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Debt Defeasance

In: Off Balance Sheet Finance

Author

Listed:
  • Ron Paterson

Abstract

Defeasance means nullification; debt defeasance therefore arises when a debtor is released from its obligations under the debt. In the context of this discussion, however, the term is used to describe a more oblique arrangement which produces a similar result, whereby a debtor deposits a sum of money with a third party which will use the money to pay off the borrowings at the end of their term. In the US, such a transaction is described as ‘in-substance defeasance’. The accounting questions which arise are whether the deposit with the third party can be set against the debt or whether the amounts must remain separately on either side of the balance sheet, and whether the difference between the two (arising because of different interest rates on the deposit and the borrowing) can be taken to the profit and loss account.

Suggested Citation

  • Ron Paterson, 1993. "Debt Defeasance," Palgrave Macmillan Books, in: Off Balance Sheet Finance, chapter 13, pages 103-105, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-12613-2_13
    DOI: 10.1007/978-1-349-12613-2_13
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