Statement No. 58
Accounting and Financial Reporting for Chapter 9 Bankruptcies
The objective of this Statement is to provide accounting and financial reporting guidance for governments that have petitioned for protection from creditors by filing for bankruptcy under Chapter 9 of the United States Bankruptcy Code. It requires governments to remeasure liabilities that are adjusted in bankruptcy when the bankruptcy court confirms (that is, approves) a new payment plan.
For accounts payable, notes, debentures and bonds, and related interest payable, this Statement requires governments to base remeasurement on the new payment plan. Reductions in future interest payments would result in lower interest costs reported in future periods. Reductions to principal or to accrued interest payable may result in gains reported at the time of the reduction. If the new payment plan does not indicate whether it reduces principal payments or future interest payments that have not been accrued, the debt should be remeasured at the present value of the future payments using the original discount rate, and a gain should be reported at the time of the reduction.
For leases, pollution remediation liabilities, and liabilities for pension and other postemployment benefit plans, this Statement requires remeasurement based on existing authoritative guidance. However, if a benefit plan is rejected in bankruptcy and becomes general unsecured debt, this Statement requires the existing liability to be removed and a new approved payment plan to be recognized as a judgment, with a gain or loss recognized for the difference.
For governments that are not expected to emerge from bankruptcy as going concerns, this Statement requires remeasurement of assets to a value that represents the amount expected to be received.
This Statement classifies gains or losses resulting from remeasurement of liabilities and assets as an extraordinary item.
Governments that have filed for bankruptcy are required to disclose information regarding, among other things, the pertinent conditions and events giving rise to the petition for bankruptcy, the expected gain, and the effects upon services.
This Statement is effective for reporting periods beginning after June 15, 2009.
How the Changes in This Statement Will Improve Financial Reporting
Prior to this Statement, there was no authoritative accounting and financial reporting guidance for governments filing for bankruptcy. Other accounting standards that have been applied to Chapter 9 bankruptcy take different approaches to, for example, recognition and measurement. The requirements in this Statement will improve financial reporting by providing more consistent recognition, measurement, display, and disclosure guidance for governments that file for Chapter 9 bankruptcy. In addition, these requirements will provide financial statement users with better information regarding the effects of bankruptcy upon governments that file for Chapter 9 protection.
Unless otherwise specified, pronouncements of the GASB apply to financial reports of all state and local governmental entities, including general purpose governments; public benefit corporations and authorities; public employee retirement systems; and public utilities, hospitals and other healthcare providers, and colleges and universities. Paragraph 2 discusses the applicability of this Statement.