What You Need to Know:
Final Guidance on Conduit Debt to be Released

In late May 2019, the GASB is expected to issue a final Statement on conduit debt. This Statement will define conduit debt obligations for accounting and financial reporting purposes, establish related standards for recognition and measurement, and improve disclosures.
 
Conduit debt obligations (CDOs) refer to certain debt instruments issued by a state or local government on behalf of a specific third party or parties. Third parties use this financing for projects including affordable housing developments, not-for-profit hospitals, and economic development.
 
Conduit debt obligations (CDOs) refer to certain debt instruments issued by a state or local government on behalf of a specific third party or parties.

Because CDOs are issued by governments, those obligations generally are tax exempt. They are a method for third-party organizations to secure financing at tax-exempt rates. Borrowers can be not-for-profits, other governments, or for-profit companies.
 
The GASB’s review of the existing standards—Interpretation No. 2, Disclosure of Conduit Debt Obligations—found variation in practice among governments that issue CDOs, which adversely affects the comparability of financial statement information. This variation traces back to:
  • An option that allowed government issuers to recognize conduit debt obligations as a liability, rather than simply disclose the transactions, and
  • Diversity in how additional commitments provided by issuers associated with these transactions (such as financial guarantees) are reported by governments.
 The anticipated Statement also will eliminate the option for government issuers to recognize conduit debt obligations as a liability. It also will clarify accounting and financial reporting guidance for (1) additional commitments extended by government issuers and (2) arrangements often characterized in practice as leases associated with conduit debt obligations.
 
This Statement will clarify the distinction between limited commitment conduit debt agreements and those with additional commitments. It will require government issuers that provide an additional commitment to make an assessment each year of certain qualitative factors to decide whether it is more likely than not that they will have to pay on that commitment. If so, they will recognize a liability for the additional commitment on the balance sheet. If not, then they would not recognize a liability.
 
For disclosure purposes, issuers will be required to disclose their conduit debt program by providing a general description of the program, describing their commitments, and presenting CDOs by type of commitment. Together, this information is intended to allow financial statement users to gain a better sense of an issuer’s entire conduit debt program, as well as the risk associated with that program.
 
More information about the conduit debt project.