GASB Statements 88 & 89October 1, 2019
By: Philip Marciano, CPA
Manager, Professional Standards Group
GASB STATEMENT 88
The Governmental Accounting Standards Board (“GASB”) issued statement 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements, which is effective for reporting periods beginning after June 15, 2018 (in other words, fiscal years ending June 30, 2019, and thereafter). Earlier application is allowed and encouraged.
There are two main provisions of this statement:
- Define debt for purposes of disclosure
- Require additional disclosures for debt
GASB 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.” What is not included, you ask? Leases are not included (except for those reported as a financed purchase of an asset), and neither are accounts payable. Accounts payable, although it may be stated at a fixed amount, is generally short-term in nature. Notice the definition is specific enough to state that a fixed amount be established when the debt is contractually obligated. Compare this to liability for pollution remediation or defined benefit post-employment obligation, where those items are not fixed amounts.
The statement does include direct borrowings (government entering into a loan agreement with a lender) and direct placements (government issues debt security directly to an investor). These types of borrowings allow for terms to be negotiated directly with the investor or lender and are not offered for public sale.
The statement also requires that the notes to the financial statements disclose summarized information about the amounts of any unused lines of credit or assets pledged as collateral for debt. Also, governments should disclose terms specified in their debt agreements related to significant – 1) events of default with finance-related consequences, 2) termination events with finance-related consequences, and 3) subjective acceleration clauses.
Disclosures of summarized information related to direct borrowings and direct placements of debt should be presented separately from information related to other types of debt, because of the different process the government goes through to incur the debt.
This statement was generally issued in response to the diversity in practice and confusion regarding the definition of debt and the related required disclosures that are found within other GASB Statements.
GASB STATEMENT 89
The Governmental Accounting Standards Board (“GASB”) issued statement 89, Accounting for Interest Cost Incurred before the End of a Construction Period, which is effective for reporting periods beginning after December 15, 2019 (in other words, calendar or fiscal years ending December 31, 2020 and thereafter). Earlier application is allowed and encouraged. This statement may be one of the shortest GASB has issued, at just six paragraphs long. The provisions of this statement establish the accounting for interest costs incurred before the end of a construction period.
Prior to the issuance of this statement, interest costs were capitalized as part of the historical cost of a capital asset. Under GASB statement 89, however, those costs should be recognized as an expense or expenditure in the period incurred, depending on the measurement focus.
Why the change? First, GASB agreed that the capitalized costs would not meet the definition of an asset when separated from a capital asset. Second, GASB agreed that interest cost is not an acquisition cost that is inseparable from the capital asset, but instead is a financing activity, and that the asset being financed will have the same ability to provide service regardless of whether interest is incurred.
GASB also considered whether the interest costs should be a deferred outflow of resources (a category unique to government financial statements). Just in case you forgot, I’ll remind you what that is – “a consumption of net assets by the government that is applicable to a future reporting period.” GASB agreed that interest costs are a cost applicable to the current reporting period, therefore not a deferred outflow of resources.
The good news is that this change is applied prospectively. For construction-in-progress, interest costs incurred after the beginning of the first reporting period that this statement is applied should not be capitalized. For example, if you applied this statement for the year ending December 31, 2020, interest incurred for construction-in-progress after January 1, 2020 should not be capitalized.