What is the appropriate accounting treatment for the difference between the carrying amount of refunded debt and its acquisition price in the public sector?

In the public sector, when a government entity refunds debt, the difference between the carrying amount of the refunded debt and its acquisition price should be treated as a deferred charge/amortization. This treatment reflects the principle that the financial impacts of refunding debt can be substantial, and recognizing these impacts over time is necessary for accurate financial reporting.

By classifying the difference as a deferred charge, the entity spreads out the recognition of this financial effect over the life of the new debt issued. This aligns with the matching principle in accounting, ensuring that the costs associated with the debt refunding are matched with the periods in which the benefits are realized. Amortization of this deferred charge is then undertaken in a systematic and rational manner, typically over the term of the new debt.

This approach ensures that the financial statements reflect the ongoing economic reality of the government’s obligations and avoids large fluctuations in reported results due to one-off transactions.