ACCOUNTING POLICIES - cont

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					                          ACCOUNTING POLICIES cont.

          REFUNDING AND ADVANCE REFUNDING BONDS – cont.

Required Note Disclosures – cont.

2. The economic gain or loss resulting from the transaction:

   Economic Gain or Loss Explained. The economic gain or loss is computed by
   determining the difference between the present value of cash flow requirements of the
   old debt and the present value of cash flow requirements of the new debt. The interest
   or discount rate used to determine the present value of the cash flows is a rate that
   generally must be computed through trial and error (either manually or by using a
   computer software package). The objective is to identify an interest rate that, when
   applied to the cash flow requirements for the new debt, produces an amount equal to
   the sum of the (1) proceeds of the new debt (net or premium or discount) and (2)
   accrued interest, less the (a) underwriting spread and (b) nonrecoverable issuance
   costs.

Computing the Required Note Disclosures

To clarify the computation of the differences in cash flow requirements and the economic
gain or loss arising from the refundings, GASB-7 has formulated a series of suggested
steps that may be followed to compute the required disclosures. The following
demonstrates how these suggested steps can be applied to specific circumstances.

Step 1:   Compute the amount of resources that will be required to (1) make a payment
          to the escrow agent in order to defease the debt and (2) pay issuance costs.
          The payment to the escrow agent must be large enough to make all interest
          payments and the principal payment based on either the call date or maturity
          date of the old debt. Either the call date or the maturity date is used, depending
          on which one is specified as the retirement date in the escrow fund agreement.
          The amount of the required payment to the escrow agent is also dependent
          upon the rate of return that can be earned in the escrow fund. The escrow rate
          of return is determined by the market investment conditions and the allowable
          yield on the escrow investment as determined by Treasury Department
          regulations. The amount of the issuance costs must be added to the amount
          that is paid to the escrow agent in order to determine the total amount of
          resources required to defease the debt.

Step 2:   Compute the effective interest rate target amount. The effective interest rate
          target amount is computed by subtracting the amount of nonrecoverable
          issuance costs from the amount of the resources required to defease the old
          debt and to pay issuance costs (computed in Step 1). By reducing the amount
          required to defease the old debt (and to pay issuance costs) by the
          nonrecoverable issuance costs, the effective interest rate (to be computed in
          Step 3) will be decreased. If all issuance costs are recoverable and the new
          debt is sold at par, the coupon rate on the new debt will be the same as the
          effective interest rate.

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