Bonds And Debt To Fund The Future

Debt: It’s the four-letter word that makes any nonprofit executive cringe. While it’s rarely something that is celebrated, a small amount of debt can be healthy for your organization.

Understanding the intricacies of debt modifications and extinguishments can be a nuisance for any organization, knowing them now will save you time, money, and headaches during tax season.

During a session at the recent AICPA Not-For-Profit Industry Conference titled “Debt Modifications/Extinguishments,” Dennis Morrone, partner-in-charge at Grant Thornton’s National Not-for-Profit and Higher Education Audit Practice, and Craig Becker, associate vice president for finance and business affairs at Lafayette College, alleviated some of the headaches and highlighted some of the key considerations a nonprofit financial manager might consider:

* Bonds may be issued to finance the operation of 501(c)(3) nonprofit organizations, however the bond is disqualified from tax-exemption if more than five percent of the proceeds are put towards “private business use.”

* Arbitrage restrictions are also in place if more than the lesser of five percent or $100,000 are reasonably expected to be used to acquire higher yielding investments.

* When a debt is de-feased, it is no longer reported as a liability on the face of the balance sheet; only the new debt, if any, is reported as a liability.

* If a cash flow analysis indicates the changed in terms associated with an exchange with a creditor is not “substantial,” then a modification of the terms of the original debt has occurred.

* If a cash flow analysis indicates a change in terms associated with an exchange with a creditor are substantial, a change in cash flow of greater than 10 percent from the original settlement date, than an extinguishment, not a modification, of the original debt has occurred.