WASHINGTON – The Governmental Accounting Standards Board has published a new financial reporting standard for state and local governments designed to enhance debt-related disclosures for direct borrowings and private placements in the notes to financial statements.

The new standard, contained in Statement 88, takes effect for the reporting period beginning after June 15, 2018 and applies to annual reports for fiscal years ending June 30, 2019 and afterward.

“We found governments are entering into more direct borrowing, where they go to a bank or do a private placement rather than a public offering of debt,” GASB Chairman David Vaudt told The Bond Buyer.

GASB Chairman David Vaudt
GASB Chairman David Vaudt Brian Tumulty, The Bond Buyer

“Concern was raised by user groups about the adequacy of the disclosures surrounding that debt,” he said.

Local governments in some cases weren’t disclosing repayment covenants with a bank that might include a priority for repayment.

Statement 88 requires the disclosure of amounts of unused lines of credit and assets pledged as collateral for debt. It also requires disclosure of terms specified in debt agreements related to significant: events of default with finance-related consequences; termination events with finance-related consequences; and subjective acceleration clauses.

GASB standards are not binding on state and local governments but they must be adhered to in order for governments to receive clean opinions on audits of their financial statements.

GASB has been working on the new standard since August 2016.

The Government Finance Officers Association offered comments in September of last year in general support with some advice for technical changes.

Emily Swenson Brock, director of GFOA’s federal liaison center, described bank loans and direct placements as “a cost-effective tool that may be utilized to create infrastructure by many issuers across the country.”

“Local governments use bank loans, in general, it’s because they are simpler than a bond issue that is marketed to the public market, with fewer issuance costs and ongoing compliance requirements,” Brock said. “Additionally, bank loans can often be structured in a manner that more closely conforms to specific project or repayment considerations than is the case with bond issues.”

GFOA also offers best practice advice to local governments on the use of bank loans.

Statement 88 also provides a uniform definition of what constitutes debt for financial statement reporting purposes.

“There was some confusion by preparers and auditors of which long-term liabilities were debt and were subject to the debt disclosure requirements, so we added some clarity,” Vaudt said.

For instance, pension obligations are not covered by this standard nor are compensated absences.

The new GASB statement requires footnotes for direct borrowings to be listed separately from those for other debt.

GASB issues about four or five statements annually to provide reporting and accounting standards for state and local governments.

Statement 88 is the first guidance issued this year. GASB is working mostly on implementation guides, but also has a project involving capitalization of interest costs that’s expected to be published in the second quarter and another planned for the third quarter on equity interest ownership that primarily impacts tribal governments, according to a GASB spokesman.

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