition cost of the refunded debt (i.e., new debt + issuance costs) is $10,224,000. Further assume that the remaining life of the refunded debt is 10 years and that the life of the refunding debt is eight years. Under the new GASB proposal, the $224,000 difference between the acquisition price of the refunded debt and its carrying value would no longer be reported as an extraordinary loss. Instead, the $224,000 would offset the related liability and would be amortized (i.e., allocated) in the operating statement over the eight-year life of the refunding bonds. As a result, interest expense would increase by $28,000 each year (i.e., $224,000/8 years = $28,000/year) over the eight-year life of the new debt.

The GASB issued its proposal statement on refinancings in June. Once again, copies may be obtained free of charge by contacting the GASB's order department 203/847-0700, extension 10.

Author STEPHEN J. GAUTHIER is director of GFOA's Technical Service Center.
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Author:Gauthier, Stephen J.
Publication:Government Finance Review
Date:Aug 1, 1993
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