Two American Institute of CPAs (AICPA) panels recently submitted comments to the Governmental Accounting Standards Board (GASB) on its Exposure Draft (ED), Conduit Debt Obligations. The primary objective of the ED is to define conduit debt obligations for accounting and financial reporting purposes, establish recognition and measurement criteria for liabilities related to conduit debt obligations and improve required note disclosures for conduit debt obligations.
The ED proposes defining conduit debt as having six specific characteristics, including that it is a liability of a third-party obligor, not the issuer.
Both the AICPA State and Local Government Expert Panel (SLGEP)and the AICPA Private Companies Practice Section Technical Issues Committee (TIC) support the Board’s proposed definition of conduit debt and the underlying notion that a conduit debt obligation is a liability of the third-party obligor.
In its October 31 letter, SLGEP asked the Board to provide guidance on when liabilities related to conduit debt obligations may be derecognized. SLGEP disagreed with the explicit requirement to annually evaluate conduit debt arrangements for additional commitments, citing an inherent requirement in generally accepted accounting principles to do so. The letter noted that this ED focuses entirely on the accounting of the issuer. However, there are some considerations from the third-party obligor’s perspective that may not be intuitive in existing literature. SLGEP also asked for some additional clarification on intra-entity debt arrangements.
TIC’s October 22 letter noted that, in practice, the estimates required by paragraph 10 of the ED will be difficult to perform. TIC suggested that the Board consider adding some additional implementation guidance and examples that will assist governments in performing these estimates, including guidance on how a government might develop that range. TIC echoed the concerns of the State and Local Governmental Panel with regard to the annual assessment being redundant, the focus on the issuer, and clarification on intra-entity debt arrangements.