Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

Accounting Issues Related to Chapter 9

A recent accounting change may be of interest to high yield as well as distressed municipal bond investors. In December 31, 2009, the Governmental Accounting Standards Board (GASB) issued accounting and financial reporting guidance for governments that have petitioned for protection from creditors by filing for bankruptcy under Chapter 9 of the United States Bankruptcy Code: GASB Statement (GASBS) No. 58 (Accounting and Financial Reporting for Chapter 9 Bankruptcies) describes the requirements for recognizing and measuring the effects on assets and liabilities of governments filing for Chapter 9 bankruptcy protection.

GASBS No. 58 is effective for periods beginning after June 15, 2009, that is, for the fiscal year that ends on June 30, 2010. For all prior periods during which a government was in bankruptcy, retroactive application is required. The GASBS No. 58 provisions cover governments that are not expected to emerge as a going concern and apply only to governments that have actually filed for protection under Chapter 9, not to governments that are just considering filing. There have not been any subsequent changes to GASBS No. 58, so this statement is the latest authoritative guidance of interest to the municipal bond investor.

Significance of GASBS No. 58

The GASB is the source of GAAP used by U.S. state and local governments, and it is subject to oversight by the same Financial Accounting Foundation (FAF) that oversees the Financial ...