ASC

ASC 470-954

Health Care Entities

470 Debt

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In brief

IntermediateRecognitionDerecognitionPresentationIndustry-specific

This Subtopic gives health care entity-specific debt guidance, principally for tax-exempt bond financings. Bonds issued by a financing authority for a health care entity's benefit are recorded as a liability (or lease liability) only if the entity is responsible for repayment; otherwise the proceeds are reported as contributions from the sponsoring entity. It also addresses arbitrage rebate liabilities owed to the U.S. Treasury and the accounting for crossover refundings.

Key points (7)
  • Tax-exempt bonds issued by a financing authority for the benefit of a health care entity are reported as a liability on the entity's balance sheet if the entity is responsible for repayment, and that obligation may take the form of a lease liability (470-954-25-1).
  • If the health care entity has no obligation to pay principal and interest (or related lease payments), no liability is recorded and the bond proceeds are reported as contributions from the sponsoring entity (470-954-25-1).
  • IRS rules prohibit investment yield on tax-exempt debt proceeds from exceeding the interest rate on the debt; excess earnings create an arbitrage rebate liability payable to the U.S. Treasury to preserve tax-exempt status (470-954-25-2).
  • The arbitrage determination is made as of the issue date, but intentional post-issuance acts can retroactively disqualify the issue, and the rebate can be substantial if proceeds are spent more slowly than planned (470-954-25-2).
  • In a crossover refunding, the old bonds are not defeased until the crossover date, so no immediate gain or loss is recognized (470-954-40-1).
  • If retirement dates of the old debt are established, the call premium, unamortized premium or discount, and initial issue costs are recognized systematically over the remaining life of the old debt as an adjustment of the cost of borrowing (470-954-40-1).
  • The escrowed funds are reported as an asset and both old and new debts as liabilities, with no offsetting; income on the funds and interest expense on both debts are recognized in the income statement (470-954-40-1).

For students. The recurring exam trap is assuming that conduit tax-exempt bond proceeds always create a liability for the health care entity — recognition turns entirely on whether the entity is obligated to repay; if not, the proceeds are contribution revenue. Also remember that a crossover refunding produces no immediate gain or loss and requires gross (non-offset) presentation of the escrow asset and both debts.

tax-exempt bond financingarbitrage rebate liabilitycrossover refundingadvance refundingconduit debt obligationdefeasancecontributions from sponsoring entityoffsetting of assets and liabilities

Machine-generated study aid for ASC 470-954. Check the source paragraphs below.

470-954-00Status

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470-954-05Overview and Background

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470-954-05-1
This Subtopic provides guidance on accounting for debt for health care entities within the scope of this Topic.

470-954-15Scope and Scope Exceptions

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Overall Guidance

470-954-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 954-10-15.

470-954-25Recognition

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Financing Authorities

470-954-25-1
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.

Arbitrage Rebate Liabilities

470-954-25-2
Internal Revenue Service (IRS) regulations concerning tax-exempt debt prohibit the yield realized from the investment of the proceeds of such debt from exceeding the interest rate to be paid on such debt. Whenever a provider invests tax-exempt bond proceeds and the ultimate yield is higher than the interest rate on the bonds, the provider may be subject to an arbitrage rebate liability. The arbitrage determination is made as of the date of the issue; however, intentional acts undertaken after the date of the issue can disqualify the issue retroactively. The earnings in excess of interest expense represent a liability that must be paid to the U.S. Treasury in order for the bonds to maintain their tax-exempt status. The arbitrage rebate liability may be a substantial amount if the bond proceeds are not spent as quickly as planned. For example, this may occur if a provider encounters a delay in a major construction project.

470-954-40Derecognition

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470-954-40-1
In a crossover refunding, because the old bonds are not defeased until the crossover date, no immediate gain or loss shall be recognized. If the retirement dates of the old debt have been established, the call premium, unamortized premium or discount, and initial issue costs shall be recognized systematically in the income statement over the remaining life of the old debt as an adjustment of the cost of borrowing related to the old debt. In addition, the income earned on the funds used to consummate the advance refunding and the interest expense on both the old and new debts shall be recognized in the income statement. The funds used to consummate the advance refunding shall be reported as an asset and both the old and new debts shall be reported as liabilities. The assets and liabilities shall not be offset.

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