Minutes Archive

Conduit Debt—Reexamination of Interpretation 2

Minutes of Meetings, March 6−8, 2018

The Board continued discussion of conduit debt obligations for the purpose of developing an Exposure Draft of a proposed Statement. The Board considered three scenarios within the general premise of an additional arrangement associated with conduit debt obligations in which (a) a capital asset is financed with a conduit debt obligation, (b) the government-issuer holds the title to the capital asset from the beginning of the additional arrangement, (c) a nongovernmental third-party obligor is the counterparty in that arrangement, (d) the payments associated with the additional arrangement are structured to cover the conduit debt obligation principal and interest payments and are made by the third-party obligor to the debt holder or the independent trustee, and (e) the term of the additional arrangement is structured to coincide with the debt repayment period.
 
In Scenario 1, the third-party obligor gets the exclusive use of the capital asset for the term of the additional arrangement. At the end of the additional arrangement, at which time the conduit debt obligation is paid off, the third-party obligor receives title to the capital asset. Regarding this scenario, the Board tentatively decided that (a) the government-issuer should not report a liability for the conduit debt obligation, (b) the government-issuer should not report the capital asset as its own capital asset, (c) the government-issuer should not report a receivable for the payments related to the additional arrangement, and (d) the additional arrangements are not leases for financial reporting purposes and, therefore, the government-issuer should not apply the requirements in Statement No. 87, Leases.
 
In Scenario 2, the third-party obligor gets the exclusive use of the capital asset for the term of the additional arrangement. At the end of the term of the additional arrangement, the conduit debt obligation is paid off, the third-party obligor does not receive title to the capital asset, and the government-issuer assumes control of the capital asset. Regarding this scenario, the Board tentatively decided that (a) the government-issuer should not report a liability for the conduit debt obligation, (b) the government-issuer should not report the capital asset as its own capital asset until the conduit debt obligation is paid off and the additional agreement ends, (c) the government-issuer should not report a receivable for the payments related to the additional arrangement, and (d) the additional arrangements are not leases for financial reporting purposes and, therefore, the government-issuer should not apply the requirements of Statement 87.
 
In Scenario 3, the third-party obligor does not get the exclusive use of the entire capital asset but gets the exclusive use of some portions of the capital asset, for example, certain parts of a building, for the term of the additional arrangement. At the end of the additional arrangement, at which time the conduit debt obligation is paid off, the government-issuer assumes control of the entire capital asset. Regarding this scenario, the Board tentatively decided that (a) the government-issuer should not report a liability for the conduit debt obligation, (b) the government-issuer should report the capital asset as its own capital asset, (c) the government-issuer should not bifurcate the capital asset based on the third-party obligor’s exclusive use and nonexclusive use, (d) the government-issuer should not report a receivable for the payments related to the additional arrangement, and (e) the additional arrangements are not leases for financial reporting purposes and, therefore, the government-issuer should not apply the requirements in Statement 87.
 
For Scenario 3, the Board also tentatively decided that the issue of the credit side of the journal entry for the capital asset transaction reported by the government-issuer should be addressed in this project rather than being deferred to future projects. The Board also tentatively agreed that the credit side of the journal entry when the government-issuer recognizes the capital asset in Scenario 3 should be reported as a deferred inflow of resources and that the deferral should be reduced over the term of the additional arrangement as revenue is recognized.
 
Next, the Board considered potential disclosure requirements for conduit debt obligations. The Board tentatively decided that the existing disclosure requirements in Interpretation No. 2, Disclosure of Conduit Debt Obligations, including conforming edits, should be included in the proposed Statement. If a government-issuer recognizes a liability for a commitment it has made in relation to the conduit debt obligation, or when a government-issuer has made debt service payments for the conduit debt obligation during the reporting period, the Board also tentatively decided that the disclosures found in paragraph 15 of Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, which will be conformed to the terms used in this project, should be proposed for conduit debt obligations. Finally, the Board tentatively decided that neither the information about the identity of third-party obligors nor the projects being financed with conduit debt obligations should be proposed for conduit debt obligations.

Minutes of Meetings, January 23−24, 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 that it is not necessary to separate housing-related conduit debt obligations from conduit debt obligations in general, or to develop separate distinguishing characteristics for housing-related conduit debt obligations. The Board also tentatively agreed to refine the general definition of conduit debt obligations.

Minutes of Meetings, December 12−14, 2017
 
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 propose that a conduit debt obligation not be recognized as a liability because it does not meet the definition of a liability. The Board then tentatively agreed that the alternatives for recognition of loss contingencies in a conduit debt obligation should be those found either in the contingencies literature in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, or in the nonexchange financial guarantee literature in Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. For all categories of a conduit debt obligation, the Board tentatively decided to propose that the recognition criteria for loss contingencies in conduit debt obligations be when a payment is more likely than not, as in Statement 70. Following that, for financial statements prepared using the economic resources measurement focus, the Board tentatively decided to propose that liabilities resulting from issuers’ commitments be measured consistent with the literature that is used for recognition—Statement 70.
 
Next, the Board considered liability recognition for financial statements prepared using the current financial resources measurement focus. The Board tentatively agreed that the guidance found in Statement 70 for such financial statements should be included in a proposed Statement, with conforming edits. Finally, the Board tentatively decided that the proposed Statement should provide qualitative factors and refer to historical data, similar to those in Statement 70, when evaluating whether a liability should be recognized for issuers’ commitments in a conduit debt obligation.

Minutes of Meetings, October 31–November 2, 2017

The Board continued discussion of the definition of a conduit debt obligation for the purpose of developing a proposed Statement. The Board tentatively decided to propose that a third-party borrower and an issuer not be within the same financial reporting entity and that exclusion be included as another key characteristic of a conduit debt obligation. The Board then tentatively decided that the purpose of a conduit debt obligation should not be limited to capital financing. The Board also tentatively decided that the terms revenue bonds, limited obligation, and limited-obligation revenue bonds should not be included in the definition of a conduit debt obligation. The Board then tentatively decided that whether a government-issuer is the recipient of debt proceeds or the provider of debt service payments should not be a defining characteristic of a conduit debt obligation. The Board also discussed a proposed definition but agreed to continue its discussion of the definition at a future meeting.

Minutes of Meetings, September 27 and 28, 2017

In its initial deliberations of the project, the Board discussed the definition of a conduit debt obligation. The Board tentatively decided to propose that the key characteristic of a conduit debt obligation be that there are three participants: the government-issuer, the third-party borrower, and the bondholder. The Board then tentatively decided to propose that the definition of a conduit debt obligation be expanded to include all issuers’ commitments.