Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Specialized Accounting

Non-Exchange Financial Guarantees

GASB 70 provides guidance on accounting and financial reporting for non-exchange financial guarantees. A state agency sometimes extends financial guarantees to other governments, non-governmental entities, or individuals as part of its mission to assist these parties within its jurisdictions.

A non-exchange financial guarantee is a guarantee by a state agency of an obligation of a legally separate entity or individual requiring the state agency (guarantor) to indemnify a third-party obligation holder if the legally separate entity or individual does not fulfill the requirements under the obligation. The guarantor does not receive equal or approximately equal value from the legally separate entity or individual in return for extending the financial guarantee.

An example of a non-exchange financial guarantee is a state agency that extends a financial guarantee to a school district for the school district’s debt service payments on construction bonds without receiving any consideration from the district in return for extending the financial guarantee.

If the issuer extended a non-exchange financial guarantee associated with a conduit debt obligation, the issuer applies GASB 91, paragraphs 12–17 and 24–26 — rather than GASB 70, paragraphs 7–10 and 14–15.

GASB 70 does not apply to guarantees related to special assessment debt within the scope of GASB 6.

GASB 99 attributes the reporting and disclosure requirements of non-exchange financial guarantees to those of exchange or exchange-like financial guarantees.

For information on note disclosures and samples, see Note 30 – Financial Guarantees.

Governments Extending Financial Guarantees

The state agency extending non-exchange financial guarantees considers qualitative factors in assessing the likelihood of making a payment in relation to the guarantee. Qualitative factors include, but are not limited to, the following factors related to the legally separate entity or individual receiving the guarantee:

• Initiation of the bankruptcy process or financial reorganization
• Breach of the debt contract related to the guaranteed obligation (such as failure to meet rate covenants or coverage ratios, default or delinquency in debt service payments)
• Other indicators of significant financial difficulty, such as:
  • Failure to make payments on a timely basis
  • Drawing on a reserve fund to make debt service payments
  • Debt holder concessions
  • Significant investment losses
  • Loss of a major revenue source
  • Significant increase in non-capital disbursements related to operating revenues
  • Commencement of financial supervision by another government

The state agency extending similar non-exchange financial guarantees to a group of organizations or individuals considers applicable qualitative factors and relevant historical data (such as default frequency) in assessing the likelihood that a payment related to the guarantees will be required.

Recognition and Measurement in Accrual Basis Financial Statements

The state agency recognizes a liability and grant expense when it determines that it is more likely than not that it will be required to make a payment related to a non-exchange financial guarantee. The expense amount is the discounted present value of the best estimate of the future cash outflows expected to be incurred as a result of the guarantee.

Note: More likely than not means the likelihood is greater than 50 percent.

Recognition and Measurement in Modified Accrual Basis Financial Statements

The state agency recognizes a liability and expenditure when it determines that it is more likely than not that it will be required to make a payment related to a non-exchange financial guarantee. The liability is the amount normally expected to be liquidated with expendable available financial resources when payments are due and payable on the guaranteed obligation.

Note: More likely than not means the likelihood is greater than 50 percent.

Governments Issuing a Guaranteed Obligation

The state agency issuing a guaranteed obligation reclassifies the previously recognized liability for the guaranteed obligation as a liability to the guarantor if it is required to repay the guarantor for the financial obligation paid on its behalf. The state agency continues to recognize the liability until it is legally released at which time the state agency recognizes revenue to the extent of the reduction of its guaranteed liability.

Intra-Entity Non-Exchange Financial Guarantees Involving Blended Component Units

The state agency issuing the guaranteed obligation recognizes a matching receivable and revenue. Simultaneously, the state agency extending a non-exchange financial guarantee recognizes a liability and expenditure/expense if the state agency issuing the guaranteed obligation is either a:

• Blended component unit of the extending state agency
• Primary government that includes the extending state agency as a blended component unit in its reporting entity
• Blended component unit as is the extending state agency — both of the same reporting entity

If either state agency (or both state agencies) in the above example is a discrete component unit, the state agency issuing the financial obligation recognizes revenue after the obligation is paid by the guarantor state agency and the liability is legally released.