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The domino effect of interest rates on demand bonds reporting classification

The stock market has experienced extreme volatility over the past several weeks as a result of the COVID-19 pandemic, which has consequently led to varying interest rates within the financial market. This affects the interest rates state and local governments receive on their demand bonds, like bond and tax anticipation notes. Due to the interest rate volatility, some governments are delaying bond offerings to a later date; however, many are unable to defer tax anticipation notes as they are utilized to meet certain cash flow needs until property or other taxes are paid.

To compound the issue, with COVID-19 having a severe effect on unemployment and other workforce changes, some taxpayers have experienced layoffs or reduced work hours, which will likely impact their ability to pay taxes. A reduction or delay in tax collections will make it more difficult for governments to pay back their tax anticipation notes that are usually paid off early in the year, not held onto until the end of the reporting year. This will result in higher-interest expenses paid by the government bodies compared to previous years.

In addition, if the tax anticipation notes or other demand bonds that are typically issued and paid during the year are still outstanding at year-end, the government will need to evaluate the appropriate reporting requirements for the liability. In order for these bonds or notes to be reported as a long-term liability (in the government-wide financial statements and excluded from the governmental funds), the governing entity needs to take action to meet specific conditions established by the Governmental Accounting Standards Board (GASB), outlined in the Codification Section D30, paragraph .108 (with reporting guidance expanded in paragraphs .109-.112). Regardless of whether the notes are classified as a current liability or a long-term liability, if the tax anticipation notes are still outstanding at the end of the reporting year, there also needs to be a debt disclosure in the notes to the financial statements with a general description and terms spelled out.

For more information on this topic, or to learn how Baker Tilly public sector specialists can help, contact our team.

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