Advance Refunding of Debt Issues (2)
Statement No. 7 of the GASB sets the rules for when the debt can be removed from the statement of net assets as a result of an in-substance defeasance. The government must irrevocably place cash or other assets with an escrow agent in a trust to be used solely for satisfying scheduled payments of both interest and principal of the defeased debt, and the possibility that the government will be required to make future payments on that debt is remote. The trust is restricted to owning only monetary assets that are essentially risk-free as to the amount, timing, and collection of interest and principal. The monetary assets should be denominated in the currency in which the debt is payable. Statement No. 7 also prescribes that for debt denominated in US dollars, risk-free monetary assets are essentially limited to
- Direct obligations of the US government (including state and local government securities, which are a type of investment that the US Treasury issues specifically to provide state and local governments with required cash flows at yields that do not exceed the Internal Revenue Service’s arbitrage limits)
- Obligations guaranteed by the US government
- Securities backed by US government obligations as collateral and for which interest and principal payments generally flow immediately through to the security holder
For advance refunding transactions that result in defeasance of debt reported in the government-wide statement of net assets, the proceeds from the new debt should be reported as “other financing source—proceeds from refunding bonds” in the fund receiving the proceeds, which this discussion is assuming is the debt service fund. Payments to the escrow from resources provided by the new debt should be reported as “other financing use—payment to the refunded bond escrow agent.” Payments to the escrow agent made from other resources of the government should be reported as debt service expenditures.
Permanent Funds
One additional type of governmental fund that was redefined by GASBS 34 is the permanent fund. Permanent funds are used to report resources that are legally restricted to the extent that only the earnings, and not the principal, may be used for purposes that support the government’s programs, meaning programs that are for the benefit of the government or its citizens. Permanent funds operate in a manner similar to endowments, where the investment earnings, and not the principal, can be spent. Note that the earnings of a permanent fund are used to support the government’s activities. This is in contrast to a type of fiduciary
fund, discussed later in this chapter, called the private-purpose trust fund, in which the principal may be spent, but not for activities or programs normally carried on by the government. An example of a permanent fund is a cemetery perpetual-care fund, which provides resources for the ongoing maintenance of a public
cemetery.
Taken From : Governmental Accounting Made Easy