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Mauldin & Jenkins Governmental Newsletter July 26, 2019

GASB 91, Conduit Debt Obligations

By Miller Edwards, Mauldin & Jenkins

Statement No. 91, Conduit Debt Obligations was issued in May 2019 and is effective for the first reporting period beginning after December 15, 2020, meaning for those with year ends of December 31, 2021 and beyond.  

What is Conduit Debt?
A conduit debt obligation is defined as a debt instrument meeting all of the following characteristics: 

  • There are at least three parties involved: (1) an issuer, (2) a third-party obligor, and (3) a debt holder (or a debt trustee);
  • The issuer and the third-party obligor are not within the same financial reporting entity;
  • The debt obligation is not a parity bond of the issuer, nor is it cross-collateralized with other debt of the issuer;
  • The third-party obligor (or its agent), not the issuer, ultimately receives the proceeds from the debt issuance;
  • The third-party obligor, not the issuer, is primarily obligated for the payment of all amounts associated with the debt obligation (debt service payments).

All conduit debt obligations involve the issuer making a limited commitment. Some issuers extend additional commitments or voluntary commitments to support debt service in the event the third party is, or will be, unable to do so.

What are the Objectives of GASB 91?
The primary objectives of this Statement are to provide a single method of reporting conduit debt obligations by issuers and eliminate diversity in practice associated with (1) commitments extended by issuers, (2) arrangements associated with conduit debt obligations, and (3) related note disclosures. This Statement achieves those objectives by clarifying the existing definition of a conduit debt obligation; establishing that a conduit debt obligation is not a liability of the issuer; establishing standards for accounting and financial reporting of additional commitments and voluntary commitments extended by issuers and arrangements associated with conduit debt obligations; and improving required note disclosures.

How is Conduit Debt Recorded?
An issuer should not recognize a conduit debt obligation as a liability. However, an issuer should recognize a liability associated with an additional commitment or a voluntary commitment to support debt service if certain recognition criteria are met. As long as a conduit debt obligation is outstanding, an issuer that has made an additional commitment should evaluate at least annually whether those criteria are met. An issuer that has made only a limited commitment should evaluate whether those criteria are met when an event occurs that causes the issuer to reevaluate its willingness or ability to support the obligor’s debt service through a voluntary commitment.

What About Leases Associated with Conduit Debt?
This Statement also addresses arrangements—often characterized as leases—that are associated with conduit debt obligations. In those arrangements, capital assets are constructed or acquired with the proceeds of a conduit debt obligation and used by third-party obligors in the course of their activities. Payments from third-party obligors are intended to cover and coincide with debt service payments. During those arrangements, issuers retain the titles to the capital assets. Those titles may or may not pass to the obligors at the end of the arrangements.

Issuers should not report those arrangements as leases, nor should they recognize a liability for the related conduit debt obligations or a receivable for the payments related to those arrangements. In addition, the following provisions apply:

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  • If the title passes to the third-party obligor at the end of the arrangement, an issuer should not recognize a capital asset.
  • If the title does not pass to the third-party obligor and the third party has exclusive use of the entire capital asset during the arrangement, the issuer should not recognize a capital asset until the arrangement ends.
  • If the title does not pass to the third-party obligor and the third party has exclusive use of only portions of the capital asset during the arrangement, the issuer should recognize the entire capital asset and a deferred inflow of resources at the inception of the arrangement. The deferred inflow of resources should be reduced, and an inflow recognized, in a systematic and rational manner over the term of the arrangement.
Are Any Disclosures Required?
This Statement requires issuers to disclose general information about their conduit debt obligations, organized by type of commitment, including the aggregate outstanding principal amount of the issuers’ conduit debt obligations and a description of each type of commitment. Issuers that recognize liabilities related to supporting the debt service of conduit debt obligations also should disclose information about the amount recognized and how the liabilities changed during the reporting period.
If you have any questions on this new Standard or other topics, please let us know.  We will be glad to help.

About Mauldin & Jenkins, LLC

Mauldin & Jenkins has provided audit, accounting and tax services since 1918. Our culture, from the beginning, has been to provide top quality service to every client. We have grown into one of the top 100 accounting firms in the nation.
The governmental sector represents a significant practice division for Mauldin & Jenkins. We provide over 100,000 hours of service to our governmental clients on an annual basis, and currently serve over 450 governmental entities, including:
  • Cities,
  • Counties,
  • School districts,
  • State entities,
  • Special purpose entities (water/sewer, airports, transit, gas, electric, etc.),
  • Governmental pension and other post-employment benefit plans,
  • Development authorities,
  • Libraries,
  • Charter schools,
  • Special service districts,
  • Housing authorities,
  • Public university foundations, and
  • Other governmental units.  
Mauldin & Jenkins also serves approximately 125 governments that receive the Government Finance Officers Association (GFOA) Certificate of Achievement for Excellence in Financial Reporting, and, or the Association of School Business Officials (ASBO) Certificate of Excellence in Financial Reporting.
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