Reporting Requirements for Annual Financial Reports of State Agencies and Universities
Notes & Samples
NOTE 5 – Long-Term Liabilities
Direct Borrowings and Direct Placements
GASB 88 defines debt and establishes additional financial statement note disclosure requirements related to debt obligations of state agencies, including:
- Direct Borrowings – Borrowers who use a direct borrowing usually do so by going directly to the lending source to avoid the high-interest rates associated with indirect lending (such as a public offering where the borrower has no relationship with the lender/investor) – for example, borrowing money from a bank. Direct borrowing is generally conducted without the use of an agent (such as a broker or investment banker) – for example, a state agency entering into a loan agreement with a lender.
- Direct Placements – Use for the sale of an issue of debt securities to a single buyer or to a limited number of buyers without a public offering. Direct placement is generally conducted by an investment banker who acts as an agent in bringing together the seller and the buyer(s) – for example, a state agency issuing a debt security directly to an investor.
The primary difference between direct borrowings and direct placements (also referred to in financing as a private placement) is the instrument. A borrowing is usually a loan instrument. A placement is usually a security. Notes and loans payable or financed purchases are direct borrowing. Bonds (revenues or general obligation) are securities and may be a direct placement or through an offering (negotiated or competitively underwritten).
Caution: When referring to direct borrowings and direct placements, the term “notes” is used for specific securities (such as Tax and Revenue Anticipation Notes) as well as occasionally part of a loan structure (such as a secured promissory note) — therefore, the reporting agency needs to correctly identify each note.
Direct borrowings and direct placements have terms negotiated directly with the investor or lender and are not offered for public sale. The requirements of GASB 88 apply to the financial statements of all state agencies.
GASB 88 amends:
- GASB 34 paragraph 119
- GASB 38, paragraphs 10 and 12
- GASB Interpretation 1, paragraph 11
- NCGA Interpretation 6, paragraphs 4 and 5
- GASB Implementation Guide No. 2015-1, Question 7.85.7
Scope and Applicability
For note disclosure to the financial statements, GASB 88 defines debt 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. Debt does not include:
- Leases (except for contracts reported as a financed purchase of the underlying asset)
- Accounts payable
COBJs and GLs for Reporting Direct Borrowings and Direct Placements
COBJs to Record Notes from Direct Borrowings and Notes from Direct Placements
| COBJ | Description |
|---|---|
| 3890 | Issuance of Direct Placements |
| 3889 | Issuance of Direct Borrowings |
| 7816 | Principal on Direct Placements |
| 7817 | Principal on Direct Borrowings |
| 7818 | Interest on Direct Placements |
| 7819 | Interest on Direct Borrowings |
GLs to Record Notes from Direct Borrowings and Notes from Direct Placements in Governmental Funds
| GL | Description |
|---|---|
| 1557 | BC CL Direct Borrowings – Notes and Loans |
| 1721 | BC NC Direct Borrowings – Notes and Loans |
| 1558 | BC CL Direct Placements – Notes and Loans |
| 1722 | BC NC Direct Placements – Notes and Loans |
| 1556 | BC CL Direct Borrowing – GO Bonds |
| 1801 | BC NC Direct Borrowing – GO Bonds |
| 1559 | BC CL Direct Placements – GO Bonds |
| 1802 | BC NC Direct Placements – GO Bonds |
| 1561 | BC CL Direct Borrowing – Revenue Bonds |
| 1761 | BC NC Direct Borrowing – Revenue Bonds |
| 1562 | BC CL Direct Placements – Revenue Bonds |
| 1762 | BC NC Direct Placements – Revenue Bonds |
GLs to Record Notes from Direct Borrowings and Notes from Direct Placements in Business-Type Activities
| GL | Description |
|---|---|
| 1071 | CL Direct Borrowings – Notes and Loans |
| 1221 | NC Direct Borrowings – Notes and Loans |
| 1072 | CL Direct Placements – Notes and Loans |
| 1222 | NC Direct Placements – Notes and Loans |
| 1056 | CL Direct Borrowing – GO Bonds |
| 1301 | NC Direct Borrowing – GO Bonds |
| 1059 | CL Direct Placements – GO Bonds |
| 1302 | NC Direct Placements – GO Bonds |
| 1061 | CL Direct Borrowing – Revenue Bonds |
| 1261 | NC Direct Borrowing – Revenue Bonds |
| 1062 | CL Direct Placements – Revenue Bonds |
| 1262 | NC Direct Placements – Revenue Bonds |
Required Note Disclosures
GASB 88 requires agencies to disclose the following summarized information:
- Amount of unused lines of credit
- Assets pledged as collateral for debt
- Terms specified in debt agreements related to significant:
- events of default with finance-related consequences
- termination events with finance related consequences
- subjective acceleration clauses
Report notes from direct borrowings and notes from direct placements in debt service funds (fund type 03). Amounts previously reported in a fund type other than debt service funds (fund type 03) are restated in the current reporting period. For more information, see NOTE 14 – Adjustments to Fund Balances and Net Position.
*For purposes of this determination, interest to be accrued and subsequently paid (such as interest on variable-rate debt) or interest to be added to the principal amount of the obligation (such as interest on capital appreciation bonds) does not preclude the amount to be settled from being considered fixed at the date the contractual obligation is established.