Governmental Accounting Standards Update: 4/24/19
The Governmental Accounting Standards Board (GASB) regularly issues GASB statements to set accounting and financial reporting standards for state and local governments that follow generally accepted accounting principles in the United States (U.S. GAAP). Below are select statements that were recently issued.
- GASB Statement No. 88, Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements
- GASB Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period
- GASB Statement No. 90, Majority Equity Interests
GASB issued Statement No. 88, Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements to improve information provided in the notes to government financial statements related to debt. Statement No. 88 also clarifies which liabilities should be included when disclosing information related to debt.
Statement No. 88 is intended to provide users with critical information regarding debt that is not consistently provided, including information regarding debt liquidation resources and the risks associated with changes in debt terms. This will provide users of government financial statements better information regarding the effects of debt on future resource flows.
Definition of Debt for Disclosure Purposes
For purposes of the disclosure requirements, Statement No. 88 defines debt as “a liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established.” Statement No. 88 clarifies that accounts payable and leases, except for contracts reported as a financed purchase of the underlying asset, should not be considered debt for disclosure purposes.
Additional Disclosure Requirements
Statement No. 88 requires the following note disclosures, in addition to existing disclosure requirements related to debt:
- Amount of unused lines of credit
- Assets pledged as collateral for debt
- Terms specified in debt agreements related to:
- Significant events of default with finance-related consequences
- Significant termination events with finance-related consequences
- Significant subjective acceleration clauses
Information related to direct borrowings and direct placements of debt should be presented separately from other debt.
Effective Date and Transition
Statement No. 88 is effective for reporting periods beginning after June 15, 2018, and applies to the notes to the financial statements for all periods presented. If the application to prior periods presented is not practicable, the reason for not applying Statement No. 88 to the prior periods should be disclosed. Early adoption is encouraged.
GASB issued Statement No. 89, Accounting for Interest Costs Incurred before the End of a Construction Period to simplify accounting for interest cost incurred before the end of a construction period as well as enhance the relevance and comparability of information about capital assets and the cost of borrowing.
Changes in Recognition Requirements
Statement No. 89 requires interest cost incurred before the end of the construction period to be recognized as an expense in the period incurred for financial statements prepared using the economic resources measurement focus. After adoption of Statement No. 89, interest cost incurred before the end of a construction period will no longer be included in the historical cost of capital asset reported in a business-type activity or enterprise fund of a governmental entity. Statement No. 89 emphasized that such interest costs should be recognized as an expenditure on a basis consistent with governmental fund accounting principles for financial statements prepared using current financial measurement focus.
Effective Date and Transition
Statement No. 89 is effective for reporting periods beginning after Dec. 15, 2019 and should be applied prospectively. Early adoption is encouraged.
GASB issued Statement No. 90, Majority Equity Interest – an amendment of GASB Statements No. 14 and No. 61 to improve the relevance of information for certain component units and the consistency and comparability of reporting a government’s majority interest in a legally separate organization. Statement No. 90, which applies to all state and local governments, modifies current requirements related to reporting a government’s majority equity interest in a legally separate organization and provides guidance for reporting a component unit if a government acquires a 100% equity interest.
Definition of an Equity Interest
Statement No. 90 defines an equity interest as “a financial interest in a legally separate organization evidenced by the ownership of shares of the organization’s stock or by otherwise having explicit, measurable right to the net resources of the organization that is usually based on an investment of financial or capital resources by a government.” The equity interest is considered explicit and measurable if the government has a present or future claim to the net resources of the organization and the method for measuring the government’s share of those resources is determinable. The definition does not include a government’s residual interest in assets that may revert to the government upon dissolution in the absence of another equitable claimant.
Reporting a Majority Equity Interest
Statement No. 90 states that a majority equity interest in a legally separate organization should be reported as an investment if the equity interest meets the definition of an investment. Statement No. 72 defines an investment as “a security or other asset that (1) a government holds primarily for the purpose of income or profit and (2) has a present service capacity based solely on its ability to generate cash or to be sold to generate cash.” Such majority equity interests should be measured using the equity method, unless it is held by a special-purpose government engaged only in fiduciary activities, a fiduciary fund, or an endowment (including permanent and term endowments) or permanent fund. Those governments and funds should measure the majority equity interest at fair value.
For all other holdings of a majority interest in a legally separate organization, the legally separate organization should be reported as a component unit, and the government or fund that holds the equity interest should report an asset related to the majority equity interest using the equity method. Statement No. 90 notes that ownership of a majority equity interest in a legally separate organization results in the government being financially accountable for the legally separate organization and, therefore, the government should report that organization as a component unit.
Statement No. 90 also requires that a component unit in which a government has a 100% equity interest account for its assets, deferred outflows of resources, liabilities, and deferred inflows of resources at acquisition value at the date the government acquired the 100% equity interest in the component unit. The activities of the component unit should include only transactions that occurred subsequent to the date of acquisition.
Effective Date and Transition
Statement No. 90 is effective for reporting periods beginning after Dec. 15, 2018. Earlier adoption is encouraged. The requirements should be applied retroactively, except for the provisions related to reporting a majority equity interest in a component unit and reporting a component unit if the government acquires a 100% equity interest. Those requirements should be applied on a prospective basis.
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