In today’s environment, state and local governments are guaranteeing the debt of other governments, not-for-profit entities, or private entities more often than they did previously. These are often considered nonexchange transactions – that is, no value is given (or not an equal value) in consideration of guaranteeing the obligation and indemnifying the holder of the obligation. Because of today’s economy, it has become more commonplace for some governments to have to make a payment on the guarantee because the other entity fails to meet its obligation to the third party.
To address this situation, the Governmental Accounting Standards Board (GASB) issued an Exposure Draft titled, Accounting and Financial Reporting for Nonexchange Financial Guarantee Transactions, to address accounting and financial reporting for governments that extend and receive nonexchange financial guarantees. The GASB proposal provides guidance on when a government guaranteeing an obligation would be required to report a liability and when a government receiving a guarantee would be required to recognize revenue as a result of being released as an obligor. The standard also would clarify the information required to be disclosed by governments that extend and receive nonexchange financial guarantees.
In its Sept. 27, 2012 letter, the AICPA’s State and Local Government Expert Panel expressed its support of some of the concepts in the GASB proposal, while also offering several suggestions for improvement. With regard to nonexchange financial guarantee transactions, the Panel requested that the Board clarify the definition of “financial guarantee” and questioned the Board’s conclusions regarding the exclusion of exchange transactions from the scope of the standard.
Additionally, the Expert Panel expressed its concern about the lack of consistency and potential confusion that may result by the introduction of a “more likely than not” criteria for determining whether a government will make a payment on a guarantee in lieu of the “probable” criteria that GASB has traditionally used for other similar types of contingent liabilities.
GASB has not scheduled a hearing on the proposal.