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GASB 91 & Conduit Debt Obligations Explained

In December 2021, the Governmental Accounting Standards Board’s new GASB 91 standard, Conduit Debt Obligations, went into effect. This standard altered conduit debt obligation accounting and reporting to streamline the process and enhance the usefulness of GASB-following financial statements.

To help you understand the new standard, we put together a guide to GASB 91.

We’ll first dive into why GASB 91 exists and what it changed regarding conduit debt obligations. Then, we’ll discuss new accounting procedures, disclosures, and other details in the new standard.

What is GASB 91?

GASB 91 is a new governmental accounting standard that systematizes how conduit debt obligations, or CDOs, are accounted for and reported on financial statements. GASB 91 was issued in May 2019 and took effect for all reporting periods beginning after December 15, 2021.

Before GASB 91, GASB-following entities such as governments and healthcare systems had more flexibility in reporting conduit debt obligations.

GASB 91 aims to make financial statements more useful to end users by eliminating this diversity of practice in CDO reporting.

Additionally, GASB 91 enhances financial statement note disclosures regarding issuers' commitments and the likelihood that they will fulfill them. These disclosure changes give financial statement users a better idea of each obligation’s potential impact on issuer resources and help users assess their roles in these obligations.

GASB 91 also clarifies the definition and rules around CDOs.

What is a Conduit Debt Obligation?

A conduit debt obligation is a debt obligation that one party issues to another party on behalf of a third party.

For example, a municipality issues a debt obligation to a debt holder and gives the proceeds to a not-for-profit hospital. This hospital uses the funds to build a hospital building and pays the debt service payments.

The hospital has a building, and the municipality has a healthcare facility for its citizens.

  • Under GASB 91, a debt obligation must meet all of the following criteria to be a CDO: There are at least three parties involved: an issuer, a third-party obligor, and a debt holder or trustee. There may be more than one third-party obligor, debt holder, or debt trustee in a CDO. The third party is often a not-for-profit hospital or affordable housing development.

  • The issuer and the third-party obligor are not within the same financial reporting entity. For example, a municipal government department cannot issue a CDO for another department in the same government.

  • The debt obligation is not a parity bond of the issuer or cross-collateralized with other debts. Parity bonds and other bonds issued under common bond indentures have equal rights to collateral. Cross-collateralization is when an asset secures a second debt.

  • The third-party obligor or its agent, not the issuer, receives the proceeds from the debt issuance.

  • The third-party obligor, not the issuer, is primarily obligated to pay all amounts associated with the debt obligation (debt service payments).

A CDO is not present if the debt obligation does not meet these criteria. Depending on the type of commitment made by the government agency, this may mean you must report a liability.

Other Commitments

A CDO issuer makes a limited commitment to keep the debt obligation’s tax-exempt status throughout the life of the debt. However, they are not responsible for making the debt service payments. That is on the third-party obligor.

That said, issuers can make additional implicit or explicit commitments to help the obligor meet their debt service payments if there is a risk that the obligor could default.

These commitments can include the following:

  • Extending a moral obligation pledge
  • Extending an appropriation pledge
  • Extending a financial guarantee
  • Pledging their property, revenue, or other assets as security

Beyond that, the issuer can make or request payments if they want which would be an Additional or Voluntary commitment. None of these impact the conduit status of the debt but could create a separate liability in the transaction that does not impact the CDO.

Accounting for Conduit Debt Arrangements

Some governments issue CDOs to finance the construction or acquisition of capital assets on behalf of third-party obligors.

However, the issuer retains the title to the capital asset being built or acquired for the life of the arrangement. Meanwhile, the obligor pays the debt holder — not the issuer — for the debt service payments.

These arrangements are frequently characterized as leases, but GASB 87 excludes them from lease guidance. Thus, the issuer should not report them as leases.

If one of these arrangements meets the GASB definition of a service concession arrangement (SCA), parties should follow GASB 60 guidance. All of the following criteria must be met to qualify as an SCA:

  • The government conveys the right and obligation to provide public services through the use and operation of a facility to the operator in exchange for significant consideration

  • The operator collects fees from a third party

  • The government determines or can modify or approve services provided, to whom services are provided, and the price/rate charged for services

  • The government is entitled to a significant residual interest in the service utility of the asset at the end of the arrangement

Otherwise, the issuer should use the following guidance, depending on the agreement’s structure:

  • The issuer relinquishes the title at the end of the arrangement. In general, the conduit debt obligation has been paid off by the end of the arrangement. Therefore, an issuer should not recognize a capital asset or liability for a CDO or receivable payments.

  • The issuer retains the title, and the third-party obligor exclusively uses the entire capital asset. The issuer should not recognize the capital asset initially. When the arrangement ends, the issuer should recognize the capital asset at its acquisition value using Statement 72, Fair Value Measurement and Application. The issuer should not recognize a liability for a CDO or receivable.

  • The issuer retains the title, and the third-party obligor has exclusive use of portions of the capital asset. At inception, the issuer should recognize the entire capital asset at its acquisition value and a deferred inflow of resources. The asset should be reduced, and the deferred inflow of resources should be recognized systematically and rationally over the arrangement term. The issuer should not recognize a liability for a CDO or a payment receivable.

GASB 91 Disclosure Requirements

GASB 91 requires entities to include the following information about their CDOs in their note disclosures within their financial statements:

  • General descriptions of all of the issuer’s CDOs
  • General descriptions of any related limited and voluntary commitments made to obligors
  • Aggregate outstanding principal amounts of all CDOs by commitment type
  • General descriptions of any additional commitments, such as legal authority and limits, commitment time lengths, and arrangements, if any, for recovering payments from obligors

If the entity exercises a commitment that causes them to recognize a liability, it must include the following disclosures:

  • A description of the timing of the liability’s recognition and measurement
  • Beginning balances, increases, decreases, and ending balances of all liabilities
  • Cumulative payments, if any, that have been made toward the liabilities
  • Arrangements or amounts the entity expects to recover, if any, for those payments

Finally, if there is no CDO, the issuer reports the debt obligation like any other debt.

In Conclusion

GASB 91 has systematized and streamlined CDO accounting to enhance financial statement usefulness. This can make CDO accounting simpler for governments in the long term by providing concrete procedures to follow.

Although DebtBook does not currently support GASB 91 compliance, it is important to be able to identify if your entity has any conduit debt that would be applicable to the GASB 91 standard. You will need to evaluate each obligation to see which ones GASB 91 considers CDOs. Then, you’ll need to assess the commitments or capital asset arrangements in each obligation and determine the proper accounting treatments.



Disclaimer: DebtBook does not provide professional services or advice. DebtBook has prepared these materials for general informational and educational purposes, which means we have not tailored the information to your specific circumstances. Please consult your professional advisors before taking action based on any information in these materials. Any use of this information is solely at your own risk.

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