In March of this year, the Governmental Accounting Standards Board (GASB) issued a new requirement that all governments are expected to follow. GASB Statement No. 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements mandates that state and local governments disclose new information about their debts in the footnotes to their financial statements. GASB 88 builds on the disclosure requirements that were set forth in GASB 34 and GASB 38, but its new requirements address concerns that stakeholders had expressed about governments’ direct borrowings and direct placements. The new disclosures will be helpful to all users of the financial statements, but they will be especially helpful to lenders and credit rating institutions who place great importance on the risks associated with different types of long-term debt.
GASB 88 will go into effect for reporting periods that begin after June 15th of this year, so time is of the essence for many of our fiscal-year governmental entities. Let’s take a look at GASB’s new requirements so that you can collect the information you’ll need to comply with these changes by the end of your next reporting period.
GASB 88 Details
GASB 88 begins by defining what debt is.
“…debt is defined 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.”
Accounts payable are specifically excluded from this definition, as are leases. The only leases that will require the additional disclosures of GASB 88 are those where there is a contract to purchase the underlying asset at the end of the lease term. Interestingly, there are a few types of debt that are not explicitly excluded, but that also do not appear to fit the definition of debt: net pension liabilities, other post-employment benefit liabilities, and compensated absences are the primary examples. Governments can continue to follow existing guidance in these areas, including the recent changes resulting from GASB 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions.
Once debt is defined, entities can begin drafting the correct disclosures. They will need to include in their notes to the financial statements the following information:
- Changes in long-term debt;
- Repayment schedules;
- Which assets are pledged as collateral for outstanding debt;
- The amount of unused lines of credit; and,
- Any significant terms listed in their debt agreements that include:
- Subjective acceleration clauses;
- Termination events that have finance-related consequences; and
- Situations of default that have finance-related consequences.
Reporting this new information is important, but the section of GASB 88 getting all of the buzz is the one that directs governments to separate their direct borrowings and direct placements of debt from other forms of debt. Direct borrowings, or “private borrowings,” is debt that is incurred when governments go to a bank or some other private institution to get a loan rather than utilizing a public offering. The risks associated with these private placements may be different than the risks of holding more traditional types of debt, like general obligation bonds or revenue bonds. The disclosures for each category of debt will be the same, but they must be segregated so that users of the financial statements can assess risk more accurately.
Why Is Debt Segregation Necessary?
In recent years, governments have been more open to direct placements; they are often simpler and have fewer issuance costs than bonds that are marketed to the public. As more governments opted for this type of private debt, stakeholders began to question how the risks of the entity’s overall debt composition had shifted. They specifically wondered how this new type of debt would impact the government’s future stability, especially in cases of default or termination of the loan. For example, governments might be utilizing a private borrowing that has a priority for repayment, which proves much riskier than a loan without priority for repayment.
How Can I Prepare?
Governments will want to take note of the looming compliance deadline and make changes as soon as they can. Not only will GASB 88 necessitate additional information gathering, but this first year will require some management muscle to draft the disclosures themselves. Members of the LaPorte Public Sector Industry Group have a great deal of experience with local governments and can help them come into compliance with GASB 88. If you have any questions about this new pronouncement, contact us and let us help – it’s what we love to do.