What is defined as in-substance defeasance?

In-substance defeasance refers to a situation where an entity transfers assets into a trust that are sufficient to settle the debt, allowing the entity to effectively remove the liability from its balance sheet while still retaining its status as the primary obligor. This process involves setting aside resources that will meet the future payment obligations of the debt, although the entity is not legally relieved from the obligation itself.

This option highlights the dual nature of in-substance defeasance, as the entity maintains control and responsibility for the debt, but can report the debt as if it has been settled due to the funds being secured in a dedicated trust. This is a significant accounting treatment that allows for a more favorable presentation of a company's financial position, as it can reduce reported liabilities and improve financial ratios while still possessing the responsibility for the debt's repayment.

The other options involve different scenarios: discharging a liability through cash payment represents a straightforward settlement of debt, while completely eliminating a liability from the balance sheet suggests that the obligation is legally extinguished. Refinancing debt to lower interest rates, on the other hand, deals with changing the terms of existing debt rather than addressing its accounting treatment. These options do not align with the specific concept of in-substance defeasance, which