The Government Accounting Standards Board wants to raise the visibility in financial statements of backup financial guarantees made by municipalities after several cities recently found themselves in trouble when called upon to make good on their commitments.
To do this GASB issued an exposure draft, “Accounting and Financial Reporting for Nonexchange Financial Guarantee Transactions.” It is seeking public comment on the draft until Sept. 28.
The draft of the statement is meant to replace portions of GASB statement No. 62 that addressed government financial guarantees. The draft proposes rules for both guarantors and guaranteed governments. The draft can be downloaded from www.gasb.com.
There are three main differences between the current draft and statement 62, a GASB source said.
First, while in statement 62 the government guarantor is required to recognize a liability on its financial statements when it is “probable,” in the new draft it would be required to recognize the liability when it is “more likely than not.” That is defined as a greater than 50% likelihood.
The government would have to determine the liability amount and state it.
Second, unlike with statement 62, the draft requires the guaranteed party — a government, government authority or some other organization — to disclose the nature and amount of the government guarantee.
Third, the draft requires the government guarantor to disclose more detail on the obligation’s nature and amount.
Disclosure would be expected to take place in governments’ annual statements, the GASB source said.
An issuer government that is required to repay a guarantor would be required to continue to report a liability unless legally released, the draft indicates.
The draft also specifies that a guarantor should use qualitative factors to determine if it is more likely than not that it will have to pay.
GASB expects the new statement to come into effect on June 15, 2013, but encourages the early adoption of the statement’s provisions.
Disclosure of amounts of guarantees paid or received would be applied prospectively. Other provisions would be applied retroactively.
“GASB’s recent proposal to require governments to accelerate their recognition of potential liabilities related to guaranties would likely make a government’s anticipated resource needs to support a struggling guaranteed project visible earlier to market participants,” said MMA managing director Lisa Washburn. “This follows a number of issuers that have faced credit disruption related to calls on guaranties, including Harrisburg, Scranton, Salem and Collingswood.”
Some analysts already keep track of these guarantees, said Bank of America Merrill Lynch’s head of municipal research, John Hallacy. However, the rule should be an improvement to accounting and transparency, he said. It should make some nonprofessional investors aware of the guarantees earlier than they would otherwise have been.