Regardless if the refunding is a legal defeasance or
in-substance defeasance, the amount of unamortized prepaid insurance associated with the debt being extinguished should be included in the net carrying amount of the extinguished debt, which is compared to the reacquisition price to determine the gain or loss on the refunding that is reported in the accrual-basis financial statements.
85-42, which addressed "
in-substance defeasance." In this ruling, the IRS described a transaction in which a corporation transferred corporate bonds yielding 6% and U.S.
Developing countries which are riding on pile-up debts may extinguish or reduce debt burden and through
in-substance defeasance or debt capitalisation, in a number of ways like calling in equipment leased flotation of techno-economic development bonds if such bonds have a call future, purchasing the bonds on the open market and subsequently retiring the bonds, swapping or exchanging equity shares for bonds, selling the bonds (debt) to other parties, and through sophisticated equipment leasing by developing countries in developed countries.
Under FASB 76, debt was considered extinguished if the debtor completed an
in-substance defeasance.
In-substance defeasance no longer is considered to constitute an extinguishment of debt.
In particular, they discussed the advantages of sinking-fund debentures and
in-substance defeasance. In a climate of rising interest rates,
in-substance defeasance becomes an attractive option to companies because it results in higher reported earnings and a lower debt-to-equity ratio.
Statement 76 allows the derecognition of a liability when you meet certain criteria, for example when you place assets in an irrevocable trust to satisfy the cash flow requirements (principal and interest) of a specific debt (the procedure is referred to as an
in-substance defeasance of debt).
Other differences arise in those areas in which bank reporting standards are intended to be more conservative than GAAP, such as in the areas of asset sales with recourse, futures contracts, excess servicing, and
in-substance defeasance of debt.
7 used the term
in-substance defeasance to describe this latter situation and specifically directed that it be treated in the same manner as a legal defeasance (i.e., remove both trust assets and related debt from the government's statement of net position).
(i) Peterson, P and Peterson, D, et al, The Extinguishment of Debt through
In-substance Defeasance, Financial Management (Spring 1985); and
For example, an arrangement for "
in-substance defeasance" of an outstanding debt was respected in Kev.
76, the FASB has eliminated the "
in-substance defeasance" rules.
Usually there would be no advantage to an
in-substance defeasance of the sinking fund obligation when interest rates decrease.
