What is the concept of in-substance defeasance primarily applicable to?

The concept of in-substance defeasance is primarily applicable to state and local governments. This accounting practice is used when a government entity sets aside resources to pay off certain types of debt, thus removing them from its financial statements for reporting purposes. In-substance defeasance occurs when the government creates a trust or fund with specific assets to pay off debt, effectively meaning that the obligation is considered settled even if the legal liability remains.

State and local governments often use this strategy as a means of managing their debt obligations and maintaining a favorable financial position. It allows them to show reduced liabilities on their financial statements, which can be beneficial for their credit ratings and financial health assessments.

In contrast, the other sectors mentioned have different accounting practices and regulations that do not emphasize in-substance defeasance in the same way. For example, federal government accounting has its own specific framework governed by different standards. Non-profit organizations may focus on resource allocation and fund accounting rather than defeasance. Private-sector accounting typically adheres to different standards that do not emphasize the concept of in-substance defeasance as prominently as it is with state and local governments. Understanding this context helps clarify why the concept is most relevant to state and local government accounting.