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Business and Policy Areas
Business and Policy Areas

GASB Proposals Would Expand Conditions for Debt Defeasance

September 16, 2016

An exposure draft of the Governmental Accounting Standards Board (GASB) would allow a debt defeasance when a governmental entity's own resources are set aside in a trust for the future repayment of outstanding debt.

In general, defeasance is a provision that voids existing debt when a borrower sets aside amounts sufficient to service the borrower’s remaining debt. However, under existing GASB guidance, a governmental entity can only extinguish debt through defeasance when the proceeds of a refunding arrangement are set aside in a trust and used to pay down the debt over its remaining life. GASB’s proposal "Certain Debt Extinguishment Issues," would allow other existing resources to be set aside in a trust to accomplish the same purpose as a bond refunding for defeasance.

The Board asserts in its proposal that the source of funds for a defeasance should not matter because the economic substance of the transaction is the same. Under the newly proposed guidance, although the assets set aside in the trust and the defeased debt would no longer be on a public institution's balance sheet, disclosures would be required over the remaining life of the defeased debt. Although NACUBO agrees with GASB’s notion that the economics of a defeasance should determine the financial accounting and reporting, we are interested in feedback from public institutions. Comments on the exposure draft are due October 28. 


Sue Menditto
Director, Accounting Policy