GASB Statement No. 65 reclassifies items that governments previously reported as assets or liabilities into two newer categories: deferred outflows of resources and deferred inflows of resources. It also requires certain costs, most notably debt issuance costs, to be expensed in the period incurred rather than capitalized and amortized. The standard took effect for fiscal years beginning after December 15, 2012.1Governmental Accounting Standards Board. Statement No. 65 – Items Previously Reported as Assets and Liabilities
Debt Refunding Differences Become Deferred Outflows or Inflows
When a government refunds debt by issuing new bonds to retire older ones, there is usually a difference between the reacquisition price of the retired debt and its net carrying amount. Under the old rules, that difference was reported as an asset or a liability. GASB 65 reclassifies it: if the reacquisition price exceeds the carrying amount, it is a deferred outflow of resources; if it falls below, it is a deferred inflow.1Governmental Accounting Standards Board. Statement No. 65 – Items Previously Reported as Assets and Liabilities
The reclassified amount is then amortized as a component of interest expense over the remaining life of the old debt or the life of the new debt, whichever is shorter. Getting the net carrying amount right at the point of refunding matters, because any error carries into interest expense for every remaining amortization period. That figure needs to include any unamortized premium or discount on the retired debt.
Items Reclassified as Deferred Inflows
Several revenue-related balances that governments used to report as liabilities now sit in the deferred inflows category.
Property Taxes for a Future Period
Property taxes received or recorded as a receivable before the fiscal year they are intended to fund are reported as deferred inflows of resources.1Governmental Accounting Standards Board. Statement No. 65 – Items Previously Reported as Assets and Liabilities In governmental fund financial statements, property tax revenue that is not “available” to pay current-period liabilities also falls into this category. Whether revenue counts as available depends on whether the government collects it during the current period or expects to collect it soon enough afterward to cover current obligations.
Grants Received Before Timing Requirements Are Met
Grant resources received before a government satisfies time requirements attached to the award are also reported as deferred inflows. The balance converts to recognized revenue when the performance or time-based condition in the grant agreement is satisfied, so those trigger dates need to be tracked closely.
Debt Issuance Costs Are Expensed Immediately
Before GASB 65, governments typically capitalized costs like legal fees, underwriting fees, and rating agency charges, then amortized them over the life of the bond. GASB 65 requires these costs to be expensed in the period they are incurred.1Governmental Accounting Standards Board. Statement No. 65 – Items Previously Reported as Assets and Liabilities The full amount hits the financial statements in the year the debt is issued.
The one exception is prepaid insurance costs related to the debt. Because insurance provides a future service benefit over the life of the debt, prepaid insurance continues to be reported as an asset and amortized over the duration of the related obligation. Every other issuance cost, regardless of the dollar amount or the length of the debt, gets expensed immediately.
At implementation, governments with unamortized debt issuance costs still on their books from earlier bond issues had to write those balances off rather than continue amortizing them.
Exception for Rate-Regulated Entities
Government utilities and other rate-regulated entities may have an alternative. Under GASB Statement No. 62, a regulated entity can continue to capitalize debt issuance costs as a regulatory asset if two conditions are met: future recovery of the costs through rates is probable, and the recovery is clearly based on prior costs rather than similar future costs. If the utility’s rate methodology recovers debt issuance costs through customer rates on a systematic basis over the life of the debt, the entity can record those costs as a regulatory asset instead. The governing body must approve this treatment and the recovery period, and if the amounts are material, the policy must be disclosed in the notes.
The Word “Deferred” Is Now Restricted
GASB 65 restricts the label “deferred” in financial statements to items that meet the definitions of deferred outflows or deferred inflows of resources.1Governmental Accounting Standards Board. Statement No. 65 – Items Previously Reported as Assets and Liabilities Balances that were loosely labeled “deferred” under old practice but don’t qualify have to be renamed.
The most common case is “deferred revenue.” If the balance represents an obligation to provide a service or return a payment, it should be relabeled as “unearned revenue” or a similar term that accurately describes it as a liability. The change matters because readers need to distinguish at a glance between a true timing difference (a deferred inflow) and an obligation the government still owes.
Major Fund Calculations Include the New Elements
GASB 65 amends the major fund test in GASB Statement No. 34. When calculating whether a fund exceeds the 10 percent and 5 percent thresholds, deferred outflows of resources are combined with assets, and deferred inflows of resources are combined with liabilities.1Governmental Accounting Standards Board. Statement No. 65 – Items Previously Reported as Assets and Liabilities For most governments the effect is modest, but entities with large pension-related deferred balances could see a fund cross a threshold it previously fell below.
Restatement at Implementation
GASB 65 required retroactive application. Governments restated financial statements for all periods presented so comparative data reflected the new classifications. Where full restatement was not practical, the cumulative effect was reported as a restatement of beginning net position or fund balance for the earliest period shown. Note disclosures had to explain the nature of the change, the reason for the restatement, and its effect on previously reported figures. For governments with significant unamortized debt issuance costs or large deferred revenue balances, those adjustments could meaningfully shift reported net position.
What Has Been Superseded Since
Parts of GASB 65 no longer apply. GASB Statement No. 87 on leases, effective for fiscal years beginning after June 15, 2021, superseded the paragraphs of GASB 65 that addressed sale-leaseback transactions (paragraphs 7 and 16 through 18); the lease accounting model in GASB 87 governs those transactions instead. GASB 86 made a minor amendment to footnote 3.2Governmental Accounting Standards Board. Status – Statement No. 65 If you are relying on GASB 65 for current reporting, check the status page to confirm which provisions still apply before citing a specific paragraph.