FSR Insights: GASB accounting on nonexchange financial guarantees

January 2013
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FSR Insights: GASB accounting on nonexchange financial guarantees

At a glance

This viewpoint helps clients to understand the best practices around the GASB's proposed accounting on nonexchange financial guarantees and how it impacts operations and stakeholder communications.

The current economic environment has stressed the finances of many state and local government entities and not-for-profit entities. The financial stress has led to the issuance or execution of various forms of financial guarantees related to their debt issuances.

The Government Accounting Standards Board’s (GASB) believes that a comprehensive standard is needed for the recognition and disclosure of financial guarantees that could lead to creditor claims given the current economic environment. The standard would provide more transparent information to evaluate the entities’ risk exposures and their ability to repay their obligations.

The GASB issued the exposure draft, Accounting and Financial Reporting for Nonexchange Financial Guarantee Transactions (“ED”) in June 2012 with the comment period ending in September 2012. The GASB met on November 30, 2012 to deliberate the issues raised by respondents and is expected to issue a final standard in the first quarter of 2013. The provisions of the ED would be effective for periods beginning after June 15, 2013.

The GASB received 27 comment letters from its constituents with the majority of the respondents generally supporting the ED but expressing concerns with respect to two particular provisions in the ED related to the recognition of the guarantee liability.

At its November 2012 meeting, the GASB tentatively affirmed the scope of the ED, and provided additional clarification on various transactions within the scope of the ED.

The ED affects all types of entities that provide and receive various forms of nonexchange financial guarantees. Entities should take the time to understand the ED and how it is may affect their organization.

This FSR Insight helps to understand the specific changes proposed and potential ramifications to your organization.