Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Notes & Samples

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

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 the debt is extinguished with existing resources, record the payment as an expenditure (debt service – payments for early extinguishment defeasance of bonds) in the fund making the payment. The old debt liability is eliminated from the general long-term liabilities.
• If the debt is extinguished using proceeds from new debt in a current refunding or advance refunding, report the proceeds as other financing sources (bonds issued for refunding debt) in the fund receiving the proceeds. Record the debt payment as other financing uses (payment to escrow for refunding debt) in the fund making the payment. The old debt liability is eliminated and replaced by the new debt in the general long-term liabilities.

Proprietary funds — Current refunding and advance refunding resulting in defeasance of debt in proprietary funds is governed by GASB 23 and GASB 65. 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).

GASB 23 requires disclosure of the difference between the reacquisition price and the net carrying amount of the old debt. Also required is the amortization of the difference as a component of interest expense (in a systematic and rational manner) over the remaining life of the old debt or the life of the new debt, whichever is shorter.

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.

The balance sheet presentation for the unamortized amount is reported as a deduction from or an addition to the new debt liability. In addition, GASB 23 makes the disclosures required by GASB 7, paragraphs 11–13, applicable to current refunding reported by proprietary activities. GASB 65 eliminates amortization of all issuance costs (other than prepaid insurance) and establishes deferred inflows of resources and deferred outflows of resources from refunding for unamortized gains or losses on refunding. This eliminates the application of this unamortized balance against bonds payable.

Other fund types — For fund types other than governmental and proprietary funds, record the extinguishing of debt by removing the old debt from the balance sheet and recognizing any resulting gain or loss on the operating statement. The accounting gain or loss is equal to the difference between the amount paid to extinguish the debt and the net carrying amount of the new debt. The net carrying amount is the par value adjusted for unamortized premium and discount.

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.