GASB 91: New requirements for conduit debt issuers

Under a new GASB pronouncement, GASB 91, Conduit Debt Obligations, conduit debt issuers will have a single method of reporting conduit debt obligations, which is disclosure in the footnotes. If commitments are made related to the conduit debt, there may be other accounting implications. This article will explore these requirements, as well as other arrangements involving conduit debt, so that you can assess the impact on your entity.

What is conduit debt?

A conduit debt obligation is a debt instrument issued in the name of a state or local government (the issuer) that’s for the benefit of a third party primarily liable for the repayment of the debt (the third-party obligor). An obligation must have all of the following characteristics to be considered a conduit debt obligation:

• At least three parties must be involved: issuer, third-party obligor, and debt holder or debt trustee.
• The issuer and the third-party obligor aren’t within the same financial reporting entity.
• The debt obligation isn’t a parity bond of the issuer, nor is it cross-collateralized with other debt of the issuer.
• The third-party obligor or its agent — not the issuer — ultimately receives the proceeds from the debt issuance.
• The third-party obligor — not the issuer — is primarily obligated for the debt service payments.

Prior to the issuance of Statement No. 91, GASB allowed for diversity in financial reporting of conduit debt obligations by the issuer. The previous standards allowed for conduit debt obligations to be included only as a disclosure or, alternatively, allowed issuers to report a liability for conduit debt obligations on their balance sheet. Any issuers currently reporting the conduit debt liability on their balance sheet will have to remove it in accordance with Statement No. 91 and include it as a footnote disclosure instead.

Commitments

A conduit debt issuer makes an inherent limited commitment to maintain the issue’s tax-exempt status.  Issuers can also choose to make additional commitments, which can be implicit or explicit, to support debt service payments. Some examples of additional commitments include, but are not limited to, the following types:

• Extending a moral obligation pledge
• Extending an appropriation pledge
• Extending a financial guarantee
• Pledging their own property, revenue, or other assets as security

Issuers can also choose to extend a voluntary commitment if they decide to make a debt service payment or request an appropriation for a debt service payment voluntarily in the event that the third party is, or will be, unable to do so.

When additional or voluntary commitments are extended, additional accounting implications may apply. Issuers must annually evaluate the likelihood of making a debt service payment for additional commitments. If a voluntary commitment is identified, this should also be reevaluated at least annually.

An issuer should recognize a liability associated with an additional commitment to support debt service payments and an expense in full accrual funds if qualitative factors indicate it is more likely than not that the issuer will support one or more debt service payments. In modified accrual funds, a fund liability and an expenditure should be recorded to the extent that the liability is normally expected to be liquidated with expendable available financial resources.

Other conduit debt arrangements

Issuers of conduit debt at times enter into associated arrangements that are often referred to as leases and display all of these attributes:

• Proceeds of the conduit debt are used to construct or acquire capital assets.
• The issuer retains title of the capital assets from the beginning of the arrangement.
• The payments from the third-party obligor are to cover the debt service payments.
• The payment schedule of the arrangement coincides with the debt service repayment schedule.

Although often called “leases,” these arrangements involving conduit debt would be accounted for by the issuer either using GASB Statement No. 60, if it meets the definition of a service concession arrangement, or by using guidance provided in Statement No. 91 if it doesn’t meet the definition of a service concession arrangement. The accounting treatment for the capital asset and associated inflows or deferred inflows of resources under Statement No. 91 by the issuer for these arrangements depends on whether the issuer relinquishes or retains title to the capital asset at the end of the arrangement.

Disclosure requirements

Issuers should disclose a general description of conduit debt obligations, including any limited, additional, or voluntary commitments. Disclosures should also include the aggregate outstanding principal amount of all conduit debt obligations at the end of the reporting period, grouped by those that share the same type of commitments. For additional commitments, a general description of the commitments, as well as the legal authority and limits for extending the commitments, the length of time of the commitments, and arrangements (if any) for recovering payments from the third-party obligors should also be disclosed.

Key details of GASB 91

Effective date: Originally applicable for reporting periods beginning after Dec. 15, 2020; however, GASB Statement No. 95, Postponement of the Effective Dates of Certain Authoritative Guidance, delayed implementation to periods beginning after Dec. 15, 2021.

Early application: Allowed and encouraged.

Application method: Retroactively, by restating financial statements for all prior periods presented.

Final thoughts

As a takeaway from this article, we recommend you read Statement No. 91 and consider whether any of your organization’s obligations meet the definition of conduit debt and need to be analyzed further. If you’re an issuer of conduit debt, you’ll need to assess whether there are any associated commitments or other arrangements related to capital assets associated with the conduit debt and determine the appropriate accounting treatment.

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