Focus Area: Accounting and Financial Reporting for Nonexchange Financial Guarantees
GASB 70 Effective for FY 2014
January 2, 2014
February 26, 2014 – Appendix A added
In April 2013, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees (GASB 70). This Statement provides new recognition, measurement, and disclosure guidance for state and local governments that extend or receive nonexchange financial guarantees.
GASB 70 is effective for the fiscal year ending June 30, 2014. A nonexchange financial guarantee occurs when a government guarantees a financial obligation but generally receives little or no compensation in return. The government guaranteeing the debt (guarantor) agrees to make payments to the holder of the debt if the entity that issued the debt (issuer) is unable to fulfill its obligations. To the guarantor, the guarantee represents the possibility of claims on the government’s resources. To the issuer, this represents potential resources that can be drawn upon to make the required payment.
GASB 70 requires a guarantor government to recognize a liability and an expenditure/expense when qualitative factors indicate that it is “more likely than not” (i.e., a likelihood of more than 50 percent) that it will actually be required to make a payment as a result of the guarantee agreement (Note: the GASB decided not to use the recognition point of “probable,” which is required for other exchange and nonexchange transactions under GASB 62). The amount recognized should be the discounted present value of the best estimate of the future outflows expected to be incurred as a result of the guarantee. Classification of expenses related to nonexchange financial guarantees should be determined in the same manner as grants or financial assistance payments to other entities or individuals.
If a government is required to repay a guarantor for nonexchange financial guarantee payments made on the government’s obligations, the government should reclassify that portion of its previously recognized liability for the guaranteed obligation as a liability to the guarantor. This Statement requires an issuer government to continue to report a liability until it is legally released as an obligor from the obligation and from any liability to the guarantor. When the issuer is released from those liabilities, it recognizes revenue as a result. Certain disclosures are also required for both the guarantor government and issuer government.
To gain additional understanding of GASB 70, please refer to the following resources:
- GASB Press Release – GASB Improves Reporting For Nonexchange Financial Guarantees
- GASB Plain Language Article – GASB Statement Provides Accounting and Financial Reporting Guidance for Nonexchange Financial Guarantees
- The GASB webpage from which you may access a PDF file of GASB 70 as well as other GASB pronouncements – GASB Pronouncements
- Journal of Accountancy – GASB Provides Guidance for Nonexchange Guarantees
- NACUBO Website Article – GASB Issues Statement on Nonexchange Financial Guarantees
- PWC Newsletter Article – GASB Issues Final Guidance on Accounting on Nonexchange Financial Guarantees
- Appendix A: Additional GASB 70 Information – See Attachment below.
Thank you for your time and attention to this important change. OSC will continue to provide updates as the standard is implemented. Questions regarding this specific update should be directed to Joy Darden at 919-707-0520 or joy.darden@ncosc.gov.