This FASB Staff Position (FSP) clarifies the definition of a public entity in certain accounting standards to include entities that are conduit bond obligors for conduit debt securities that are traded in a public market. This FSP amends APB Opinion No. 28, Interim Financial Reporting; FASB Statements No. 69, Disclosures about Oil and Gas Producing Activities, No. 109, Accounting for Income Taxes, No. 126, Exemption from Certain Required Disclosures about Financial Instruments for Certain Nonpublic Entities, No. 131, Disclosures about Segments of an Enterprise and Related Information, No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, and No. 141, Business Combinations; and AICPA Audit and Accounting Guides, Health Care Organizations, and Not-for-Profit Organizations.
A state or unit of local government or an agency or instrumentality of a state or local government (governmental entity) can raise funds in the capital markets by issuing municipal bonds. The Internal Revenue Code also permits a governmental entity to issue a conduit debt security (commonly referred to as municipal bonds or industrial revenue bonds). A conduit debt security is an offering by a governmental entity that is not for its own use but for the use of a private party (the conduit bond obligor). The types of private entities that can be involved in a conduit debt security are limited by the Federal tax code to certain not-for-profit entities (for example, hospitals, museums, and libraries) and to for-profit entities for which the security is issued in the form of an industrial revenue or development bond for a specific purpose allowable by the Internal Revenue Code. In some instances, these conduit debt securities are traded in a public market (a domestic or foreign stock exchange or on an over-the-counter market, including local or regional markets).
Under conduit debt securities, the governmental entity that issues them often does not have any subsequent liability or continuing involvement. Therefore, entities that benefit from the conduit debt securities frequently are considered the obligors to the conduit debt securities. Obligors may be added or removed subsequent to the initial offering. In the initial security offering, the governmental entity is listed as the issuer, and the entity that receives the proceeds from the sale of the conduit debt security is listed as the obligor. The governmental entity does not include any of its own financial operating results in the initial offering or future filings. The conduit bond obligor is required to make or fund all interest and principal payments as they become due, and any future financial reporting requirements also are the responsibility of that conduit bond obligor.
Questions have arisen as to whether a conduit bond obligor for conduit debt securities that are traded in a public market, should be considered a public entity for the purposes of applying certain existing authoritative accounting literature.
An entity that is an obligor for conduit debt securities that are traded in a public market meets the definition of a public entity or enterprise. The definition of a conduit bond obligor includes all individual conduit bond obligors that participate in a pooled conduit debt security. This FSP amends only the accounting literature in the first paragraph above to include conduit bond obligors in the definition of a public entity or enterprise. That is, other references in authoritative accounting literature, that include a definition of a public entity or enterprise that have not been specifically amended to include a reference to conduit bond obligors, are unaffected by this FSP, e.g. FASB 128-Earnings Per Share. FASB 128 specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held “common stock” or “potential common stock”, as defined in the Glossary to FASB 128. Therefore, the requirements of FASB No. 128 are not applicable to an entity defined as a “public entity” in FSP 126-1, unless the entity has issued common stock or potential common stock which is publicly held.
FASB No. 126 was originally issued in December 1996, effective for years beginning after December 15, 1996, to exempt nonpublic entities from certain required financial statement disclosures about financial instruments. FSP 126-1 revises the definition of a public entity or enterprise to specifically include conduit debt obligors. Thus, the original exemption provided by FASB No. 126 is not applicable to nonprofit entities or other private enterprises that have issued conduit debt obligations.
As a result of this revised definition of a public entity or enterprise, certain accounting rules and financial statement disclosure requirements, that may not have been required in the past, are now required for conduit debt holders, including privately held entities and nonprofit enterprises that issue these instruments. Standards such as those governing interim financial reporting, segment reporting and disclosures about financial instruments, are now effective for conduit debt obligors.
One of the most significant impacts of issuing FAS 126- 1 is that the deferral of the effective date of Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) for nonpublic entities, is no longer applicable to conduit debt obligors. For public enterprises, including conduit debt obligors, FIN 48 is effective for years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 may impact nonprofit entities that have taken certain positions regarding unrelated business income in their tax returns. For privately held entities and nonprofit entities with conduit debt, the required analysis and footnote disclosures under FIN 48 should be incorporated in financial statements for periods beginning after December 15, 2006.
FSP No. 126-1 should be applied prospectively in fiscal periods beginning after December 15, 2006; however, retrospective application is permitted. If an entity issues interim financial statements, FSP No. 126-1 should be applied to the first interim period after the date of adoption.
The need to file financial statements with various regulators, e.g. the U.S. Securities and Exchange Commission, is a legal question which should be discussed by management of the particular entity with its legal counsel.