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Sunday, November 1, 2020 | History

2 edition of Illustrations of accounting for in substance defeasance of debt found in the catalog.

Illustrations of accounting for in substance defeasance of debt

Hortense Goodman

Illustrations of accounting for in substance defeasance of debt

a survey of the application of FASB statement no. 76

by Hortense Goodman

  • 361 Want to read
  • 11 Currently reading

Published by American Institute of Certified Public Accountants in New York .
Written in English

    Subjects:
  • Extinguishment of debts -- Accounting

  • Edition Notes

    Includes index.

    Statementby Hortense Goodman and Leonard Lorensen.
    SeriesFinancial Report Survey -- 32, Financial report survey -- 32.
    ContributionsLorensen, Leonard.
    The Physical Object
    Pagination35 p. ;
    Number of Pages35
    ID Numbers
    Open LibraryOL23372074M

    Defeasance of debt can be either legal or in-substance. A legal defeasance occurs when debt is legally satisfied based on certain provisions in the bond documents for the refunded debt even though the debt is not actually paid. An in-substance defeasance occurs when debt is considered defeased for accounting and financial reporting purposes.   Types of Debt Covered• Long-Term Obligations• Zero-Interest-Rate Bonds• Debt Refunding / Defeasance• Capital Leases3 4. Introduction• Accounting standards used to determine how debt transactions are recorded depends on whether the liability is presented in: – Governmental Funds – Proprietary or Fiduciary Funds, or – Government.   GASB’s proposal "Certain Debt Extinguishment Issues," would allow other existing resources to be set aside in a trust to accomplish the same purpose as a bond refunding for defeasance. The Board asserts in its proposal that the source of funds for a defeasance should not matter because the economic substance of the transaction is the same.


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Illustrations of accounting for in substance defeasance of debt by Hortense Goodman Download PDF EPUB FB2

Illustrations of accounting for in substance defeasance of debt: a survey of the application of FASB statement no.

The exposure draft, Certain Debt Extinguishment Issues, proposes to make accounting and financial reporting guidance more uniform for debt that is “defeased in substance,” regardless of the source of the resources that are placed in a trust.

In-substance defeasance refers to a situation in which the debt remains outstanding, but sufficient resources – in the form of essentially risk-free. Illustrations of accounting for in substance defeasance of debt: a survey of the application of FASB statement no.

76 Author: Hortense Goodman ; Leonard Lorensen ; American Institute of Certified Public Accountants. An in-substance defeasance occurs when debt is considered defeased for accounting and financial reporting purposes, as discussed below, even though a legal defeasance has not occurred.

When debt is defeased, it is no longer reported as a liability on the face of the balance sheet; only the new debt, if any, is presented in the financial statements.

To achieve consistency in accounting treatment for the defeasance of debt regardless of whether the funds were obtained from new borrowing or allocated from existing resources, the Governmental Accounting Standards Board (GASB) issued Statement No.

86, “Certain Debt Extinguishment Issues,” on May   Defeasance is any provision of an agreement that nullifies the agreement. The concept usually relates to a set of requirements that a buyer must fulfill before a seller’s interest in an asset can be cancelled.

This involves having the buyer set aside a sufficient amount of cash that it offsets the liability associated with the arrangement. Advance refundings generally result in the in-substance defeasance of debt, in which debt is considered defeased for accounting and financial reporting purposes even though a legal defeasance has not occurred.

Defeased debt—both legal and in-substance—is no longer reported as a liability on the face of the financial statements.

This Standard deals with the circumstances in which the liability of a debtor. for a debt may be considered extinguished by defeasance, the accounting methods. to be employed, and the required disclosure in respect of debt defeasance. Therefore, a liability is not considered extinguished by an in-substance defeasance.

This Statement provides implementation guidance for assessing isolation of transferred assets, conditions that constrain a transferee, conditions for an entity to be a qualifying SPE, accounting for transfers of partial interests, measurement of retained interests, servicing of financial assets, securitizations,transfers of sales-type and direct financing lease receivables.

Our Financing transactions guide provides a summary of the guidance relevant to the accounting for debt and equity instruments and serves as a roadmap to help you evaluate the accounting requirements for a particular transaction.

Specifically, this guide compiles the accounting guidance a reporting entity should consider when: Issuing debt, convertible debt, common stock, or preferred stock. Sermon Illustrations provides sermon illustrations, sermons, eulogies, funeral helps, and counseling aids for ministers.

Personal debt in the U.S. is increasing at the rate of $ per second and consumer installment debt has mushroomed to a point where it takes approximately $1 out of every $4 that consumers earn after taxes to keep up.

IAS 39 – Achieving hedge accounting in practice Covers in detail the practical issues in achieving hedge accounting under IAS It provides answers to frequently asked questions and step-by-step illustrations of how to apply common hedging strategies.

Defeasance refers to a contract provision that voids a bond or loan on a balance sheet when the borrower sets aside cash or bonds sufficient enough to service the : Will Kenton. Issuer’s accounting for debt and equity financings. #N#Our FRD publication on an issuer’s accounting for debt and equity financings has been updated to reflect recent standard-setting activity and enhance and clarify our interpretive guidance.

Refer to Appendix F of the publication for a summary of the updates. If the debt is extinguished with existing resources, record the payment as an expenditure (debt service – payments for early extinguishment defeasance of bonds) in the fund making the payment.

The old debt liability is eliminated from the general long-term liabilities. If the debt is extinguished using proceeds from new debt in a current. FASB Statement No.Accounting for Mortgage Servicing Rights. This Statement also supersedes Technical Bulletins No. In-Substance Defeasance of Debt, No.Accounting for Collateralized Mortgage Obligations (CMOs), and No.Accounting for Mortgage Servicing Fees and Rights.” (Financial Accounting Standards Board ).

Corporate borrowing: cash flow implications of in-substance defeasance. (Accounting) by Turpen, Richard. Abstract- In-substance defeasance is an attractive financing option for companies since it leads to smaller debt-to-equity ratios, bigger reported earnings and better credit financing method involves the depositing of cash assets into a trust for the single purpose of paying.

“From a government’s perspective, the source of the money that is being used to refund debt should not matter as long as the requirements for an in-substance defeasance are met.” In addition, GASB is proposing guidance related to prepaid insurance on debt that is extinguished and notes to the financial statements for certain defeased debt.

The City of Williamsburg decided to defease old 6% bonds carried in its Electric Enterprise Fund with new % bonds. As a result of the defeasance, the City incurred an accounting loss. This loss should be recognized. As an adjustment to retained earnings since it is applicable to prior periods.

in-substance debt defeasance: A loan provision that removes it from the balance sheet of cash is set to the side for debt service.

Defeasance typically happens when a borrower owns a portfolio of Treasury securities where coupons are used to service a debt. If the borrower set aside enough assets to cover the debt obligation, the debt will not.

The provisions of the Refunding Bond Act (Chapter RCW) satisfy the criteria for in-substance defeasance, except for the requirement to place cash and assets in an irrevocable escrow.

If the irrevocable trust fund is not established, both the refunded (old) and the refunding (new) debt must be recorded and reported in the government’s financial statements. AN EMPIRICAL INVESTIGATION OF THE FINANCIAL STATEMENT CHARACTERISTICS OF FIRMS ENGAGING IN IN-SUBSTANCE DEFEASANCE OF DEBT A Dissertation Submitted to the Graduate Faculty of the Louisiana State University and Agricultural and Mechanical College.

in partial fulfillment of the requirements for the degree of Doctor of Philosophy inAuthor: Raymond Jeffords. In-substance defeasance occurs when debt is considered defeased for accounting and financial reporting purposes even though it has been neither legally defeased nor paid.

In order for debt to be in-substance defeased, GASB standards require that the debtor place cash or other essentially risk-free assets in an irrevocable trust with an escrow.

This practice of in-substance defeasance enjoyed some popularity, specially under US GAAP, which was largely due to accounting treatment that has been permitted under earlier standards. However, this financial practice was subsequently banned under US GAAP and it was also considered by IAS 39 and was rejected as an appropriate financing option.

Regardless if the refunding is a legal defeasance or in-substance defeasance, the amount of unamortized prepaid insurance associated with the debt being extinguished should be included in the net carrying amount of the extinguished debt, which is compared to the reacquisition price to determine the gain or loss on the refunding that is reported in the accrual-basis financial statements.

The source of a debt defeasance receipt Meditari Accountancy Research Vol. 11 – 1 Introduction In Novemberthe Financial Accounting Standards Board (FASB) of the United States of America issue d an amendment to statement number 26 of the. Defeasance, as its name suggests, is a method for reducing the fees required when a borrower decides to prepay a fixed-rate commercial real estate loan.

Instead of. Note that Valley does not need any interest adjusting entries because the interest payment date falls on the last day of the accounting period. The income statement for each of the 10 years would show Bond Interest Expense of $12, ($ 6, x 2 payments per year); the balance sheet at the end of each of the years 1 to 8 would report bonds.

Definition of In-substance defeasance. In-substance defeasance. defeasance whereby debt is removed from the balance sheet but not cancelled. Related Terms: Defeasance. Practice whereby the borrower sets aside cash or bonds sufficient to service the borrower's debt.

Both the borrower's debt and the offestting cash or bonds are removed from the. The name is somewhat forbidding - ''in-substance defeasance'' - but the pitch is easy: pay off large amounts of old, cheap debt with smaller amounts of. An entity should disclose the following information regarding transfers and servicing of financial assets and extinguishment of liabilities: a.

If the entity has entered into repurchase agreements or securities lending transactions, its policy for requiring collateral or other security.

Refunded debt (sometimes referred to as old debt) - debt for which payment at specified dates has been provided by the issuance of refunding debt. Regular Method of Advance Refunding Under the regular method of advance refunding there can be either a legal or an in-substance defeasance.

In-substance defeasance occurs when debt is considered defeased for accounting and financial reporting purposes even though legal defeasance has not occurred. GASB Codification Section D sets forth in detail the circumstances for in-substance defeasance. The source of a debt defeasance receipt The source of a debt defeasance receipt M.

Stiglingh; M.M.A. Biemans A debt defeasance arrangement is an arrangement whereby a debtor’s obli- gation to pay a creditor is nullified. The debtor and other parties perform a variety of legal and other actions in order to effect a valid debt defeasance arrangement.

Accounting for General Long-Term Liabilities & Debt Service. 2 General Long Term Debt. Governmental Unit Not Individual Funds. Reported in Government-Wide Financial Statements. 3 •New Debt Replaces Old Debt "In-Substance Defeasance. For nonby Financial Accounting Foundation, Norwalk CT.

For non-commercial, educational/academic purposes only. Recognize the difference between the net carrying amount of the debt and the reacquisition price as a gain or loss in the period of defeasance (unlike advance refundings, which defer and amortize the difference)File Size: KB.

Issue No. “Debtor’s Accounting for a Modification of Debt Terms,” addresses circumstances under which existing debt should be considered extinguished, resulting in recognition by the debtor of an extraordinary gain or loss. Essentially, defeasance allows an issuer to collateralize outstanding debt with a portfolio of "risk-free government securities", thereby instantly removing the debt from the issuer's balance sheet.

This occurs because the government securities generate the cash flow needed to pay all interest and principal on the outstanding bonds when due. The following key terms relate to accounting for general long-term liabilities and debt service: Legal defeasance Regular serial bonds In-substance defeasance Irregular serial bonds Debt limit Annuity serial bonds Debt margin For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the.

Financial Statements for In-Substance Defeasance Transactions.” SPECIFIC COMMENTS Accounting and Financial Reporting for In-Substance Defeasance of Debt Using Only Existing Resources GASB determined that existing guidance did not address situations where ONLY existing resources are used to extinguish debt.

In-substance defeasance occurs when a firm irrevocably deposits cash or other assets Into a trust for the sole purpose of making principal and interest payments on debt as the payments become due.

The trust is restricted to owning virtually risk-free securities whose scheduled interest payments and maturity dates roughly coincide in timing and.Definition of in-substance debt defeasance in the Financial Dictionary - by Free online English dictionary and encyclopedia.

What is in-substance debt defeasance? Meaning of in-substance debt defeasance as a finance term.Refunded debt (sometimes referred to as old debt) - debt for which payment at specified dates has been provided by the issuance of refunding debt.

Advance refunding may be either a legal or an in-substance defeasance. A legal defeasance occurs when debt is legally satisfied based on certain provisions in the debt instrument.