CH 06

Chapter 6
Accounting for Capital Projects

and Debt Service
Chapter 6 Granof-5e 1
Learning Objectives
Capital Projects Fund
Debt Service Fund
Special Assessments
What is Arbitrage?
Debt Refundings
Capital Projects Funds(CPF)-Definition
A fund that accounts for and report financial resources
that are legally restricted and contractually required
for the acquisition of capital assets.
The primary purpose of this fund is to ensure and
demonstrate the expenditure of the dedicated financial
resource is both legally and contractually compliant.
The total cost of a capital project is accumulated in a
single expenditures account, which accumulates until the
project is completed, at which time the fund ceases to
exist.
--i.e. Fund has a Project-life focus,
not year-to-year focus.
Overview
Governments must maintain capital projects funds for resources
that are legally restricted , committed, or assigned to
expenditure for capital outlays .
This includes the acquisition or construction of capital facilities
Fund DOES NOT account for Capital Assets themselves. These
are maintained in a Schedule of Capital Assets.
Basis of Accounting
Fund Statements
--Modified accrual basis
Government-wide statements
--Full accrual basis.
Two types of capital projects
General (public benefit)
--Examples: public buildings, roads, highways and bridges, park
improvements, sewer systems, plant and equipment; etc.
Special assessment (private benefit)
--i.e. Benefits citizens in a specified benefit district.
--Examples: street improvements, curbs, sidewalks, street lighting, sewage,
etc.
Construction Phases
Phase 1: Preconstruction Phase
--Project & Financing authorization
Phase 2: Construction Phase
Phase 3: Debt Servicing Phase
Phase 1: Preconstruction Phase
Project & Financing authorization
Financing
Acquire extensive, long-term financing (3 types)
Type I - Tax Supported Debt
--General obligation (tax-supported) bonds or
special taxes restricted to payment of debt
Type II - Grants
Type III - Other forms of financing
--Special Assessments
(Special Assessments actually claim only 2 phases
because financing & construction are a single phase)
Type I
Tax Supported Debt
Overview
Voter approval required
Memo entry for bond/tax authorization
Proceeds accounted for as other financing
sources.
Difference between face value of bonds and
cash received is attributed to:
Issue costs.
Premiums and discounts.
Type I - Example
Assume that bonds with a face value of $5,000,000 were
issued at 101 to finance the project.
Capital Projects Fund: Dr. Cr.

Cash $5,050,000
Other Financing Sources-Bond proceeds 5,000,000
Other Financing Sources-Bond premium 50,000
Govt.-wide (Govtal. Activities)*:

Cash $5,050,000
Bonds Payable 5,000,000
Premium on Bonds Payable 50,000
*Note: This entry is not made on the books, this is the conversion at the eoy
Type II Grants-Example
Assume approval is obtained for a federal grant as partial
funding for a citys office building project.
Upon approval, the following journal entry would be made:

Due from other Governmental Units $100,000
Revenues 100,000
Due from Other Governmental Units $100,000

Program Revenues-Capital Grants and
Contributions-General Government 100,000
*Note: This entry is not made on the books, this is the conversion at
the end of year
Type II Example (contd)
The amount due from the federal government for the
previously recorded capital grant was received in full

Cash $100,000
Due from Other Governmental Units 100,000

Same entry.
*Note: This entry is not made on the books, this is the conversion at
the eoy
Type III Other Forms of Financing
Overview
Most Common: Special Assessments
--Levied when taxpayers in areas beyond
their jurisdiction want to benefit from
certain facilities and services.
Additional Topics CPFs
Interim Financing
May be necessary to obtain interim financing
until proceeds from intended source are
received.
Used often to complete architectural and
engineering design during preconstruction
phase.
Interim Financing - Example
Assume for the office building project, $50,000
was borrowed from the General Fund, to be
repaid later from bond proceeds.
Cash $50,000
Due to General Fund 50,000
Govt.-wide (Govtal. Activities):
No entry needed.
Interim Financing Example (contd)
The $50,000 due to the General Fund was repaid.
Due to General Fund $50,000
Cash 50,000
Govt.-Wide (Govtal. Activities)*:

No entry needed. (if repaid within period)
*Note: This entry is not made on the books, this is the

conversion at the eoy
Budgeting
Budgets help ensure control
Since CPF have project (not period) focus, it
may be unnecessary to make annual budgets
But, since numerous projects are integrated
into a single fund, budgetary accounts help
control individual project expenditures.
GASB requires budgeting over integrated
funds when control cannot be established
by other means (e.g. fixed-price contracts)
Budgeting Example (contd)
A contract was let in the amount of $50,000 with an
architectural firm to complete the architectural design
for the new city office building. The following entry
would be required in the capital projects fund.

Encumbrances $50,000
Reserve for Encumbrances 50,000

No entry needed.
Budgeting Example (contd)
The architectural firm for which an encumbrance of $50,000
had been recorded (see preceding slide), tendered its final
billing in the amount of $48,000. The city immediately paid the
amount due.
Construction Expenditures $48,000
Reserve for Encumbrances 50,000
Cash 48,000
Encumbrances 50,000
Construction Work in Progress $48,000
Cash 48,000
Debt Service Funds(DSF) - Overview
Accounts for and report financial resources that are restricted, committed, or
assigned to expenditure for principal and interest on all general long-term
debt.
This does not include debt issued for and serviced by Enterprise or Internal
Service Funds and some Trust Funds
Debt service funds: accounted for on the modified accrual basis.
--Exception: Interest and principal are NOT considered current
liabilities of DSF until the period in which they must be paid but the
interest revenue on bonds held as investments is accrued.
Resources may come from two types:
1) Tax Supported Debt
Taxes levied by DSF
Taxes levied by GF and transferred to DSF
Special taxes restricted to the payment of debt
3) Other means of financing
Special assessments
*2) Grants would not have debt to service
DSFs - Overview (contd)
GASB requires DSFs be established when:
Legally required, or
Financial resources are being accumulated for principal
and interest payments maturing in future years.
GASB recommends:
A single DSF for all debt serviced by property taxes
Governments hold number of funds to a minimum
Refer to the comprehensive example on pgs. 234-237.
DSFs -Overview (contd)
Budgets least common for DSFs

If DSF receives fund from other funds, then
the other fund maintains controls
Exception: If resources are derived from
special taxes or assessments, then an
appropriations budget enhances control
--Decision of budgetary accounts is usually
decided legislatively
DSF - Example
Assume bonds are issued on January 1, 2010 and pay
interest semiannually on January 1 and July 1 in the amount
of $100,000. The fiscal year ends on Dec. 31, 2010.
Q: How much expenditures would be
recognized in fiscal 2010?
A: Only the July 1, 2010 interest payment, or
$100,000, would be recognized as an expenditure of
2010.
Type I - Tax Supported Debt
Overview
Two Types
1) Serial bonds: Two types:
Regular serial bonds
Deferred Serial bonds
2) Term bonds
1) Serial Bonds - Overview
Principal matures in annual installments.
For serial bonds, the amount budgeted for
revenues or inter-fund transfers in, is usually just
what is needed that fiscal year for matured
principal and interest.
Advantage: Self-amortizing; no sinking fund
needed
Serial Bonds DSF - Example
A certain city issued $100,000 of 6% serial general
obligation (G.O.) bonds on Dec. 1, 2010. In addition,
interest of $3,000 is due on June 1, 2011, December 1,
2011, and in decreasing amounts every June 1 and
Dec. 1 for the next 19 years after that. The first
principal maturity of $5,000 is due on December 1,
2011.
Govt.-wide (Govtal. Activities): Dr. Cr.

Cash $100,000
Serial Bonds Payable 6% 100,000
Serial Bonds DSF - Example (contd)
The budget approved for FY 2011 requires the General
Fund to transfer $11,000 to the DSF for debt service
which includes principal repayment of $5,000 and two
interest payments totaling $6,000.
Debt Service Fund: Dr. Cr.
Estimated Other Financing Sources $11,000
Appropriations 11,000
Due from General Fund 11,000
Interfund Transfers In 11,000
Govt. wide (Govt. Activities):
No entry needed.
Serial Bonds DSF - Example (contd)
On May 28, 2011, the transfer from the General Fund
was received.

Cash $3,000
OFS-nonreciprocal transfer from GF 3,000
(Note: Assuming Interfund (nonreciprocal)Transfers In was accrued at
the time the budget was recorded, thus Interfund Transfers In was
credited here rather than Due from General Fund)

No entry needed.
Serial Bonds - Example (contd)
The June 1, 2011, interest payment was made on
schedule
Expenditures-Bond Interest $3,000
Cash 3,000

Interest Expense on Long-Term Debt $3,000
Cash 3,000
*Note: This entry is not made on the books, this is the
conversion at the eoy
The remaining $8,000 transfer was received from the General
Fund on November 29, 2011. On December 1, the City paid
the interest and principal maturing that date.
Debt Service Fund: (11/29/11) Dr. Cr.
Cash $8,000
OFS-nonreciprocal transfer from the GF 8,000
12/1/11
ExpendituresBond Principal $5,000
ExpendituresBond Interest 3,000
Cash 8,000
Interest Expense on Long-Term Debt $3,000
Current Portion of Bonds Payable 5,000
Cash 8,000
Closing entries on December 31, 2011:

Interfund Transfers In 11,000
Estimated Other Financing Sources 11,000
Appropriations $11,000
ExpendituresBond Principal 5,000

Net Assets Unrestricted $6,000
Interest Expense on Long-term Debt 6,000
*Note: This entry is not made on the books, it is the conversion at the eoy
Term Bonds-Overview
Principal matures in one lump-sum amount at end
of the bond term
Not used as frequently for municipal financing as serial bonds.
Disadvantages:
Usually requires a sinking fund and therefore investment
management
Sinking fund investments: reported at fair market value
(fmv)
Changes in fmv: reported as a component of investment
earnings.
More complex accounting than for serial bonds
Type III Other Forms of Financing
Special Assessments - Overview
--benefits only a select group of individuals
Fund Statements
DSF accounted for using modified accrual basis
In the DSF, special assessment revenues and receivables
are accounted for on a full accrual basis
Government-wide statements:
Interest on long-term debt would be accrued and charged
as an expense.
Discounts and premiums on bonds payable would be
amortized over the maturity term of the bond.
Property taxes would be recognized as revenues.
Principal of special assessments would be recognized as
both assets and revenues.
Special Assessments-Overview(contd)
Government may or may not be obligated to account for
special assessment debt (both interest and principle)
OBLIGATED:
Government accounts for debt service on special
assessment debt in a DSF when the government is obligated
in some manner for the debt.
GASB states government is obligated if:
--It is responsible for the debt in the event of property
owner default, or
--It is legally liable for assuming the debt or gives indication
that it may honor the debt in the event of default.
NOT OBLIGATED
Both the special assessment debt and the debt service are
accounted for in an agency fund.
Disclose the amount of debt in the notes to the financial
statements.
Special Assessments - Overview (cont.)
Special Assessments Debt is sometimes paid from
a proprietary fund
--In this case, all transactions are reported in the
proprietary fund.
Improvements financed with assessments should
be capitalized.
Special Assessments - Example
Example: $1,000,000 of special assessments were levied on property owners in
a special benefit district, payable in 10 equal annual installments of
$100,000 each.

Assessments ReceivableCurrent $100,000
Assessments ReceivableDeferred 900,000
Revenues 100,000
Deferred Revenues 900,000
Assume all current Assessments Receivable were collected during fiscal year
along with 8% of interest on the previous unpaid balance. The entry would
be:

Cash $180,000
Assessments ReceivableCurrent 100,000
Revenues 80,000
Special Assessments-Example (contd)
Bond Principal of $100,000 and interest of 8% were paid on
schedule:
ExpendituresBond Principal 100,000
Cash 180,000
Early next year, the following reclassification entries would be

made:
Assessments ReceivableCurrent 100,000
Assessments ReceivableDeferred 100,000
Deferred Revenues 100,000

Revenues 100,000
Additional Topics
Arbitrage
Investment of idle cash
Issuance of debt at low tax-exempt interest rates and
investment of proceeds in taxable securities yielding higher
return.
Interest received is exempt from federal taxes.
2 Provisions to prevent arbitrage abuse:
o Arbitrage restrictions.
State and local governments must observe arbitrage regulations.
o Rebate on arbitrage.
Arbitrage rules and regulations are complex and contain several
exemptions and exceptions.
Investment revenues should be reduced and rebate liabilities
established.
Arbitrage
Arbitrage: Investment of idle cash
Issuance of debt at low tax-exempt interest rates and
investment of proceeds in taxable securities yielding higher
return.
Interest received is exempt from federal taxes.
2 Provisions to prevent arbitrage abuse:
-Arbitrage restrictions.
State and local governments must observe arbitrage
regulations.
-Rebate on arbitrage.
Arbitrage rules and regulations are complex and contain
several exemptions and exceptions.
Investment revenues should be reduced and rebate
liabilities established.
Debt Refunding
Means that existing debt is replaced with new
issue of debt hopefully at a lower interest rate
Bonds traded on the open market can be repurchased at
the going market rate
Example in text (p. 237-268) shows there is no real economic
gain or loss from refunding debt
However, there may be a book gain or loss: difference
between book value and price paid to retire old bonds
Existing debt may have a call feature that lets the
government repay face value early (but several years
after original issue date)
Bonds without a call feature that are not actively traded are
more challenging this is the situation that leads to use of
in-substance defeasance
Debt Refunding Transactions
Bond refunding
Refinance
General rule
Debt Refunding Transactions:
Entries in DSF, assuming that because of reduced market rates of
interest, $100,000 of previously issued bonds are refunded by a
new $100,000 bond issue with lower interest payments
When refunding (new) bonds are issued:
Cash $100,000
Other Financing Sources-
Proceeds of refunding (new) Bonds 100,000
If old bonds are not retired by the end of the fiscal year, both issues would be
reported as long-term debt in governmental activities.
Debt Refunding Transactions (contd)
Assuming old bonds are retired shortly after issue of
refunding bonds

Other Financing UsesRefunded Bonds $100,000
Cash 100,000
(Note: Report only the new issue as debt in governmental
activities)
In-Substance Defeasance
In-substance defeasance (advance refunding)
Provision for the government to lock the
savings that would result from a decline in
the interest rates.
Advance refunding in which the borrower
economically satisfies its existing
obligations.
Journal entries are similar to those for
regular refundings.
Refer to the example on pgs. 247-248
In-Substance Defeasance (contd)
In-substance defeasance should satisfy the
following conditions:
1. Debtor must place cash/assets with an escrow agent
to be solely used for servicing/retiring the debt
2. Possibility of debtor having to make future payments
on the debt must be remote
3. Assets in escrow fund must be investments
considered risk-free like US Treasury Bonds
Amortize loss (or gain) over future years using the
shorter of the original term or the term of the new
debt.
Granof-5e 62
Summary
Capital Projects and Debt Service Fund are accounted
for on a modified accrual basis.
The principles for revenue and expenditure are the same
as the General fund. Accordingly, the long-term assets
and liabilities are accounted for off the balance sheet.
Special Assessments are accounted for just as any other
capital projects.
In Government-wide statements, both CPF and DSF are
combined with other governmental funds. Both revenues
and expenses are recognized on a full accrual basis.
Arbitrage is issuing of debt at relatively low, tax-exempt
interest rates.
Bond refunding is the early retirement of existing (high
interest) debt with so that it can be replaced with new
(low interest) debt.

CH 06

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

CH 06

Transféré par

Droits d'auteur :

Formats disponibles

Chapter 6

Accounting for Capital Projects

Capital Projects Fund: Dr. Cr.

Govt.-wide (Govtal. Activities)*:

Upon approval, the following journal entry would be made:

Capital Projects Fund: Dr. Cr.

Due from Other Governmental Units $100,000

Capital Projects Fund: Dr. Cr.

Govt.-wide (Govtal. Activities)*:

Govt.-Wide (Govtal. Activities)*:

*Note: This entry is not made on the books, this is the

Capital Projects Fund: Dr. Cr.

Govt.-wide (Govtal. Activities):

Refer to the comprehensive example on pgs. 234-237.

Budgets least common for DSFs

Govt.-wide (Govtal. Activities): Dr. Cr.

Debt Service Fund: Dr. Cr.

Govt.-wide (Govtal. Activities):

Govt.-wide (Govtal. Activities)*:

Debt Service Fund: Dr. Cr.

Govt.-wide (Govtal. Activities)*:

Debt Service Fund: Dr. Cr.

Debt Service Fund: Dr. Cr.

Early next year, the following reclassification entries would be

Deferred Revenues 100,000

Debt Service Fund: Dr. Cr.

Vous aimerez peut-être aussi