GASB has improved its existing standards to provide a single method for government issuers to report conduit debt obligations and related commitments. The enhanced guidance is designed to eliminate diversity in practice associated with these issues.
Conduit debt obligations are debt instruments issued by a state or local government to provide financing for a specific third party, which is primarily liable for repaying the debt instrument. Third parties sometimes seek this kind of tax-exempt financing for projects such as the construction of a not-for-profit hospital, a not-for-profit university library, or a qualifying private business’s headquarters building.
GASB’s existing standards—Interpretation No. 2,
Disclosure of Conduit Debt Obligations
—allowed variation in practice among governments that issue conduit debt obligations, which adversely affects the comparability of financial statement information. The variation arose from the option for government issuers either to recognize conduit debt obligations as their own debt or to disclose them.
Statement No. 91
Conduit Debt Obligations
, addresses the variation in practice by:
- Clarifying what is a conduit debt obligation;
- Eliminating the option for government issuers to recognize conduit debt obligations, thereby providing a single method of reporting;
- Broadening the definition of conduit debt obligations to include those for which government issuers (1) make related additional commitments, such as guarantees or moral obligation pledges, or (2) voluntarily agree to make debt service payments or request an appropriation for such payments, if necessary;
- Clarifying how government issuers should account for and report (1) commitments they extend or voluntarily provide and (2) arrangements associated with conduit debt obligations, which often are characterized in practice as leases, but are not leases for financial reporting purposes; and
- Enhancing note disclosures.
Although government issuers will no longer report conduit debt obligations as liabilities, they may need to recognize a liability related to commitments they make or voluntarily provide associated with that conduit debt. Statement 91 requires a government issuer to recognize a liability if qualitative factors indicate that it is more likely than not that it will support one or more debt service payments for a conduit debt obligation.