Project Pages

Debt Disclosures, including Direct Borrowing—Reexamination of Statements 34, 38, and 62

Project Description: The primary objective of this project is to define debt, including direct borrowing, to distinguish it from other long-term liabilities in applying disclosure requirements for notes to financial statements. The project also will evaluate (1) whether the disclosures in notes to financial statements related to long-term debt also should be required for short-term debt and (2) whether additional disclosures for direct borrowings are essential to a user’s understanding of the basic financial statements.

Status:
Added to Research Agenda: April 2015
Added to Current Agenda: August 2016

Debt Disclosures, including Direct Borrowing—Project Plan

Background: Existing guidance for notes to the financial statements requires two general disclosures for outstanding debt:

  • Changes in the amount of outstanding debt during the reporting period, as part of the overall disclosure of changes in long-term liabilities (paragraph 119 of Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments)
  • Debt service requirements for each of the succeeding five fiscal years and in five year increments thereafter until maturity (paragraph 10 of Statement No. 38, Certain Financial Statement Note Disclosures).
Additional note disclosures required for certain debt-related transactions, include:
  • Changes in short-term debt during the reporting period (paragraph 12 of Statement 38)
  • Short-term obligations (paragraph 44 of Statement 62, as amended).
The notes to the financial statements of a typical general purpose government with outstanding municipal bonds also are likely to contain a variety of other debt-related information such as original amounts, outstanding amounts, issuance dates, and final maturities of individual issuances of general obligation bonds, tax-backed bonds, and revenue bonds. This information is not required by GASB standards; governments may be presenting it under the general rubric to “provide necessary disclosure of material items, the omission of which would cause the financial statements to be misleading” (NCGA Interpretation 6, Notes to the Financial Statements) or as part of their continuing disclosure under SEC Rule 15c2-12.

In the period since the existing standards for debt disclosures were issued, governments have continued to innovate and diversify with respect to their debt-issuance practices. In recent years, governmental borrowers have increasingly satisfied their financing needs by using direct loans from banks rather than issuing municipal bonds. Financial statement users—particular credit ratings agencies, industry groups, and bond market regulators—have expressed concerns about this practice. Their concerns have centered upon governments that have either (1) provided inadequate or no disclosure regarding their direct borrowing arrangements, or (2) inappropriately classified direct loans as other types of debt in their financial statements.

Accounting and Financial Reporting Issues: The major issues that will be addressed by this project include the following:
  1. Although existing standards require specific disclosures for long-term and short-term debt, debt is not defined for financial reporting purposes. Which liabilities should be considered debt for disclosure purposes?
  2. Current requirements for short-term debt include (1) providing a schedule of changes in short-term debt outstanding and (2) disclosing the purpose for which the short-term debt was issued. What additional disclosures, if any, should be required?
  3. Current requirements do not specifically address direct borrowings. Should specific disclosures related to direct borrowings be required?
Project History:
  • Pre-agenda research approved: April 2015
  • Added to the current technical agenda: August 2016
  • Deliberations began: October 2016
Current Developments: At the October and December 2016 Board Meetings, the Board deliberated issues related to the various liabilities that should be considered debt for disclosure purposes.

Work Plan:

Board Meetings

Topics to be considered

April 2017: Review draft standards section of an Exposure Draft.
May 2017: Review preballot draft of an Exposure Draft.
June 2017 (T/C): Review ballot draft and consider an Exposure Draft for approval.
July 2017–September 2017: Comment period.
October 2017–January 2018: Redeliberations.
March 2018: Review preballot draft of a final Statement.
March 2018 (T/C): Review ballot draft and consider a final Statement for approval.

Debt Disclosures, including Direct Borrowing—RECENT MINUTES


Minutes of Meetings, March 7–9, 2017

The Board continued deliberations addressing the proposed definition of debt for disclosure purposes. The Board tentatively agreed to amend the proposed working definition of debt for disclosure purposes as follows:

A contractual obligation to pay cash (or other assets that may be used in lieu of payment of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established.1

1For the purposes of this determination, interest to be accrued should not preclude that amount from being considered fixed.

The Board also discussed proposed disclosures related to direct borrowings. The Board tentatively agreed to propose requiring for direct borrowings, separately from other types of debt, disclosure of: the date of issuance, maturity date, amount borrowed, interest rates, information related to additional lines of credit extended, information related to collateral related to direct borrowings, and covenants and other remedies, including termination events and accelerated payment clauses. The Board tentatively agreed not to propose direct debt disclosures of: the direct debt lender, borrowing costs, and premiums paid. The Board also instructed the project staff to examine the proposed Securities and Exchange Commission amendments to Rule 15c2-12 and develop a definition of direct borrowings to differentiate them from public offerings.

Minutes of Meetings, January 17–19, 2017

The Board continued to discuss the definition of debt for disclosure purposes and tentatively decided that the “certainty of amount for repayment” should be incorporated into the working definition of debt. The Board also discussed incorporating the phrase “resulting from a borrowing or financing” into the working definition of debt for disclosure purposes and tentatively decided that the phrase should not be incorporated. The Board tentatively decided to add to the working definition of debt for disclosure purposes the phrase “one or more payments” to allow for the possibility that the debt could be satisfied with multiple payments. The Board tentatively decided to remove the phrase “on demand or on fixed or determinable dates” from the definition of debt for disclosure purposes. The Board also requested that the staff explore including the concept that the use of assets other than cash to settle the debt would not preclude a contractual obligation from being considered debt for disclosure purposes. The Board tentatively decided to move forward with the following working definition of debt for disclosure purposes:

A contractual obligation to pay cash, in one or more payments, to settle an amount that is fixed at the date the contractual obligation is established. For purposes of this determination, interest to be accrued should not preclude that amount from being considered fixed.

The Board then discussed issues related to disclosures for short-term debt related to (a) disclosures related to amounts and timing of resource flows and
(b) disclosures related to compliance with short-term debt agreements. The Board tentatively decided to not require any additional disclosures related to short-term debt.

Minutes of Meetings, December 5–8, 2016

The Board continued discussing the working definition of debt for disclosure purposes. The Board considered whether common liabilities found by staff in annual financial reports could meet the working definition of debt for disclosure purposes. For liabilities meeting the definition, the Board discussed whether they should be proposed to be exempted from disclosure requirements in notes to the financial statements.

The Board tentatively agreed that bonds, notes, and loans payable meet the proposed working definition of debt and should not be proposed to be excluded from disclosures related to debt., The Board tentatively agreed that some prizes payable from lottery activities meet the proposed working definition of debt and should not be proposed to be excluded from disclosures related to debt.

The Board tentatively agreed that the following liabilities meet the proposed working definition of debt but tentatively agreed to propose that they be excluded from the scope of the project: (a) compensated absences, (b) termination benefits, (c) nonexchange financial guarantees, and (d) prepaid tuition obligations. In addition, the Board tentatively agreed that some claims and judgments meet the proposed working definition of debt but tentatively agreed to propose that they be excluded from the scope of the project.

The Board tentatively agreed that pollution remediation obligations, landfill closure and postclosure costs, and asset retirement obligations do not meet the working definition of debt and subsequently do not require exclusion.

Minutes of Meetings, October 25–27, 2016

The Board began deliberations by discussing a working definition of debt for disclosure purposes. The Board tentatively agreed that the definition of debt for disclosure purposes should be “a contractual obligation to pay cash on demand or on fixed or determinable dates.”

The Board tentatively decided to provide exceptions to this definition in the scope of the proposed guidance rather than in the definition itself. The Board also tentatively agreed to the following scope exceptions: (1) derivative instruments, (2) leases, (3) postemployment benefits, and (4) trade accounts payable. The Board also directed the staff to look at additional liabilities that may unintentionally meet the tentative definition of debt for disclosure purposes and require exclusion.

Debt Disclosures, including Direct Borrowing —TENTATIVE BOARD DECISIONS TO DATE


The Board tentatively decided:
  • The definition of debt for disclosure purposes should be “a contractual obligation to pay cash (or other assets that may be used in lieu of payment of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established.1
  • Leases and trade accounts payable should be excluded from the definition of debt.
  • To require for direct borrowings, separately from other types of debt, disclosure of: the date of issuance, maturity date, amount borrowed, interest rates, information related to additional lines of credit extended, information related to collateral related to direct borrowings, and covenants and other remedies, including termination events and accelerated payment clauses.

                                        
1For purposes of this determination, interest to be accrued should not preclude that amount from being considered fixed.