Search within this section
Select a section below and enter your search term, or to search all click Not-for-profit entities
Favorited Content
11.6 Conduit obligor financial statement presentation and disclosure
Publication date: 30 Nov 2022
us NFP guide
Conduit financing arrangements between a government financing agency and an NFP can take many forms, but most often will involve execution of a loan agreement. The bond issue and the loan agreement are executed simultaneously and in substance, represent a single, integrated transaction. Typically, the loan agreement will contain principal and interest payment requirements that correspond to the payment schedules on the bonds, such that the debt service payments on the bonds are funded through that mechanism.
In accordance with ASC 958-470-25-1 (NFP) and ASC 954-470-25-1 (HCO), in its financial statements, the entity “looks through” the loan agreement and reports a liability to the bondholders, consistent with the bondholders’ understanding of who is responsible for repayment. This expectation is mirrored in the continuing disclosure agreement for a public offering, which requires that the financial and operating disclosures to bondholders throughout the life of the issue be those of the conduit obligor.
A not-for-profit entity may finance part of its activities from the proceeds of tax-exempt bonds or other obligations issued through state and local financing authorities. Because the NFP is responsible for the repayment of those obligations, that financing shall be recognized as a liability in its statement of financial position.
When a financing authority issues tax-exempt bonds or similar debt instruments and uses the proceeds for the benefit of a health care entity, the obligation shall be reported as a liability in the entity's balance sheet if the health care entity is responsible for repayment. In some cases, this obligation may take the form of a liability arising from a lease. If a health care entity has no obligation to make payments of principal and interest on the debt or lease payments on related buildings or equipment, the entity shall not reflect the liability on its balance sheet. In such circumstances, proceeds from the bond issue shall be reported as contributions from the sponsoring entity.
11.6.1 Conduit obligor—balance sheet classification
11.6.1.1 Conduit obligor—demand bonds supported by liquidity facility
As discussed in NP 11.2.1, VRDOs typically are supported by a liquidity facility (such as an irrevocable letter of credit from a financial institution) that provides the issuer with the ability to refinance obligations that may arise if tendered bonds cannot immediately be remarketed to another investor. ASC 470 addresses balance sheet classification in these situations. See FSP 12.6.
11.6.2 Conduit obligor—interim financial reporting
Some continuing disclosure agreements entered into by NFPs in connection with tax-exempt financing will require the provision of financial information on a quarterly basis as well as an annual basis. This has become standard practice for NFP health care sector borrowings.
When evaluating interim financial reporting requirements, it is important to distinguish between presentations that are considered “financial statements” and those that are simply presentations of financial information (for example, providing an interim balance sheet and statement of operations without a statement of cash flows). When an interim reporting presentation constitutes an “issuance of financial statements,” it can trigger adoption of new accounting pronouncements in the interim period, including provisions requiring retrospective application.
Interim financial statements are generally prepared based on the expectation that users will have read the prior annual financial statements. Therefore, interim financial statements are not expected to repeat extensive annual disclosures but, rather, provide an update from the prior year end. Interim financial statements may be condensed and include limited footnote disclosures.
ASC 270, Interim Reporting, provides the minimum disclosure requirements for all reporting entities that prepare interim financial statements. Certain requirements are specific to public entities, which would include NFP conduit obligors. For more information on ASC 270's requirements, see FSP 29.
11.6.3 Conduit obligor—obligated group reporting issues
Some conduit bond obligors (particularly in the health care sector) coordinate multiple borrowings using a master trust indenture (MTI) structure. This indenture is separate from, and serves a different purpose than, the indenture discussed in NP 11.3.1. In these arrangements, a conduit obligor selects a bank to serve as “master trustee” for a credit group (often referred to as an “obligated group”) whose aggregated revenue, cash, and assets are used as collateral for various financings. Normally, the obligated group is comprised of specifically identified entities within the consolidated financial reporting entity. In most cases, the entities within an obligated group have joint and several liability for the payment of any debt secured by the MTI, which means that in theory, any one of the parties to the arrangement could be liable for the entire amount of the bonds.
Continuing disclosure agreements for obligated group financings will usually require the issuer to provide financial information on the assets, liabilities, revenues, and expenses of the obligated group. Typically, the consolidated external financial statements of the consolidated reporting entity are used, with balance sheet and income statement information of the obligated group provided in combining or consolidating schedules that are presented as supplemental information. For example, a supplemental schedule might include individual columns for each entity in the obligated group, an obligated group subtotal column, an aggregate column for all other entities, and the consolidated total column that corresponds to the consolidated financial statements.
When separately issued statements are required for an individual entity within the obligated group, that entity’s obligation and its joint-and-several liability must be appropriately presented and described. ASC 405-40, Obligations Resulting from Joint and Several Liability Arrangements, provides accounting and financial statement presentation guidance on these matters.
Based on the requirements of ASC 405-40-30-1, an obligated group member’s individual financial statements would reflect a liability for the portion of the obligation that has been allocated to it for repayment, plus any amount that it expects to pay on behalf of its co-obligors.
Obligations resulting from joint and several liability arrangements included in the scope of this Subtopic initially shall be measured as the sum of the following:
- The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors.
- Any additional amount the reporting entity expects to pay on behalf of its co-obligors. If some amount within a range of the additional amount the reporting entity expects to pay is a better estimate than any other amount within the range, that amount shall be the additional amount included in the measurement of the obligation. If no amount within the range is a better estimate than any other amount, then the minimum amount in the range shall be the additional amount included in the measurement of the obligation.
The amount that an individual group member expects to pay on behalf of its co-obligors is measured based on principles that are similar to those in ASC 450-20, Loss Contingencies. The amount recorded should be the best estimate of the expenditure required to settle the obligation. If the best estimate is a range, and if one amount in that range represents a better estimate than any other amount within the range, that amount should be accrued. If no amount in the range is a better estimate than any other, the minimum amount in the range is included (which could be zero).
Disclosure should be made regarding the joint-and-several nature and amount of the overall obligation as well as information about the risks that the obligation poses to the entity’s future cash flows.
Example NP 11-1 illustrates the application of this guidance.
EXAMPLE NP 11-1
Joint and several liability – obligated group
Joint and several liability – obligated group
ABC Health System has an obligated group consisting of three hospitals. In 20X1, the obligated group issues $450 million of bonds, with the proceeds allocated among the hospitals as shown. The hospitals are jointly and severally liable for repayment of the bonds. Each individual hospital is expected to repay the portion of the proceeds that were allocated to it.
Hospital A prepares and issues standalone financial statements. How should Hospital A reflect the bond liability?
Analysis
Under ASC 405-40, Hospital A’s statements should reflect a liability for the amount that has been allocated to it for repayment ($200 million), plus an additional amount reflecting the amount it expects to pay on behalf of another member (if any). If each member of the group is solvent and expected to pay its allocated share of the obligation, Hospital A’s balance sheet would reflect a $200 million liability at the outset, and the notes would disclose the $250 million contingent obligation. The disclosures should include the nature and amount of the obligation as well as information about risks such obligations pose to Hospital A’s future cash flows.
If in 20X3 it appears that Hospital C might become unable to repay some or all of its $75 million allocation, Hospital A’s estimate of the additional amount it expects to pay on behalf of others may increase above zero. Hospital A would develop a range of exposure (for example, $15-50 million). If no amount is better than any other in that range, Hospital A would increase the liability by $15 million.
For more information on accounting for joint and several obligations, see FG 2.9.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
