GASB Issues Statement on Nonexchange Financial Guarantees
May 16, 2013
The Governmental Accounting Standards Board (GASB) has released Statement 70, "Accounting and Financial Reporting for Nonexchange Financial Guarantees." Statement 70 provides guidance for state and local governments that have extended or received financial guarantees that are nonexchange transactions. Nonexchange means that a guarantee was provided without receiving an equal form of consideration in exchange for the guarantee. The financial guarantees in the standard apply to borrowing obligations.
Generally, nonexchange financial guarantees are extended by governments as part of their mission to assist other governments, nongovernmental entities, or individuals within the government's jurisdiction. Governments may also receive a financial guarantee for an obligation it has issued without providing any value in return. An example of this would be a public institution that receives a financial guarantee on debt service payments from its state government, without providing consideration to the state government for the guarantee.
When qualitative factors and historical data indicate that it is "more likely than not" that a government will be required to make a payment related to the nonexchange financial guarantees it extended for liabilities of other entities or individuals, the government should recognize a liability and an expense in its financial statements. In Statement 70 the term "more likely than not" means a likelihood of more than 50 percent.
If a government is required to repay a guarantor for nonexchange financial guarantee payments, the government should reclassify the portion of its liability subject to repayment as a liability to the guarantor. The government that issued the guaranteed obligation should continue to recognize its liability until that portion of the liability is legally released. When a government that receives a nonexchange financial guarantee is legally released as an obligor from the obligation and from any liability to the guarantor, the government should recognize revenue to the extent of the reduction of its guaranteed liabilities.
Statement 70 specifies the information required to be disclosed by governments that extend nonexchange financial guarantees - whether or not the guarantee becomes actionable. Disclosure requirements increase when guarantor governments recognize a liability or make payments on the borrower's obligation. In turn, governments that receive nonexchange financial guarantees must disclose information about the guarantee, and would need to disclose additional information if payments are made by the guaranteeing government.
The requirements of this statement are effective for reporting periods beginning after June 15, 2013 - or FY14 for the vast majority of public colleges and universities. Earlier application of the standard is encouraged. The new standard is available for download from GASB's Web site.
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