NO. 297-B  DECEMBER 2009
Governmental
Accounting Standards Series
Statement No. 58 of the
Governmental Accounting
Standards Board
Accounting and Financial Reporting for
Chapter 9 Bankruptcies
Governmental Accounting Standards Board
of the Financial Accounting Foundation
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Summary
The objective of this Statement is to provide accounting and financial reporting
guidance for governments that have petitioned for protection from creditors by filing for
bankruptcy under Chapter 9 of the United States Bankruptcy Code.
It requires
governments to remeasure liabilities that are adjusted in bankruptcy when the bankruptcy
court confirms (that is, approves) a new payment plan.
For accounts payable, notes, debentures and bonds, and related interest payable, this
Statement requires governments to base remeasurement on the new payment plan.
Reductions in future interest payments would result in lower interest costs reported in
future periods. Reductions to principal or to accrued interest payable may result in gains
reported at the time of the reduction. If the new payment plan does not indicate whether it
reduces principal payments or future interest payments that have not been accrued, the
debt should be remeasured at the present value of the future payments using the original
discount rate, and a gain should be reported at the time of the reduction.
For leases, pollution remediation liabilities, and liabilities for pension and other
postemployment benefit plans, this Statement requires remeasurement based on existing
authoritative guidance. However, if a benefit plan is rejected in bankruptcy and becomes
general unsecured debt, this Statement requires the existing liability to be removed and a
new approved payment plan to be recognized as a judgment, with a gain or loss
recognized for the difference.
For governments that are not expected to emerge from bankruptcy as going
concerns, this Statement requires remeasurement of assets to a value that represents the
amount expected to be received.
i
This Statement classifies gains or losses resulting from remeasurement of liabilities
and assets as an extraordinary item.
Governments that have filed for bankruptcy are required to disclose information
regarding, among other things, the pertinent conditions and events giving rise to the
petition for bankruptcy, the expected gain, and the effects upon services.
This Statement is effective for reporting periods beginning after June 15, 2009.
How the Changes in This Statement Will Improve Financial Reporting
Prior to this Statement, there was no authoritative accounting and financial reporting
guidance for governments filing for bankruptcy. Other accounting standards that have
been applied to Chapter 9 bankruptcy take different approaches to, for example,
recognition and measurement. The requirements in this Statement will improve financial
reporting by providing more consistent recognition, measurement, display, and disclosure
guidance for governments that file for Chapter 9 bankruptcy.
In addition, these
requirements will provide financial statement users with better information regarding the
effects of bankruptcy upon governments that file for Chapter 9 protection.
Unless otherwise specified, pronouncements of the GASB apply to financial reports of all
state and local governmental entities, including general purpose governments; public
benefit corporations and authorities; public employee retirement systems; and public
utilities, hospitals and other healthcare providers, and colleges and universities.
Paragraph 2 discusses the applicability of this Statement.
ii
Statement No. 58 of the
Governmental Accounting
Standards Board
Accounting and Financial Reporting for
Chapter 9 Bankruptcies
December 2009
Governmental Accounting Standards Board
of the Financial Accounting Foundation
401 Merritt 7, PO Box 5116, Norwalk, Connecticut 06856-5116
iii
Copyright © 2009 by Financial Accounting Foundation, 401 Merritt 7, PO Box 5116,
Norwalk, CT 06856-5116. All rights reserved. Content copyrighted by Financial
Accounting Foundation may not be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of the Financial Accounting
Foundation.
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Statement No. 58 of the Governmental Accounting Standards Board
Accounting and Financial Reporting for Chapter 9 Bankruptcies
December 2009
CONTENTS
Paragraph
Numbers
Introduction ....................................................................................................................... 1
Standards of Governmental Accounting and Financial Reporting ...................................2
Scope and Applicability of This Statement ................................................................ 2
Accounting for Chapter 9 Bankruptcies ............................................................... 3–15
Recognition .......................................................................................................3–4
Measurement ...................................................................................................5–11
Accounts Payable, Notes, and Debt Obligations ........................................5–7
Capital Leases ................................................................................................ 8
Pensions and Other Postemployment Benefits ..............................................9
Other Liabilities ............................................................................................ 10
Additional Requirements for Governments Not Expected
to Emerge from Bankruptcy as Going Concerns ........................................11
Reporting Gains and Losses................................................................................ 12
Reporting Costs Associated with Bankruptcy Proceedings ............................... 13
Reporting in Governmental Funds ......................................................................14
Disclosures ..........................................................................................................15
Effective Date and Transition ......................................................................................... 16
Appendix A: Background ........................................................................................ 17–26
Appendix B: Basis for Conclusions ......................................................................... 27–53
Appendix C: Codification Instructions ..........................................................................54
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Statement No. 58 of the Governmental Accounting Standards Board
Accounting and Financial Reporting for Chapter 9 Bankruptcies
December 2009
INTRODUCTION
1.
Chapter 9 of the U.S. Bankruptcy Code is intended to protect a financially distressed
government from its creditors while it develops and negotiates a plan for adjusting its
debts. The objective of this Statement is to improve financial reporting by providing more
consistent recognition, measurement, display, and disclosure guidance for governments1
that have filed for bankruptcy under Chapter 9.
STANDARDS OF GOVERNMENTAL ACCOUNTING AND
FINANCIAL REPORTING
Scope and Applicability of This Statement
2.
This Statement establishes accounting and financial reporting standards for all
governments that have petitioned for relief under Chapter 9 of the U.S. Bankruptcy Code
or have been granted relief under the provisions of Chapter 9, including governments that
enter into bankruptcy and are not expected to emerge as a going concern. This Statement
does not apply to troubled debt restructurings that occur outside of bankruptcy. The
disclosures required by this Statement cease to apply for periods following the fiscal year
in which the bankruptcy case is closed or the government has its petition dismissed.
1
Chapter 9 of the U.S. Bankruptcy Code allows municipalities to file for bankruptcy if specifically
authorized to do so by state law. The bankruptcy code defines a municipality as a “political subdivision or
public agency or instrumentality of a State” (Section 101). This can include cities, counties, special taxing
districts, school districts, certain hospital authorities, airport authorities, or other revenue producing
enterprises.
1
Accounting for Chapter 9 Bankruptcies
Recognition
3.
When the Plan of Adjustment is confirmed by the court, the pre-petition liabilities
that are subject to the plan are discharged, and the government is bound to the new debt
and payment terms in the plan. Based on the measurement guidance in paragraphs 5–11,
governments should recognize gains (or losses) from adjustments to those liabilities (and
assets, as discussed in paragraph 11) as of the confirmation date or a later date when all
significant conditions existing prior to the plan’s becoming binding are resolved.
4.
A confirmed Plan of Adjustment may call for payments that are contingent upon
future events. For example, a government may be required to make certain payments if
tax collections exceed a specified amount or if the government is able to issue new debt.
The government should recognize a liability for a contingent future payment if it meets
the recognition requirements in paragraph 14 of NCGA Statement 4, Accounting and
Financial Reporting Principles for Claims and Judgments and Compensated Absences.
Additional recognition guidance for employer obligations relating to employee benefit
plans is provided in paragraph 9a.
Measurement
Accounts Payable, Notes, and Debt Obligations
5.
Except as provided in paragraphs 8–10, a contractual obligation to pay on demand or
on fixed or determinable dates (for example, accounts payable, notes, debentures and
bonds, and related accrued interest) that is included in a confirmed Plan of Adjustment
should be remeasured as set forth in paragraphs 6 and 7.
2
6.
Measurement should be based on the payment terms specified in the confirmed Plan
of Adjustment. Reductions in future interest payments that have not been accrued, if any,
should result in lower interest costs reported in future periods. Reductions to the prepetition principal and accrued interest payable amounts, if any, should be reported as gains
to the extent that the adjusted principal and accrued interest payable amounts in the
confirmed Plan of Adjustment are less than the carrying amounts of the debt, including
unamortized premium or discount and accrued interest payable.
Any remaining
unamortized issuance costs associated with a liability that has been adjusted should be
expensed. If the adjusted principal and accrued interest payable amounts in the confirmed
Plan of Adjustment are greater than the carrying amounts (which may be encountered with
deep discount debt), the difference should be reported as an adjustment to interest costs in
future periods.
7.
If the Plan of Adjustment does not indicate whether it reduces the principal amount
or interest payments, then the debt should be adjusted, and a gain reported, by an amount
equal to the difference between the present value of the future payments under the
confirmed Plan of Adjustment and the carrying amount of the pre-petition debt. The
present value of the future payments should be computed using the effective rate of
interest for the original debt.
Capital Leases
8.
If the provisions of a capital lease are modified in a way that changes the amount of
the remaining minimum lease payments and the modification either (a) does not give rise
to a new agreement or (b) does give rise to a new agreement but such agreement is also
classified as a capital lease, then the present balances of the asset and the obligation
3
should be adjusted by an amount equal to the difference between the present value of the
future minimum lease payments under the revised or new agreement and the carrying
amount of the pre-petition obligation. The present value of the future minimum lease
payments under the revised or new agreement should be computed using the rate of
interest used to record the lease initially. A termination of a capital lease should be
accounted for by removing the asset and obligation, with a gain or loss recognized for the
difference.
Pensions and Other Postemployment Benefits
9.
The method of measuring changes to an employer’s pension or other
postemployment benefit (OPEB) obligations depends on whether the confirmed Plan of
Adjustment results in (a) rejection or (b) amendment of the pension or OPEB plan.
a.
b.
If an employer’s obligation for unsecured plan benefits is rejected and becomes
general unsecured debt, then the change should be accounted for as a termination of
the pension or OPEB plan and a new liability recognized in its place. Any assets or
liabilities that the employer has recognized related to the terminated plan should be
eliminated. Any new liability established in the confirmed Plan of Adjustment
should be recognized consistent with standards of accounting for liabilities arising
from judgments. The gain (or loss) upon termination of the pension or OPEB plan
and the outflow of economic resources related to the establishment of the new
liability should be reported as provided in paragraph 12.
If an employer’s liability for benefits is not rejected, the financial effects of benefit
changes should be accounted for by applying the standards of accounting and
financial reporting for amendments of a pension or OPEB plan.
Other Liabilities
10.
Payment provisions in a confirmed Plan of Adjustment also should be incorporated
into the remeasurement of other liabilities that are measured and reported based on
payment expectations (for example, pollution remediation liabilities).
4
Additional Requirements for Governments Not Expected to Emerge from
Bankruptcy as Going Concerns
11.
If a government is not expected to emerge from bankruptcy as a going concern, then
the government’s assets should be remeasured and reported at a value that represents the
amount expected to be received as of the date of the confirmation of the Plan of
Adjustment.
Reporting Gains and Losses
12.
Gains (or losses) resulting from remeasurement of liabilities or assets in bankruptcy
should be reported as an extraordinary item. Additional guidance for governmental funds
is provided in paragraph 14.
Reporting Costs Associated with Bankruptcy Proceedings
13.
Professional fees and similar types of costs directly related to the bankruptcy
proceedings should be reported as an expense or expenditure as incurred.
Reporting in Governmental Funds
14.
If the new payment terms affect liabilities (and assets) reported in the governmental
funds, those amounts should be adjusted.
Adjustments to the reported amount of
governmental fund liabilities (and assets), if any, should be reported as an extraordinary
item.
Disclosures
15.
Governments that have filed for bankruptcy should disclose the following:
a.
b.
Pertinent conditions and events giving rise to the petition for bankruptcy
The expected or known effects of such conditions and events, including:
(1) The principal categories of the claims subject to compromise or that already
have been adjusted
(2) The principal changes in terms and the major features of settlement
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c.
d.
e.
(3) The aggregate gain expected to occur by remeasuring liabilities subject to a
proposed Plan of Adjustment, or realized, as appropriate; or a statement that
any gain is not yet reasonably estimable and the reasons therefor
(4) Contingent claims not subject to reasonable estimation, based on the
provisions of NCGA Statement 4
Significance of those conditions and events on the levels of service and operations of
the government, and any mitigating factors, such as assumption of services by other
governments
Possibility of termination of the government, or any plans to terminate the
government, as appropriate
How to obtain a copy of the government’s Plan of Adjustment or a statement that a
plan is not yet available and an estimate of when it will be completed.
EFFECTIVE DATE AND TRANSITION
16.
The requirements of this Statement are effective for periods beginning after June 15,
2009. Early application is encouraged. Retroactive application is required for all prior
periods presented during which a government was in bankruptcy. If restatement of the
financial statements for prior periods is required but not practical, then the cumulative
effect of applying this Statement should be reported as a restatement of beginning net
assets (or equity or fund balance, as appropriate) for the earliest period restated (generally,
the current period). If the information for previous years is not restated, governments
should explain the nature of the differences from the prior information and why
restatement was not practical.
6
The provisions of this Statement need
not be applied to immaterial items.
This Statement was issued by unanimous vote of the seven members of the
Governmental Accounting Standards Board.
Robert H. Attmore, Chairman
Michael D. Belsky
William W. Holder
David E. Sundstrom
Jan I. Sylvis
Marcia L. Taylor
James M. Williams
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Appendix A
BACKGROUND
Overview of Chapter 9
17.
First enacted in 1934, Chapter 9 of the U.S. Bankruptcy Code provides a financially
distressed government protection from its creditors while it develops and negotiates a plan
for adjusting its debts. An automatic stay goes into effect as soon as a municipality files a
petition with the bankruptcy court. The stay prevents creditors from attempting to collect
any debts and also prevents other court proceedings involving the debtor. The court has
no power to change the government’s leadership or organizational structure, nor to set
rates or make spending decisions.
18.
Restructuring of a government’s debt typically is accomplished by extending debt
maturities, reducing the amount of principal or interest, or refinancing the debt with new
borrowing. Only some of the government’s debt may be adjusted in bankruptcy. “Special
revenue” (that is, revenue-backed) debt generally will not be affected, for example. In
addition, under the “avoiding” powers provisions, a government has the power to reject
and renegotiate unexpired leases and executory contracts, including collective bargaining
agreements between the government and its employees. Retiree benefit plan obligations
also are subject to amendment or rejection.
19.
To qualify for bankruptcy under Chapter 9, a government is required to (a) be a
municipality, defined as a “political subdivision or public agency or instrumentality of a
State,” (b) be specifically authorized to file for bankruptcy by state law, and (c) be
insolvent. Chapter 9 also includes additional provisions, including, in most cases, that a
good faith effort to negotiate with creditors be made prior to filing for bankruptcy. The
8
term municipality excludes state governments and tribal governments. Research indicates
that 24 states have specifically authorized municipalities to file for bankruptcy as of the
date of this Statement. Insolvency is not necessarily established when a government’s
liabilities exceed the fair value of its assets. Instead, the test is the lack of solvency, with
solvency being manifested by a government paying its obligations as they become due or
having the ability to do so. Governments may meet the negotiation requirement in various
ways, including creating an arrangement that satisfies creditors holding at least a majority
of claims, in amount, of each class of debt that will be adjusted under the plan. The goodfaith-negotiation criterion may be met if a municipality can demonstrate that negotiating is
impracticable due to, for example, the number of creditors or the need to prevent delays in
obtaining bankruptcy protection from creditors. If a government believes that a creditor
would attempt to negotiate a payment that could be viewed as a preferential transfer, the
court will allow the government to file for bankruptcy and negotiate later.
20.
A committee of creditors holding unsecured claims is assembled shortly after the
petition is filed. The selection criteria for the committee are similar to those under
Chapter 11; however, the powers of the committee are significantly more limited under
Chapter 9. The committee may not submit a plan of reorganization, nor may it compel the
government to alter any disbursements or revenues it generates.
21.
A government is required to submit a Plan of Adjustment with the petition for
bankruptcy or at a later time if the court determines that the government does not have
sufficient information to develop a plan at the time of filing. Only the government has the
ability to submit a Plan of Adjustment. The Plan of Adjustment is required to separate all
claims into classes and identify which classes are or are not subject to adjustment. All
9
creditors within a certain class are required to receive equitable treatment, although
individual creditors may waive that right. The bankruptcy court is required to confirm the
Plan of Adjustment if certain requirements are met.
22.
When the bankruptcy court confirms the Plan of Adjustment, and all other
requirements are met, the government is discharged from its previous debts covered by the
plan and the government is bound to the new debt and payment terms in the plan. All
debts entered into before the government filed the petition are discharged except debts that
are specifically excluded from discharge or debts to creditors who were not notified of the
bankruptcy. The case is usually closed when the plan has been completely administered
and all claims have been determined.
History of This Project
23.
In the more than 70 years since Chapter 9 was added to the bankruptcy code, there
have been fewer than 600 filings. The relatively few Chapter 9 bankruptcy filings and the
number of states that have chosen not to provide for municipal bankruptcy tend to limit
the impact of municipal bankruptcy issues. Nevertheless, recent activities have brought
the process to the public’s attention, and the current economic environment raises
questions about the accounting implications that result from such filings.
24.
At its July 2008 meeting, the members of the Governmental Accounting Standards
Advisory Council (GASAC) discussed the possible addition of a project on Chapter 9
bankruptcies. The members noted that existing American Institute of Certified Public
Accountants (AICPA) guidance may not be appropriate for state and local governments.
Considering recent government financial difficulties, the members expressed a high level
of support for the project, and suggestions were made to expedite the project to issue
10
timely guidance. Accordingly, a research project on Chapter 9 filings was commenced in
August 2008. The research was discussed at the November 2008 GASAC meeting, and
the project continued to receive a high level of support.
A project on Chapter 9
bankruptcy was added to the GASB’s current agenda in December 2008.
25.
In June 2009, the Board issued an Exposure Draft, Accounting and Financial
Reporting for Chapter 9 Bankruptcies. The Board received 18 responses to the Exposure
Draft.
The comments and suggestions from the organizations and individuals who
responded to the Exposure Draft contributed to the Board’s deliberations in finalizing the
requirements of this Statement.
26.
In arriving at the conclusions presented in this Statement, the GASB considered its
own standards and those of the Financial Accounting Standards Board (FASB) and the
AICPA.
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Appendix B
BASIS FOR CONCLUSIONS
27.
This appendix discusses factors considered significant by Board members in
reaching the conclusions in this Statement. It includes discussion of the alternatives
considered and the Board’s reasons for accepting some and rejecting others. Individual
Board members may have given greater weight to some factors than to others.
Scope and Applicability
28.
This Statement establishes accounting and financial reporting standards only for
governments that have petitioned for relief under Chapter 9 of the U.S. Bankruptcy Code.
It does not apply to governments that may file for bankruptcy or governments that
restructure their debts outside of bankruptcy. Governments that may file for bankruptcy
could be subject to a going-concern assessment, which is included in the scope of
Statement No. 56, Codification of Accounting and Financial Reporting Guidance
Contained in the AICPA Statements on Auditing Standards. Governments that restructure
their debts outside of bankruptcy currently apply those provisions of FASB Statement No.
15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, that do not
conflict with or contradict GASB pronouncements.
29.
The disclosure requirements of this Statement cease to apply for periods following
the fiscal year in which the bankruptcy case is closed or the government has its petition
dismissed. The Board believes that bankruptcy accounting and disclosure requirements
no longer are needed at that time because it would be much less likely to provide decisionuseful information. A government that has its petition dismissed may, however, be subject
to a going-concern assessment.
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Accounting and Financial Reporting Approach
30.
In developing accounting and financial reporting guidance for Chapter 9
bankruptcies, the Board avoided, to the extent possible, developing new guidance that,
although having limited initial application, would potentially impact other areas of
accounting and financial reporting in future projects. Accordingly, much of the guidance
in this Statement is based on existing accounting guidance, and new accounting guidance
has been provided only where the Board believes that existing accounting guidance would
not be appropriate for Chapter 9 bankruptcies.
Recognition
31.
This Statement requires adjustments in bankruptcy to be recognized normally when
the Plan of Adjustment is confirmed (that is, approved) by the bankruptcy court. At that
time, the pre-petition liabilities subject to the plan are discharged and the government is
bound to the new debt and payment terms in the plan. The Board considered recognition
of expected adjustments at an earlier time, such as when the petition for bankruptcy is
filed. However, some governments file for bankruptcy without having determined the
amount that is owed to creditors. In addition, some creditors may be unknown at the time
of filing. In those cases, a Plan of Adjustment will be prepared following the filing for
bankruptcy. An initial draft of a Plan of Adjustment may be amended several times
before it is acceptable to both the government and its creditors, and the initial draft may be
significantly different from the confirmed plan.
Therefore, the Board believes that
disclosure of the expected effects of bankruptcy is appropriate prior to confirmation of the
Plan of Adjustment but that recognition is appropriate only when the liabilities are legally
adjusted, which occurs when the Plan of Adjustment is confirmed by the court.
13
32.
When a Plan of Adjustment has been confirmed, there may be evidence that an
appeal will be filed, which could result in the plan not going into effect.
AICPA
Statement of Position (SOP) 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code, discusses that situation for private-sector entities that file
under Chapter 11 of the bankruptcy code and states that its provisions apply “as of the
confirmation date or as of a later date when all material conditions precedent to the plan’s
becoming binding are resolved” (paragraph 35). The Board believes that guidance also is
appropriate for Chapter 9 bankruptcy and has based the guidance in this Statement on the
SOP provision.
Measurement of Accounts Payable, Notes, and Debt Obligations
33.
In determining the appropriate approach to measuring adjustments to contractual
obligations to pay on demand or on fixed or determinable dates, the Board considered
three approaches: (a) measurement based on the provisions of FASB Statement 15, which
requires that reductions primarily affect future interest costs; (b) measurement at the
present value of the amounts to be paid, as required by SOP 90-7 for private-sector
entities that are reorganized in Chapter 11 bankruptcy; and (c) measurement based on the
payment terms specified in the confirmed Plan of Adjustment.
34.
FASB Statement 15 bases measurement on the notion that reductions of future
payments are reductions of interest first and principal second for any excess amounts.
That is, reductions of future payments are reported as reductions of interest cost of the
periods when the reduced payments are due. This could result in future interest expense
being reduced to zero. In that case, any further reductions would be reported as reductions
14
of principal to prevent reporting of negative interest expense. This approach was
supported by some of the respondents to the Exposure Draft.
35.
The Board did not adopt this approach primarily because it fails to recognize a gain
when the government is economically better off at the time the Plan of Adjustment is
confirmed by the court. That is, because the cash required to satisfy the liabilities has
been diminished or a greater time has been provided to satisfy the liabilities or both, the
present value of the government’s future cash payments has been reduced, which normally
results in a gain being reported at the time of the reduction. The Board also believes that
the FASB Statement 15 approach, by not recognizing a gain in these cases, fails to
recognize the time value of money. Without adjusting the debt for the effect of the
payment reduction, a financial statement reader is left with the impression that the claims
on the government’s resources are unchanged. Although the payment reduction could be
disclosed in the notes to the financial statements, the Board believes that disclosure is not
a substitute for financial statement recognition.
36.
SOP 90-7 states that “liabilities compromised by confirmed plans should be stated at
present values of amounts to be paid, determined at appropriate current interest rates”
(paragraph 41). This approach also was supported by some of the respondents to the
Exposure Draft. When the Plan of Adjustment does not indicate whether it reduces the
pre-petition amount owed to creditors or future interest payments thereon, the Board
believes that this present-value approach is appropriate because it recognizes the
economic betterment as a gain at the time that it occurs. However, the Board concluded
that the appropriate interest rate is the effective rate for the original debt because the
amounts owed generally are to the same party that had the right to receive the debt
15
payments prior to the bankruptcy. After recognizing the beneficial effects of the reduced
payments or extended repayment period, the rate of interest inherent in the liability
remains constant.
37.
When a confirmed Plan of Adjustment specifies that it reduces future interest
payments or the pre-petition amount owed to creditors or both, the Board concluded that
measurement should be based on the payment terms specified in the confirmed Plan of
Adjustment. The Board believes that those terms establish the legal liabilities of the
government and, because of the magnitude and systemic effect of the bankruptcy event,
the accounting should reflect that fact. If the Plan of Adjustment indicates that only future
interest payments have been reduced, then no gain would be recognized. Instead, the
government would report lower interest costs in future periods. If the Plan of Adjustment
indicates that the pre-petition amount owed to creditors has been reduced, then a gain
would be recognized to the extent that the adjusted amount is less than the carrying
amount of the debt, including unamortized premiums or discounts and accrued interest
payable. If the adjusted amount is greater than the carrying amount, which could occur
with deep discount debt, the difference is recognized as an adjustment of interest costs in
future periods to prevent the reporting of an accounting loss when there is an economic
gain.
38.
As previously noted, there was support from the respondents to the Exposure Draft
for all of the measurement alternatives identified in that document. The first alternative
view presented in the Exposure Draft would apply the measurement approach of FASB
Statement 15 when the confirmed Plan of Adjustment does not indicate whether it reduces
the principal amount or interest payments. Those who agreed with this approach believed
16
that it is more appropriate in those circumstances. Those respondents generally stated that
adjustments normally reduce interest before principal and that, unless a bankruptcy court
approves a reduction in the carrying amount of the debt, the financial statements should
report that the government is still legally obligated to pay the carrying amount, with no
decrease in liabilities. Other respondents agreed with the second alternative view, which
is based on SOP 90-7. They believed that all debt adjustments should be presented at their
net present value in all circumstances.
Those respondents generally stated that
discounting cash flows in this manner appropriately reflects the economic effects of the
adjustment and achieves present-value comparability with payment arrangements with
different timing. Most of these respondents stated that the accounting should not vary
based on whether the confirmed Plan of Adjustment does or does not indicate whether
principal or interest is being reduced.
39.
The Board considered all the views expressed by respondents; however, for the
reasons specified in paragraphs 35–37, the Board concluded that the principles originally
identified in the Exposure Draft remain the most appropriate measurement approaches in
accounting and financial reporting for Chapter 9 bankruptcies.
Measurement of Capital Leases
40.
This Statement adopts the current guidance for measurement of adjustments to
capital leases found in paragraph 14 of FASB Statement No. 13, Accounting for Leases, as
amended. That paragraph specifies lessee reporting for changes in the provisions of a
capital lease and for early terminations. Paragraph 9 of FASB Statement 13 explains that
changes to lease terms, other than renewing the lease or extending its terms, can result in
changing the classification of a lease from operating to capital, or vice versa.
17
Notwithstanding that, it goes on to note that “. . . changes in circumstances (for example,
default by the lessee) . . . shall not give rise to a new classification of a lease for
accounting purposes.”
Measurement of Obligations for Pension and Other Postemployment
Benefits
41.
There are two broad approaches to adjusting benefit obligations in Chapter 9
bankruptcy. With court approval, a government may reject one or more of the benefit
plans and their related obligations.
In that case, any remaining unfunded benefit
obligations are classified as general unsecured debt of the government and are subject to
equitable adjustment in the Plan of Adjustment, together with other general unsecured
debt.
Participants in a rejected benefit plan (the retirees and employees of the
government) would need to present their claims in the creditor’s committee together with
all other general creditors of the government.
42.
The Board concluded that if a benefit plan is rejected in bankruptcy and becomes
general unsecured debt, any related net benefit assets or liabilities that the employer has
recognized should be eliminated because those assets and liabilities provide funding
information about a benefit plan that no longer exists. Any new liability established in the
confirmed Plan of Adjustment should be recognized as a judgment liability rather than as
a net benefit liability, because it represents amounts owed to creditors rather than an
employee benefit obligation. The gains and losses from elimination of the net benefit
asset or liability and recognition of the new liability are reported with other gains and
losses resulting from the bankruptcy.
18
43.
A second approach to adjusting benefit obligations is to not reject them but to
bargain for reduced amounts. That is, the government and the participants in the benefit
plan can bargain for a new level of benefits, come to an agreement, and the government
would assume the previous obligation at a reduced amount by putting it into the Plan of
Adjustment, which would be confirmed by the court. Under this scenario, the benefit
obligations are not treated as general unsecured debt (that is, a judgment liability). There
are various forms that this approach may take. For example, a government and a union
could reach a settlement in compromise that continues the existing benefit plan with
reduced benefit levels.
Alternatively, the government and union could choose to
terminate a benefit plan and create a new follow-on plan with some of the obligations
from the prior plan carried forward. In addition, a government could choose to freeze a
benefit plan, allowing no further benefits to accrue to it but continuing to honor the
previously earned benefits.
44.
The Board concluded that changes to benefit plans under the second approach
should be accounted for under the provisions of Statements No. 27, Accounting for
Pensions by State and Local Governmental Employers, as amended, and No. 45,
Accounting and Financial Reporting by Employers for Postemployment Benefits Other
Than Pensions, as amended. Although changes to a benefit plan may occur in the course
of bankruptcy proceedings, if the changes do not terminate the plan, then from an
accounting perspective, those changes are no different from changes to a benefit plan that
occur outside of bankruptcy. Accordingly, the changes to the plan would be amortized
and recognized through the annual required contribution (ARC) and through the ARC
adjustment, if any.
19
Measurement of Other Liabilities
45.
Statement No. 49, Accounting and Financial Reporting for Pollution Remediation
Obligations, requires pollution remediation liabilities to be measured as the sum of
probability-weighted amounts in a range of possible estimated amounts. If a confirmed
Plan of Adjustment reduces future remediation payments, then the measurement of the
resulting pollution remediation liability would be affected. Accordingly, this Statement
requires that the new payment expectations be included in the remeasurement of the
liability. Other liabilities that may be affected by a confirmed Plan of Adjustment and
would need to be remeasured include liabilities for unpaid claims costs of risk pools, as
provided in Statement No. 10, Accounting and Financial Reporting for Risk Financing
and Related Insurance Issues, as amended, and liabilities for termination benefits, as
provided in Statement No. 47, Accounting for Termination Benefits.
Governments Not Expected to Emerge from Bankruptcy as Going
Concerns
46.
Not all governments that enter Chapter 9 bankruptcy are expected to emerge as
going concerns. For example, a special-purpose district that provides services that are no
longer needed may enter bankruptcy for the purpose of dissolving.
Therefore, this
Statement also provides measurement guidance for assets that will be liquidated to satisfy
creditor claims. Specifically, this Statement requires that the government’s assets be
remeasured to a value that represents the amount expected to be received as of the date of
the confirmation of the Plan of Adjustment.
47.
In developing this guidance, the Board considered that guidance exists for disposal
of some assets.
For example, paragraph 16 of Statement No. 42, Accounting and
20
Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries,
requires that “impaired capital assets that will no longer be used by the government should
be reported at the lower of carrying value or fair value,” and paragraph 9 of Chapter 3a of
Accounting Research Bulletin No. 43, Restatement and Revision of Accounting Research
Bulletins, requires the use of a valuation account to bring receivables to their present
realizable value. However, guidance was needed for other assets, such as investments
carried at cost. The Board believes that the amount expected to be received is the most
relevant measure in this situation and should be applied to all assets.
Reporting Gains and Losses
48.
Paragraph 55 of Statement No. 34, Basic Financial Statements—and Management’s
Discussion and Analysis—for State and Local Governments, requires transactions to be
reported as extraordinary items if they are both unusual in nature and infrequent in
occurrence.
Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations—Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, explains
that unusual in nature means “the underlying event or transaction should possess a high
degree of abnormality and be of a type clearly unrelated to, or only incidentally related to,
the ordinary and typical activities of the entity, taking into account the environment in
which the entity operates” (paragraph 20a), and that infrequent in occurrence means “the
underlying event or transaction should be of a type that would not reasonably be expected
to recur in the foreseeable future, taking into account the environment in which the entity
operates” (paragraph 20b). The Board concluded that Chapter 9 bankruptcy meets those
21
criteria. Therefore, gains or losses resulting from remeasurement of liabilities (or assets)
should be classified as extraordinary items.
49.
The Board considered requiring gains or losses from remeasurement of assets to be
displayed separately from remeasurement of liabilities. However, this Statement requires
separate disclosure of the gain on adjustment of liabilities.
Reporting Costs Associated with Bankruptcy Proceedings
50.
Prior to the issuance of SOP 90-7, some entities in Chapter 11 bankruptcy deferred
professional fees and similar types of expenditures until the plan was confirmed and then
reduced the gain from debt discharge to the extent of the previously deferred expenses.
Others accrued professional fees and similar types of expenditures upon the filing of the
Chapter 11 petition. Still others expensed professional fees and similar types of
expenditures as incurred. SOP 90-7 harmonized practice by requiring that professional
fees and similar types of costs directly relating to the bankruptcy proceedings be reported
as an expense as incurred. The Board believes that the guidance in SOP 90-7 also is
appropriate for Chapter 9 bankruptcies. These costs do not provide an increase in service
capacity and do not meet the definition of assets or deferred outflows in the GASB
conceptual framework.
Disclosures
51.
The disclosures in this Statement are derived from disclosures in FASB Statement
15 and SOP 90-7, modified to make them applicable to Chapter 9 bankruptcy and the
accounting requirements in this Statement. In addition, because entities that have filed for
bankruptcy would likely have failed a going-concern assessment at the time of the filing,
the disclosures in this Statement are consonant with the going-concern disclosures in
22
GASB Statement 56.
The Board believes that the disclosures in this Statement are
appropriate for governments in bankruptcy and that they should be made once a
municipality files a petition for bankruptcy, regardless of whether or when the Plan of
Adjustment may be confirmed.
52.
Other disclosures that may be appropriate for governments in bankruptcy include
those for contingent liabilities, significant violations of finance-related legal or contractual
provisions, and construction and other significant commitments.
Effective Date
53.
This Statement is effective for periods beginning after June 15, 2009. The effective
date is considered appropriate because the need for the information required by this
Statement is paramount when a government is in bankruptcy. The Board believes that
information in the Plan of Adjustment will allow governments to restate any prior periods
presented that represent the time when a government was in bankruptcy and had an
approved Plan of Adjustment. Disclosure of the nature of the restatement and its effect is
required by the disclosure provisions of this Statement.
23
Appendix C
CODIFICATION INSTRUCTIONS
54.
The sections that follow update the June 30, 2009, Codification of Governmental
Accounting and Financial Reporting Standards for the effects of this Statement. Only the
paragraph number of the Statement is listed if the paragraph will be cited in full in the
Codification.
* * *
REPORTING CAPITAL ASSETS
SECTION 1400
See also: [Add the following:] Section Bn5, “Bankruptcies”
[Insert new paragraph .140, including heading; renumber subsequent paragraphs and
update cross-references throughout section.]
Bankruptcies
.140 Accounting and financial reporting for remeasurement of capital assets in
bankruptcy is discussed in Section Bn5.
* * *
REPORTING LIABILITIES
SECTION 1500
See also: [Add the following:] Section Bn5, “Bankruptcies”
[Insert new paragraph .119, including heading.]
24
Bankruptcies
.119 Accounting and financial reporting for liability adjustments in bankruptcy is
discussed in Section Bn5.
* * *
NOTES TO FINANCIAL STATEMENTS
SECTION 2300
.107 [Insert new subparagraph mm as follows:] Required disclosures about bankruptcies.
(See Section Bn5, “Bankruptcies,” paragraph .114.)
* * *
BOND, TAX, AND REVENUE ANTICIPATION
NOTES
SECTION B50
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
CLAIMS AND JUDGMENTS
SECTION C50
See also: [Add the following:] Section Bn5, “Bankruptcies”
[Insert new paragraph .151.]
.151 Accounting and financial reporting for liability adjustments in bankruptcy is
discussed in Section Bn5.
* * *
25
COMPENSATED ABSENCES
SECTION C60
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
DEBT REFUNDINGS
SECTION D20
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
DEMAND BONDS
SECTION D30
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
DERIVATIVE INSTRUMENTS
SECTION D40
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
INVESTMENTS
SECTION I50
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
26
ACCOUNTING FOR PARTICIPATION IN
JOINT VENTURES AND JOINTLY GOVERNED
ORGANIZATIONS
SECTION J50
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
LANDFILL CLOSURE AND POSTCLOSURE
CARE COSTS
SECTION L10
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
LEASES
SECTION L20
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
PENSION ACTIVITIES—EMPLOYER
REPORTING
SECTION P20
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
POLLUTION REMEDIATION OBLIGATIONS
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
27
SECTION P40
POSTEMPLOYMENT BENEFITS OTHER THAN
PENSION BENEFITS—EMPLOYER REPORTING
SECTION P50
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
SALES AND PLEDGES OF RECEIVABLES AND
FUTURE REVENUES AND INTRA-ENTITY
TRANSFERS OF ASSETS AND FUTURE REVENUES
SECTION S20
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
TERMINATION BENEFITS
SECTION T25
See also: [Add the following:] Section Bn5, “Bankruptcies”
* * *
[Create new Codification section as follows:]
BANKRUPTCIES
SECTION Bn5
Source: GASB Statement 58
.101–.114
[GASBS 58, ¶2–¶15, including headings] [Change Statement to section,
update cross-references, and after first instance of the word “governments,” insert footnote
1 as follows:]
[1GASBS 58, fn1]
28