Conduit Debt—Reexamination of Interpretation 2
Project Description: The objective of this project is to address certain issues related to accounting and financial reporting for conduit debt obligations. The project will consider improvements to the existing guidance in Interpretation No. 2, Disclosure of Conduit Debt Obligations, related to: (1) diversity in current reporting that adversely affects comparability between governments, (2) whether conduit debt obligations are liabilities as defined in the GASB’s conceptual framework and, therefore, should be reported in government-issuers’ financial statements, and (3) the usefulness of required notes to government-issuers’ financial statements decision-making and assessing accountability.
Status:
Statement No. 91, Conduit Debt Obligations, approved: May 2019
Background: The GASB addressed conduit obligations in Interpretation 2, issued in 1995. Interpretation 2 describes conduit debt obligations as follows:
Interpretation 2 requires that conduit debt obligations be disclosed in the notes to the financial statements of the government issuer, including: (1) a general description of the conduit debt transactions, (2) the aggregate amount of all conduit debt obligations outstanding at the balance sheet date, and (3) a clear indication that the issuer has no obligation for the debt beyond the resources provided by related leases or loans. For those conduit issuers that currently report their conduit debt obligations as liabilities on their balance sheets along with related assets, Interpretation 2 does not alter that reporting or the reporting of future conduit debt obligations that are substantially the same as those already reported.
Accounting and Financial Reporting Issues: Major issues that will be addressed by this project, presented in order of their relative significance, are as follows:
Minutes of Teleconference, May 13, 2019
The Board reviewed a ballot draft of a final Statement, Conduit Debt Obligations, and discussed clarifying edits. The Board then voted unanimously to approve the issuance of Statement No. 91, Conduit Debt Obligations.
Minutes of Meeting, April 22–24, 2019
The Board reviewed a preballot draft of a final Statement, Conduit Debt Obligations, and discussed clarifying edits. The Board tentatively decided to exclude debt with only limited commitments from the annual evaluation requirement, unless a triggering event has occurred such that the issuer determines it is more likely than not that it will make a voluntary payment. The Board then agreed to move forward with a ballot draft of a final Statement at the May 2019 teleconference.
Minutes of Meeting, March 13, 2019
The Board continued redeliberations based on stakeholder feedback received on the Exposure Draft, Conduit Debt Obligations, and discussed the following topics: disclosures, effective date, illustrations, cost-benefit considerations, and GASB scope of authority.
The Board first redeliberated the disclosures section of the proposed Statement, tentatively deciding to exclude disclosure requirements for governmental third-party obligors from the scope of the final Statement. The Board also tentatively agreed not to include a disclosure requirement for a debt maturity schedule when a liability is recognized for an additional commitment. Additionally, the Board tentatively decided not to include a specific reference in the standards that disclosure requirements for contingencies from Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, would apply when the likelihood of an issuer making a payment to support debt service of the conduit debt obligation is not more likely than not. The Board also tentatively agreed to specifically exclude additional commitments related to conduit debt obligations that are exchange financial guarantees from the recognition and measurement provisions for contingencies of Statement 62.
Continuing on with disclosures, the Board next tentatively decided to specify that the disclosure of a general description of additional commitments should include the following:
The Board tentatively decided to carry forward the provisions that disclosures for all conduit debt obligations should include:
The Board next discussed the effective date of the final Statement, tentatively deciding to carry forward the effective date of December 15, 2020. Next, the Board tentatively decided to carry forward, with clarifying edits, the illustrations provided for the disclosures of conduit debt obligations.
Next, the Board tentatively decided that the intended benefits of the conduit debt guidance justify the anticipated costs of implementation and ongoing compliance. Finally, the Board tentatively decided that the proposed accounting and financial reporting requirements to be included in the conduit debt final Statement meet all of the characteristics of Group 1 and, therefore, are within the scope of the GASB’s authority.
Minutes of Meetings, January 29–31, 2019
The Board began redeliberations based on stakeholder feedback received on the Exposure Draft, Conduit Debt Obligations, and discussed the following topics: scope and applicability, the definition of conduit debt, recognition and measurement, limited and additional commitments associated with conduit debt, and arrangements associated with conduit debt.
The Board first redeliberated the scope and applicability of the statement, tentatively agreeing not to add the accounting treatment for governmental third-party obligors to the scope of the project.
Next, the Board discussed the definition of conduit debt and tentatively decided to carry forward the requirement that the issuer and third-party obligor not be within the same reporting entity. The Board tentatively agreed that a primary government commitment to appropriate funds to a third-party obligor of debt issued by a component unit of that primary government should not prevent conduit debt treatment by the issuer. The Board also tentatively agreed to carry forward, with clarifying edits, the expanded definition of conduit debt obligations. The Board also decided not to provide specific guidance on housing-related conduit debt obligations within the Statement. Additionally, the Board tentatively decided not to include specific definitions for the following terms or phrases:
The Board next redeliberated the recognition and measurement criteria and tentatively decided to carry forward the provisions that an issuer of conduit debt should not recognize a liability for the debt. The Board also tentatively decided to not provide an exception such that conduit debt issued through a state revolving program would be recognized as a liability of the issuer. Additionally, the Board tentatively decided to not provide specific guidance on recognition of conduit debt transactions in the statement of revenues, expenses, and changes in net position. The Board also tentatively decided to carry forward the requirement for issuers to recognize a liability for additional commitments, if qualitative factors indicate it is more likely than not that the issuer will support debt service payments for a conduit debt obligation.
The Board tentatively decided to exclude additional commitments related to conduit debt obligations that are nonexchange financial guarantees from the recognition and measurement provisions of Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. The Board also tentatively decided to carry forward, with clarifying edits, the requirement to evaluate at least annually whether the criteria for recognizing a liability for an additional commitment are met. Additionally, the Board tentatively agreed not to provide specific guidance on either the accounting treatment for derecognizing a liability or the treatment of recoveries on payments an issuer made to support a conduit debt obligation.
Next, the Board discussed the provisions regarding arrangements associated with conduit debt obligations, tentatively deciding to carry forward, with clarifying edits, the provisions related to their general attributes. The Board tentatively decided not to include specific guidance addressing situations in which the issuer holds title to the capital asset in perpetuity and the asset is for the general public’s use. Additionally, the Board tentatively decided to carry forward the provisions that arrangements associated with conduit debt obligations should not be reported as leases. The Board also tentatively decided not to provide specific guidance related either to bargain purchase options included in an arrangement associated with conduit debt obligations or to leasehold interests involved with conduit debt obligations.
The Board next tentatively decided to carry forward the requirement that the issuer recognize no asset, liability, or expense in an arrangement in which the issuer relinquishes the title to the capital asset at the end of the arrangement, at which time the conduit debt obligation has generally been paid off. Additionally, the Board tentatively decided not to include specific guidance addressing the asset classification and measurement date in situations in which the issuer retains title and the third-party obligor has exclusive use of the entire capital asset. The Board tentatively decided to provide guidance that an inflow of resources should be recognized when the issuer recognizes a capital asset at the end of a conduit debt arrangement. Lastly, the Board tentatively decided not to include specific guidance regarding the type of inflow to be recognized subsequent to the recognition of the deferred inflow of resources in situations in which the issuer retains title and the third-party obligor has exclusive use of portions of the capital asset.
Minutes of Teleconference, July 30, 2018
The Board reviewed the ballot draft of an Exposure Draft of a proposed Statement, Conduit Debt Obligations, and discussed clarifying edits. The Board then voted unanimously to approve the issuance of the Exposure Draft.
Minutes of Meetings, July 10–12, 2018
The Board reviewed a preballot draft of an Exposure Draft, Conduit Debt Obligations, and discussed clarifying edits. The Board then agreed to move forward with a ballot draft of an Exposure Draft of a proposed Statement at the July 2018 teleconference.
Minutes of Meetings, May 29–31, 2018
The Board continued discussion of conduit debt obligations for the purpose of developing an Exposure Draft of a proposed Statement. The Board tentatively decided to include that the third-party obligor or its agent of a conduit debt obligation should be the ultimate recipient of proceeds from the debt issuance and the primary beneficiary of the debt obligation as part of the proposed characteristics that define conduit debt obligations. The Board also tentatively decided to include that the third-party obligor has the primary obligation for debt service payments as part of the proposed characteristics that define conduit debt obligations.
The Board also reviewed a draft of the Standards section of a proposed Exposure Draft and discussed clarifying edits. The Board agreed that the project staff should present a preballot draft of an Exposure Draft for discussion at the July 2018 meeting.
Minutes of Meetings, April 17–18, 2018
The Board continued discussion of conduit debt obligations for the purpose of developing an Exposure Draft of a proposed Statement. The Board discussed whether the intended benefits of information to users and other stakeholders from the tentative decisions justify the anticipated costs to preparers and other stakeholders. The Board tentatively decided that the expected benefits associated with the proposed reporting requirements are anticipated to justify the perceived implementation and ongoing costs. The Board tentatively decided that the proposed transition provisions should include retroactive application of the standards.
The Board tentatively decided that the proposed effective date should be for periods beginning after December 15, 2020, and that early implementation should be encouraged. The Board also tentatively decided that the comment period for the Exposure Draft of the proposed Statement should be 90 days.
Finally, the Board discussed the characteristics of the financial information that would be provided as a result of the tentative decisions in this project. The Board tentatively agreed that the proposed accounting and financial reporting requirements would meet the all of the characteristics in Group 1 financial information and, therefore, are within the scope of the GASB’s authority.
Minutes Archive
Statement No. 91, Conduit Debt Obligations, was approved in May 2019.
Project Description: The objective of this project is to address certain issues related to accounting and financial reporting for conduit debt obligations. The project will consider improvements to the existing guidance in Interpretation No. 2, Disclosure of Conduit Debt Obligations, related to: (1) diversity in current reporting that adversely affects comparability between governments, (2) whether conduit debt obligations are liabilities as defined in the GASB’s conceptual framework and, therefore, should be reported in government-issuers’ financial statements, and (3) the usefulness of required notes to government-issuers’ financial statements decision-making and assessing accountability.
Status:
Statement No. 91, Conduit Debt Obligations, approved: May 2019
- Background
- Accounting and Financial Reporting Issues
- Project History
- Recent Minutes
- Tentative Board Decisions
- Project staff:
Conduit Debt—Reexamination of Interpretation 2—Project Plan
Background: The GASB addressed conduit obligations in Interpretation 2, issued in 1995. Interpretation 2 describes conduit debt obligations as follows:
The term conduit debt obligations refers to certain limited-obligation revenue bonds, certificates of participation, or similar debt instruments issued by a state or local governmental entity for the express purpose of providing capital financing for a specific third party that is not a part of the issuer’s financial reporting entity. Although conduit debt obligations bear the name of the governmental issuer, the issuer has no obligation for such debt beyond the resources provided by a lease or loan with the third party on whose behalf they are issued. [Paragraph 2, footnote omitted.]
Conduit obligations generally are tax exempt, provided that they conform to relevant portions of the Internal Revenue Code. Thus, these financings are a way for not-for- profit organizations—for example, hospitals, nursing facilities, and educational institutions—to secure financings at tax-exempt rates. Third-party borrowers also may be other governments. This structure is popular when the issuer is considered to have financing expertise and economies of scale (for example, a state bond bank). Finally, some borrowers may be for-profit corporations. Many issuers receive a fee for arranging conduit financings and some are government agencies organized solely to issue conduit debt. A third-party borrower generally is identified in bond documents, such as offering statements and bond indentures. Based on the GASB’s pre-agenda research, users generally consider information about conduit debt obligations to be important.
Interpretation 2 requires that conduit debt obligations be disclosed in the notes to the financial statements of the government issuer, including: (1) a general description of the conduit debt transactions, (2) the aggregate amount of all conduit debt obligations outstanding at the balance sheet date, and (3) a clear indication that the issuer has no obligation for the debt beyond the resources provided by related leases or loans. For those conduit issuers that currently report their conduit debt obligations as liabilities on their balance sheets along with related assets, Interpretation 2 does not alter that reporting or the reporting of future conduit debt obligations that are substantially the same as those already reported.
Accounting and Financial Reporting Issues: Major issues that will be addressed by this project, presented in order of their relative significance, are as follows:
- What is the definition of a conduit debt obligation? In the event of a third-party borrower’s default, some government-issuers make commitments to cover debt service as a moral obligation or to make appropriations. How do those commitments affect the definition of a conduit debt obligation?
- Given the definition of a liability in Concepts Statement 4, when should a conduit debt obligation be reported as a liability by a government-issuer, if ever?
- Given the criteria for notes to financial statements in Concepts Statement 3 and the needs of users, what information should government-issuers disclose?
- Are commitments by third-party borrowers to cover debt service or lease payments assets of government-issuers?
- Some conduit debt obligations are structured as leases. How do such financings affect the definition of a conduit debt obligation and its reporting?
- Conduit debt obligations may be refunded. Should that occur, what effect should it have on reporting conduit debt obligations, if any?
- Pre-agenda research approved: December 2016
- Research results reported to the Board: July 2017
- Added to current technical agenda: August 2017
- Task force established? No
- Deliberations began: September 2017
- Exposure Draft issued: August 2018
- Comment period: September–November 2018
- Redeliberations began: January 2019
- Final Statement, Conduit Debt Obligations, approved: May 2019
Conduit Debt—Reexamination of Interpretation 2—Recent Minutes
Minutes of Teleconference, May 13, 2019
The Board reviewed a ballot draft of a final Statement, Conduit Debt Obligations, and discussed clarifying edits. The Board then voted unanimously to approve the issuance of Statement No. 91, Conduit Debt Obligations.
Minutes of Meeting, April 22–24, 2019
The Board reviewed a preballot draft of a final Statement, Conduit Debt Obligations, and discussed clarifying edits. The Board tentatively decided to exclude debt with only limited commitments from the annual evaluation requirement, unless a triggering event has occurred such that the issuer determines it is more likely than not that it will make a voluntary payment. The Board then agreed to move forward with a ballot draft of a final Statement at the May 2019 teleconference.
Minutes of Meeting, March 13, 2019
The Board continued redeliberations based on stakeholder feedback received on the Exposure Draft, Conduit Debt Obligations, and discussed the following topics: disclosures, effective date, illustrations, cost-benefit considerations, and GASB scope of authority.
The Board first redeliberated the disclosures section of the proposed Statement, tentatively deciding to exclude disclosure requirements for governmental third-party obligors from the scope of the final Statement. The Board also tentatively agreed not to include a disclosure requirement for a debt maturity schedule when a liability is recognized for an additional commitment. Additionally, the Board tentatively decided not to include a specific reference in the standards that disclosure requirements for contingencies from Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, would apply when the likelihood of an issuer making a payment to support debt service of the conduit debt obligation is not more likely than not. The Board also tentatively agreed to specifically exclude additional commitments related to conduit debt obligations that are exchange financial guarantees from the recognition and measurement provisions for contingencies of Statement 62.
Continuing on with disclosures, the Board next tentatively decided to specify that the disclosure of a general description of additional commitments should include the following:
- The legal authority and limits for extending the commitments
- The length of time of the commitments
- Arrangements for recovering payments from the third-party obligors.
The Board tentatively decided to carry forward the provisions that disclosures for all conduit debt obligations should include:
- A general description of the issuer’s conduit debt obligations
- A general description of the issuer’s limited and additional commitments
- The aggregate outstanding principal amount of all conduit debt obligations that share the same type of commitment(s) at the end of the financial reporting period.
The Board next discussed the effective date of the final Statement, tentatively deciding to carry forward the effective date of December 15, 2020. Next, the Board tentatively decided to carry forward, with clarifying edits, the illustrations provided for the disclosures of conduit debt obligations.
Next, the Board tentatively decided that the intended benefits of the conduit debt guidance justify the anticipated costs of implementation and ongoing compliance. Finally, the Board tentatively decided that the proposed accounting and financial reporting requirements to be included in the conduit debt final Statement meet all of the characteristics of Group 1 and, therefore, are within the scope of the GASB’s authority.
Minutes of Meetings, January 29–31, 2019
The Board began redeliberations based on stakeholder feedback received on the Exposure Draft, Conduit Debt Obligations, and discussed the following topics: scope and applicability, the definition of conduit debt, recognition and measurement, limited and additional commitments associated with conduit debt, and arrangements associated with conduit debt.
The Board first redeliberated the scope and applicability of the statement, tentatively agreeing not to add the accounting treatment for governmental third-party obligors to the scope of the project.
Next, the Board discussed the definition of conduit debt and tentatively decided to carry forward the requirement that the issuer and third-party obligor not be within the same reporting entity. The Board tentatively agreed that a primary government commitment to appropriate funds to a third-party obligor of debt issued by a component unit of that primary government should not prevent conduit debt treatment by the issuer. The Board also tentatively agreed to carry forward, with clarifying edits, the expanded definition of conduit debt obligations. The Board also decided not to provide specific guidance on housing-related conduit debt obligations within the Statement. Additionally, the Board tentatively decided not to include specific definitions for the following terms or phrases:
- Primarily liable
- Primarily obligated
- Ultimately receives the proceeds
- Third-party’s agent
- Appropriation pledge
- Cross-collateralization
- Guarantee
- Moral obligation.
The Board next redeliberated the recognition and measurement criteria and tentatively decided to carry forward the provisions that an issuer of conduit debt should not recognize a liability for the debt. The Board also tentatively decided to not provide an exception such that conduit debt issued through a state revolving program would be recognized as a liability of the issuer. Additionally, the Board tentatively decided to not provide specific guidance on recognition of conduit debt transactions in the statement of revenues, expenses, and changes in net position. The Board also tentatively decided to carry forward the requirement for issuers to recognize a liability for additional commitments, if qualitative factors indicate it is more likely than not that the issuer will support debt service payments for a conduit debt obligation.
The Board tentatively decided to exclude additional commitments related to conduit debt obligations that are nonexchange financial guarantees from the recognition and measurement provisions of Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. The Board also tentatively decided to carry forward, with clarifying edits, the requirement to evaluate at least annually whether the criteria for recognizing a liability for an additional commitment are met. Additionally, the Board tentatively agreed not to provide specific guidance on either the accounting treatment for derecognizing a liability or the treatment of recoveries on payments an issuer made to support a conduit debt obligation.
Next, the Board discussed the provisions regarding arrangements associated with conduit debt obligations, tentatively deciding to carry forward, with clarifying edits, the provisions related to their general attributes. The Board tentatively decided not to include specific guidance addressing situations in which the issuer holds title to the capital asset in perpetuity and the asset is for the general public’s use. Additionally, the Board tentatively decided to carry forward the provisions that arrangements associated with conduit debt obligations should not be reported as leases. The Board also tentatively decided not to provide specific guidance related either to bargain purchase options included in an arrangement associated with conduit debt obligations or to leasehold interests involved with conduit debt obligations.
The Board next tentatively decided to carry forward the requirement that the issuer recognize no asset, liability, or expense in an arrangement in which the issuer relinquishes the title to the capital asset at the end of the arrangement, at which time the conduit debt obligation has generally been paid off. Additionally, the Board tentatively decided not to include specific guidance addressing the asset classification and measurement date in situations in which the issuer retains title and the third-party obligor has exclusive use of the entire capital asset. The Board tentatively decided to provide guidance that an inflow of resources should be recognized when the issuer recognizes a capital asset at the end of a conduit debt arrangement. Lastly, the Board tentatively decided not to include specific guidance regarding the type of inflow to be recognized subsequent to the recognition of the deferred inflow of resources in situations in which the issuer retains title and the third-party obligor has exclusive use of portions of the capital asset.
Minutes of Teleconference, July 30, 2018
The Board reviewed the ballot draft of an Exposure Draft of a proposed Statement, Conduit Debt Obligations, and discussed clarifying edits. The Board then voted unanimously to approve the issuance of the Exposure Draft.
Minutes of Meetings, July 10–12, 2018
The Board reviewed a preballot draft of an Exposure Draft, Conduit Debt Obligations, and discussed clarifying edits. The Board then agreed to move forward with a ballot draft of an Exposure Draft of a proposed Statement at the July 2018 teleconference.
Minutes of Meetings, May 29–31, 2018
The Board continued discussion of conduit debt obligations for the purpose of developing an Exposure Draft of a proposed Statement. The Board tentatively decided to include that the third-party obligor or its agent of a conduit debt obligation should be the ultimate recipient of proceeds from the debt issuance and the primary beneficiary of the debt obligation as part of the proposed characteristics that define conduit debt obligations. The Board also tentatively decided to include that the third-party obligor has the primary obligation for debt service payments as part of the proposed characteristics that define conduit debt obligations.
The Board also reviewed a draft of the Standards section of a proposed Exposure Draft and discussed clarifying edits. The Board agreed that the project staff should present a preballot draft of an Exposure Draft for discussion at the July 2018 meeting.
Minutes of Meetings, April 17–18, 2018
The Board continued discussion of conduit debt obligations for the purpose of developing an Exposure Draft of a proposed Statement. The Board discussed whether the intended benefits of information to users and other stakeholders from the tentative decisions justify the anticipated costs to preparers and other stakeholders. The Board tentatively decided that the expected benefits associated with the proposed reporting requirements are anticipated to justify the perceived implementation and ongoing costs. The Board tentatively decided that the proposed transition provisions should include retroactive application of the standards.
The Board tentatively decided that the proposed effective date should be for periods beginning after December 15, 2020, and that early implementation should be encouraged. The Board also tentatively decided that the comment period for the Exposure Draft of the proposed Statement should be 90 days.
Finally, the Board discussed the characteristics of the financial information that would be provided as a result of the tentative decisions in this project. The Board tentatively agreed that the proposed accounting and financial reporting requirements would meet the all of the characteristics in Group 1 financial information and, therefore, are within the scope of the GASB’s authority.
Minutes Archive
Conduit Debt—Reexamination of Interpretation 2—Tentative Board Decisions to Date
Statement No. 91, Conduit Debt Obligations, was approved in May 2019.