Governments are continuing to identify new avenues to borrow and are diversifying their debt-issuance practices. One of the newer trends in governments is direct borrowing from banks. These borrowings have led some users of the financial statements to have some concerns about the level of disclosure provided in the notes to the financial statements. Inconsistency in the level of detail provided surrounding these arrangements, or no disclosure at all, along with inappropriate financial statement classification of debt, caused GASB to add this project to the technical agenda in August of 2016.
The culmination of this project was the issuance of GASB 88 in March of 2018. This Statement, which is effective for years ending June 30, 2019, seeks to improve the information disclosed related to debt, including direct borrowings and direct placements, and to clarify which liabilities governments should include when disclosing information related to debt.
One critical piece of this standard is the definition of debt for purposes of disclosure. Per GASB 88, 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.” The standard then goes on to clarify the debt does not include most leases or accounts payable.
Going along with the theme of clarity and consistency, this standard also adds other disclosure requirements. It requires disclosure of unused lines of credit, assets pledged as collateral for debt, and significant terms specified in the debt agreement related to events of default, termination events, or subjective acceleration clauses.
Lastly, it requires that the information pertaining to direct placements and direct borrowings be shown separately from other debt.
While not technically cumbersome, entities will want to take the time to identify and collect the information for the new disclosure requirements. If you have direct borrowings or direct placements and are unsure what information is necessary to disclose, CRI government specialists are available to answer your questions.