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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

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Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Notes & Samples

NOTE 6 – Bonded Indebtedness
Accounting for Early Extinguishments and Advance Refunding

When debt is extinguished, refunded, or defeased, the accounting treatment depends on the type of fund, the measurement focus, and whether the transaction uses existing resources or proceeds of new debt.

Governmental Funds

When debt is extinguished in governmental funds, the proper recording of the extinguishment depends on the resources used to extinguish the debt.

If debt is extinguished using existing resources, report the payment as a debt service expenditure in the fund making the payment. If cash or other monetary assets acquired with existing resources are placed in an irrevocable trust that meets the criteria for in-substance defeasance, the debt is no longer reported as a liability in the government-wide financial statements. GASB 86 requires note disclosure of the transaction in the period of defeasance and disclosure in later periods of the amount of defeased debt still outstanding, if any.

If debt is refunded using proceeds from new debt, report the proceeds as other financing sources in the fund receiving the proceeds. Report the payment to the escrow agent or bondholders as other financing uses or debt service expenditures, as applicable. The old debt is removed from the government-wide long-term liabilities if legally extinguished or defeased in substance, and the new debt is reported as a long-term liability.

Proprietary Funds

Current refunding and advance refunding resulting in defeasance of debt in proprietary funds is governed by GASB 7, GASB 23, GASB 65 and GASB 86.. Refunding involves the issuance of new debt whose proceeds are used to repay previously issued debt. The proceeds may be used immediately for this purpose (a current refunding) or they may be placed with an escrow agent and invested until they are used to pay principal and interest on the old debt at a future time (an advance refunding).

For proprietary funds and government-wide statements, GASB 65 requires the difference between the reacquisition price and the net carrying amount of the old debt be reported as a deferred outflow of resources or deferred inflow of resources, as applicable. That deferred amount is recognized as a component of interest expense in a systematic and rational manner over the shorter of the remaining life of the old debt or the life of the new debt, as required by GASB 23 and carried forward pursuant to GASB 65.

Note: Amortization is required if the amount equals or exceeds 5 percent of the refunded debt. Lesser amounts may be expensed in the year of the refunding.

Debt issuance costs, except any portion related to prepaid insurance, are expensed in the period incurred in accordance with GASB 65, paragraphs 12–13. Prepaid insurance related to debt is recognized as an asset and amortized over the duration of the related debt issue. For extinguished or refunded debt, GASB 86, paragraph 6, requires that any remaining prepaid insurance associated with the extinguished debt be included in the net carrying amount of the old debt when calculating the gain or loss on extinguishment or the deferred outflow/inflow of resources arising from a refunding.

Other Fund Types

For fund types reported using the economic resources measurement focus, remove the old debt from the statement of net position when the debt is legally extinguished or defeased in substance, in accordance with GASB 7 and GASB 86. Recognize any separately identified gain or loss, or deferred outflow/inflow of resources from refunding, based on the difference between the reacquisition price and the net carrying amount of the old debt, as required by GASB 23, as amended by GASB 65.

COBJs Used to Record Refunding of Long-Term Debt

When refunding long-term debt with bonds payable, report proceeds from new debt as other financing sources rather than revenue for governmental funds. Record the funding of long-term debt using the following COBJs:

  • If the refunded debt is bonds payable, use COBJ 3870 – Bonds Issued to Refund Existing Bond Debt.
  • If the refunded debt is other than bonds payable, use COBJ 3878 – Bonds Issued to Refund Other Debt.