Debt Cancellation

FASAB Contact, Melissa Batchelor, batchelorm@fasab.gov, 202-512-5976

Request for Comment	Due Date	Word Version of questions for Respondents	Comment Letters	Final Pronouncements
Debt Cancellation: An Interpretation of SFFAS 7, Paragraph 313 (PDF)	July 23, 2021	Word Version of Questions for Respondents (Download)	Comment Letters	Debt Cancellation: An Interpretation of SFFAS 7, Paragraph 313 (PDF)

Technical Clarifications of Existing Standards (TCES) Project Description:

Members of the Board and the federal financial management community have expressed a general concern that federal entity resources are increasingly constrained. Some believe the Board should evaluate existing requirements and eliminate any unnecessary requirements. When appropriate, the Board explores opportunities to engage with the community on changes to existing standards and areas where clarification may be needed.

TCES addresses requests for guidance that align with the above goals and provide benefits that clearly exceed costs. To accomplish these goals, ongoing efforts may include providing additional forums for preparers, auditors, and users to identify requirements they believe are unnecessary and where clarification may be needed (this can be accomplished through an open-ended written request for input or round table discussions). The Board will assess requests against the reporting objectives. The Board may address these requests through the appropriate level of GAAP guidance.

Debt Cancellation Project Objective:

As part of the TCES project, this sub-project considers whether paragraph 313 of SFFAS 7, Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting, which pertains to debt cancellation needs to be clarified.

The objective is to respond to a request for guidance from stakeholders by issuing clarifying guidance regarding debt cancellation as included in paragraph 313 of SFFAS 7. For example, the Board will clarify that debt cancellation activity should be reported on the statement of changes of net position.

HISTORY OF BOARD DELIBERATIONS

November 29, 2021

 On November 29, 2021, FASAB issued Interpretation 11, Debt Cancellation: An Interpretation of SFFAS 7, Paragraph 313. Statement of Federal Financial Accounting Concepts (SFFAC) 2, Entity and Display, paragraph 100 provides that nonexchange activity is reported on the statement of changes in net position (SCNP). When considering paragraph 313 of SFFAS 7 and SFFAC 2 together, Interpretation 11 clarifies that the standards provide that debt cancellation is a nonexchange activity that should be reported on the SCNP. Interpretation 11 also clarifies that paragraph 313 of SFFAS 7 should not be interpreted to require that a particular line item “gain” or “loss” be displayed on the SCNP.

Although Interpretation 11 does not provide guidance on budgetary accounting, it notes budgetary accounting should be considered. As noted in paragraph 313 of SFFAS 7, the cancellation of debt requires an Act of Congress. Each debt cancellation is governed by the particular language used in the enacted legislation canceling the debt.

Interpretation 11 is available at https://fasab.gov/accounting-standards/.

August 24-25, 2021

At the August 2021 Board meeting, the Board considered the comment letters, staff analysis, and staff’s recommendations on the proposed Interpretation, Debt Cancellation: An Interpretation of SFFAS 7, Paragraph 313.

The exposure draft (ED), Debt Cancellation: An Interpretation of SFFAS 7, Paragraph 313, was issued on May 25, 2021, with comments requested by July 23, 2021. FASAB received 17 comment letters. The majority of respondents agreed with the proposed guidance. Specifically, respondents generally agreed that the Interpretation clarified that that the standards provide that debt cancellation is a nonexchange activity that should be reported on the statement of changes in net position (SCNP.) The Interpretation also clarifies that paragraph 313 of SFFAS 7 should not be interpreted to require that a particular line item  “gain” or “loss” be displayed on the SCNP.

Only one respondent disagreed with certain aspects of the proposal. The respondent requested clarification on reporting the restructuring of debt and other aspects of paragraph 313 of SFFAS 7. The Board determined the referenced transactions outside of the scope of the proposed Interpretation. Certain respondents provided minor editorial clarifications that were incorporated and approved by the Board.

The Board agreed to pre-ballot the proposed Interpretation titled Debt Cancellation: An Interpretation of SFFAS 7, Paragraph 313 during September 2021. After the pre-ballot, the document will move to ballot. Once approved by the Board, the Interpretation will be submitted to the members representing the sponsor agencies for 45 days. If within the 45 days none of these members object, then the Interpretation will be published by FASAB.

Briefing materials – Topic B

May 25, 2021 

On May 25, 2021, FASAB released for comment the proposed Interpretation of Federal Financial Accounting Standards titled Debt Cancellation: An Interpretation of SFFAS 7, Paragraph 313.

The proposed Interpretation would clarify that debt cancellation is a nonexchange activity that should be reported on the statement of changes in net position (SCNP). This proposed Interpretation would also clarify that paragraph 313 of SFFAS 7 should not be interpreted to require that a particular line item “gain” or “loss” be displayed on the SCNP.

In addition to the proprietary accounting and reporting discussed above, budgetary accounting should be considered. As noted in paragraph 313 of SFFAS 7, the cancellation of debt requires an Act of Congress. Each debt cancellation is governed by the particular language used in the enacted legislation canceling the debt. This proposed Interpretation would not provide guidance on budgetary accounting, which is issued by central agencies.

The Board requests comments on the exposure draft (ED) by July 23, 2021.

April 27-28, 2021

At the April 2021 meeting, the Board considered the remaining issues on the draft exposure draft (ED) Interpretation titled Debt Cancellation: An Interpretation of SFFAS 7, Paragraph 313.

The Board revisited the issue of whether to include a question for respondents regarding the clarity of the reference to “other financing sources” from the February 2021 meeting. Staff had provided the Board a pre-ballot ED in March 2021. Based upon the pre-ballot in March 2021, the majority of members did not believe the question was necessary. Another member had submitted an alternative question for consideration that was included in the April briefing materials.

Most members agreed the alternative question was an improvement. Some members favored obtaining the additional information that could result from the added question. Others believed the language in the Interpretation was sufficiently clear and the question could add complexity. After discussion, by a five to four vote, members decided to include the question for respondents.

The Board also revisited the language of paragraph 9. After discussion, the Board preferred to explicitly state in the authoritative section of the ED that it does not provide guidance on budgetary accounting. Accordingly, the Board agreed to revise the last sentence of paragraph 9. The Board agreed to retain a detailed discussion in the basis for conclusions about central agencies providing guidance regarding budgetary accounting about debt cancellations.

The Board agreed to ballot the Interpretation ED, pending incorporation of additional edits as agreed to by members. Staff provided members an electronic copy of the document and ballot after the April meeting. The ED is anticipated to be released for comment at the end of May 2021.

Briefing materials – TOPIC B

February 23, 2021

At the February 2021 Board meeting, the Board considered a revised exposure draft (ED) Interpretation titled Debt Cancellation: An Interpretation of SFFAS 7, Paragraph 313. The project relates to paragraph 313 of SFFAS 7, Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting. The Board previously had agreed that clarification should be resolved with an Interpretation.

Since the December 2020 meeting, FASAB staff had coordinated with OMB staff and determined that eliminating the sub-categories “Budgetary Financing Sources” and “Other Financing Sources (Non-exchange)” presented under the Cumulative Results on the SCNP from the A-136 form and content requirements would enhance clarity and ensure consistency with GAAP. OMB plans to propose removing the sub-category classifications in the next A-136 update. Staff explained that when OMB removes the sub-category classification on the SCNP, this will alleviate the sub-category classification issue that the Board had considered in this project. Therefore, there would be no reason for the Interpretation to reference the sub-category classifications (if the sub-category classifications are no longer presented or required by A-136 on the SCNP).

Staff stressed the importance of the A-136 revisions and that staff would not recommend that the Interpretation move forward as currently drafted without the A-136 revisions. FASAB staff is comfortable with the ED being exposed for comment while A-136 is under revision because the ED sufficiently explains this. Further, the final Interpretation would not be issued until the A-136 update is complete.

Additional narrative was included in the Interpretation to explain that the budgetary accounting and reporting for debt cancellation should be based upon language provided in the enacted legislation canceling the debt and that guidance would be provided by central agencies.

Board members discussed suggested edits and the Board agreed that a new, focused question for respondents could be added to ensure there was no confusion regarding the term “other financing sources.”

FASAB staff explained that a member was concerned about the length of the basis for conclusions with the inclusion of excerpts from SFFAS 7. Certain members agreed but noted relevant excerpts might be helpful during the ED process. The Board asked if there were options to streamline, reference, or include the excerpts as an attachment that could be dropped after the ED. The Board requested staff to research options for its consideration.

The Board agreed to move forward to a pre-ballot ED Interpretation titled Debt Cancellation: An Interpretation of SFFAS 7, Paragraph 313, pending incorporation of additional edits as agreed to by members.

Briefing materials – TAB E

December 15 – 16, 2020

At the December 2020 meeting, the Board received an update on the debt cancellation project that was last presented at the June 2020 Board meeting. Members then assessed whether the Board should move forward with the Interpretation or defer the issue as part of the reexamination of existing standards project. The staff provided materials for the session in tab B of the briefing materials.

A majority of the Board was supportive of the draft Interpretation; however, a member suggested the Board consider a short-term solution through a limited scope Interpretation and address other issues when the Board reassesses SFFAS 7, Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting, in the reexamination of existing standards project. FASAB staff agreed to meet with all parties—DHS, Treasury representatives, and auditors—to ensure the draft Interpretation through paragraph 9 would fully resolve the debt cancellation issue that existed. 

Staff explained that FASAB staff and Treasury representatives met with the appropriate parties and determined that the short-term proposal as suggested would not resolve the issue. The parties confirmed that the full Interpretation as previously reviewed by the Board, was necessary to resolve the debt cancellation issue.

Staff asked whether the majority of the Board preferred to move forward with the Interpretation or defer the issue as part of the reexamination of existing standards project. Staff recommended moving forward with the Interpretation because the relevant parties had confirmed that the draft Interpretation would resolve the issue.

The chair polled members on whether they preferred to move forward with the Interpretation or defer the issue. The majority of the Board agreed to move forward with the draft Interpretation.

One member suggested clarifying the placement on the statement of changes in net position, the terminology used, and the interrelationship between this document and OMB Circular A-136, Financial Reporting Requirements (form and content). The member believed clarification may improve the proposed Interpretation and prevent any confusion with classification among sections used by OMB in A-136. The OMB representative agreed and suggested that any revisions necessary to A-136 would also be considered to support the effort. The Board agreed clarifying edits would improve the document. Staff will work with the sponsor agencies to include appropriate clarifications. Once the clarification has been addressed, staff will provide the Board a pre-ballot Interpretation, Debt Cancellation: An Interpretation of SFFAS 7 paragraph 313.

Briefing materials – TAB B

June 24 – 25, 2020

At the June 2020 meeting, the Board’s objective was to consider an updated draft Interpretation titled Debt Cancellation: An Interpretation of SFFAS 7 paragraph 313 and staff’s analysis of a proposal presented by the Department of the Treasury (Treasury) and the Office of Management and Budget (OMB). The project was not on the agenda in April 2020. Instead, staff provided the Board with a memo conveying an update regarding the debt cancellation issue. The memo was a means to provide the results of the research performed by Treasury and OMB as well as the outreach performed by FASAB staff. This memo is included with the June 2020 materials as attachment 6. In summary, neither the feedback obtained from the reporting entities affected by the recent debt cancellation nor the additional research regarding previous debt cancellations should impede or prevent the Board from moving forward on the project.

There were diverse comments and views expressed by members to the questions included in the April 2020 staff update. For example, as indicated in the June 2020 briefing materials, Treasury and OMB believe the Board should broaden the scope and revise the Interpretation to be consistent with their proposal. Certain members do not believe there is a need for FASAB action because they believe the standards are clear. Certain members are willing to move forward with an Interpretation if it can be done swiftly. In addition, certain members believe the circumstances are rare, and no action is required at this time because the Board can address the issue in a broader reexamination of existing standards project.

During the June 2020 meeting, the Board considered the Treasury and OMB proposal. The biggest difference is that their proposal provides flexibility with debt cancellation reported as a “budgetary financing source” or an “other financing source” on the statement of changes in net position (SCNP), whereas the staff proposal provides that debt cancellation would be classified as an “other financing source” on the SCNP.

Based on the basis for conclusions in Statement of Federal Financial Accounting Standards (SFFAS) 7, Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting, FASAB staff does not believe the draft Interpretation should allow flexibility to recognize debt cancellation as either a “budgetary financing source” or an “other financing source” on the SCNP. Paragraphs 209-212 in SFFAS 7discuss the budgetary process and its linkage to accounting. Footnote 43 to paragraph 212 states, “Amounts appropriated to liquidate contract authority or repay debt are not available to incur new obligations and hence are not considered new budget authority.” Likewise, debt cancellation activity would not be considered new budget authority or a budgetary financing source. Debt cancellations should be classified as an “other financing source” on the SCNP, whether an appropriation was received or not.

FASAB staff does not believe the suggested flexibility in the Treasury/OMB proposal would resolve the issue presented in the Interpretation. Further, it is not supported by the basis for conclusions of SFFAS 7.

 The Board discussed issuing the draft Interpretation through paragraph 9, so it would provide clarity and guidance on the issue regarding gain/loss as it relates to debt cancellation. However, there was concern whether those paragraphs would resolve what the issue.

FASAB staff did not believe issuing an Interpretation through paragraph 9 would fully resolve the debt cancellation issue that occurred in fiscal year 2018 at the Department of Homeland Security (DHS) and resulted in the material weakness. The remaining paragraphs were necessary to address the issue pertaining to the classification on the SCNP.

The Board agreed to give Treasury an opportunity to revisit the specifics with the agencies to confirm the issues.

The chair polled the members to see if they supported the Treasury proposal to issue the draft Interpretation through paragraph 9—providing guidance on the issue regarding gain/loss as it relates to debt cancellation. However, staff noted that this abbreviated Interpretation would not fully resolve the issue  The Board agreed with the Treasury request to revisit the issue with all parties—FASAB staff, DHS, Treasury, and auditors—to discuss whether the draft Interpretation through paragraph 9 would resolve the issue. The Chairman noted that it is very important to ensure the guidance would resolve a problem.

The Board agreed to Treasury’s short-term proposal to issue the draft Interpretation through paragraph 9 if it will resolve the debt cancellation issue. Treasury and FASAB staff will meet with all parties—DHS, Treasury deputy chief financial officer, and auditors to ensure the draft Interpretation through paragraph 9 will fully resolve the debt cancellation issue that existed.

Considering the Board’s goal that work on the limited scope project be accomplished without significant additional resources, FASAB staff will consider if lower level GAAP guidance may be appropriate.

Briefing materials – TAB B

February 26-27, 2020

At the February 2020 Board meeting, the Board considered an initial staff draft, Debt Cancellation: An Interpretation of SFFAS 7 paragraph 313. The Board first discussed paragraph 313 of Statement of Federal Financial Accounting Standards (SFFAS) 7, Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting, at the October 2019 Board meeting and agreed that an Interpretation would be used at the December 2019 meeting.

The Board agreed to allow time for additional research request by the two members and requested that staff consult with the reporting entities affected by the recent debt cancellation to determine whether staff’s draft Interpretation would have resolved the issues.

The Board agreed to delay further consideration of the debt cancellation exposure draft (ED) pending research into prior debt cancellations and other historical circumstances.

February 26-27, 2020 – Tab G (PDF)

December 17-18, 2019

At the December 2019 meeting, the Board considered two potential Interpretation topics under the evaluation of existing standards project.

At the October 2019 meeting, the Board had agreed that paragraph 313 of SFFAS 7, Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting, which pertains to debt cancellation, needed clarification.

The Board agreed that the terms “gain and loss” as used in paragraph 313 need clarification or an explanation that those terms are not required for presentation. It is important to clarify that debt cancellation activity is reported on the statement of changes in net position. An Interpretation will be used to clarify these items. A member requested that a question be included in the exposure draft (ED) that requests feedback on whether the proposed Interpretation resolves ambiguity that may exist in paragraph 313 and provides the necessary clarification.

The Board also agreed that SFFAS 1, Accounting for Selected Assets and Liabilities, paragraph 31, which pertains to non-entity fund balance with Treasury (FBWT), required clarification. The issue relates to how monies received in deposit funds from non-federal sources in anticipation of an order should be reported and presented on the financial statements. The Board agreed that an Interpretation would be the appropriate generally accepted accounting principles vehicle to address the SFFAS 1, paragraph 31 non-entity FBWT issue.

Issue Paper for December 17-18, 2019 – Tab B (PDF)

October 23-24, 2019

The Board considered whether paragraph 313 of SFFAS 7, which pertains to debt cancellation, needs to be revised. Messrs. Soltis and Bell requested that FASAB review paragraph 313 of SFFAS 7 because they believed there may be a disconnect in requirements related to debt cancellation. This is based on an issue raised during the FY 2018 audit cycle.

The Board agreed that fundamentally paragraph 313 is accurate, but it may be the imprecision of the terms “gain/loss” that is the issue. The Board also discussed that a presentation issue may exist and may be related to how U.S. Standard General Ledger accounts roll up to the statement of changes in net position. The Board believed it may be important to clarify that the categorization or captioning is not important as long as it is on the statement of changes in net position.

The Board agreed that the issue regarding debt cancellation required generally accepted accounting principles (GAAP) clarification. Specifically, the guidance would clarify that debt cancellation is reported on the statement of changes in net position but need not be presented as a specific “gain/loss” line item. The guidance would also provide for enhanced disclosures as appropriate.

Most Board members agreed that the issue should be resolved with the lowest level of GAAP guidance afforded. The Board will consider options at the next Board meeting.

Issue Paper for October 23-24, 2019 – Tab H (PDF)