Debt extinguished before it's maturity

Governmental Accounting Standards Board has issued guidance for state and local governments to use when they extinguish debt before it matures.

GASB’s Statement No. 86, Certain Debt Extinguishment Issues, provides guidance on accounting for transactions in which cash and other monetary assets that have been acquired with only a government body’s existing resources are put in an irrevocable trust only for the purpose of extinguishing debt.

The current GASB standards already offer guidance on how to account for and report when cash and other monetary assets that have been acquired with the proceeds of refunding bonds are placed in a trust for the future repayment of outstanding debt. However, GASB decided that more guidance was needed when only the existing resources (in other words, other than bond proceeds) are used to acquire cash and other monetary assets placed in a trust for the future repayment of outstanding debt.

The new GASB statement also includes guidance on prepaid insurance on debt that is extinguished and notes to the financial statements for defeased debt.When debt is defeased in substance, GASB noted, the debt and the cash and other monetary assets put in trust are not reported in the financial statements anymore. State and local governments are required, though, to disclose information in the notes to the financial statements about debt that has been defeased in substance.

The new requirements take effect for reporting periods beginning after June 15, 2017, although GASB is encouraging them to be applied earlier.