Is In‐Substance Defeasance of Debt Too Good To Be True?

Abstract

Many managers have taken advantage of the benefits associated with engaging in in‐substance defeasance of debt. For example, defeasance can generatea ccounting gains that result in higher reported income and earnings per share without a corresponding change in cash flows. Since the inception of this transaction in 1982, controversy over the accounting treatment of defeasance resulted in the issuance of Statement of Accounting Standards No. 76, Extinguishment of Debt. However, unsettled issues remain. This article describes the evolution of the defeasance transaction, the related controversial points, and explores the unsettled issues that remain so that due consideration can be given to a contemplated defeasance transaction.

Citation

Apostolou, B. and Jeffords, R. (1989), "Is In‐Substance Defeasance of Debt Too Good To Be True?", American Journal of Business, Vol. 4 No. 2, pp. 15-20. https://doi.org/10.1108/19355181198900014