Accounting for Other Government Fund Types Capital Projects, Debt Service and Permanent

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• Chapter 5
• Accounting for Other Government Fund Types --
  Capital Projects, Debt Service and Permanent

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Overview of Chapter 5

• Review of common characteristics of governmental
  type funds
• Capital Projects Funds
• Debt Service Funds
• Permanent Funds
• Review of Fund statementsGovernmental type funds

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Review of Governmental Type Funds

• Use modified accrual basis
• Long-term asset purchases are treated as
  expenditures, depreciation not recorded
• Do not carry long-term assets or long-term
  liabilities on fund balance sheet
• LTA/LTD are shown on the government-wide
  statements
• If annual budget is used, may be recorded in fund
• If control of purchase orders is relevant to the
  fund, can use encumbrance accounting

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Capital Project Funds

• Used for construction or acquisition of major
  long-term assets such as buildings, bridges, etc.
  for governmental funds
• Proprietary type funds handle construction
  activities in proprietary fund, not capital
  project fund
• Accounts for issuance of bonds and receipt of
  other financing sources
• Accounts for construction or acquisition
  expenditures
• Does not carry the long-term asset in the CP
  fundTreated as expenditure in the fund
• Long-term asset is listed in government-wide
  Statement of Net Assets
• Can record the long-term asset in the GFAAG

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Primary Sources of Funds for Capital Projects

• Taxes raised specifically for capital projects
• Revenue
• Issuance of bonds
• Other financing sources
• Grants from other government units
• Revenue
• Transfers from other funds
• Other financing sources
• Donations
• Other financing sources
• Interest earned on funds held
• Revenue

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Bond Issues

• Long-term bonds are not fund liabilities in
  governmental type funds
• Will be shown in Government wide statements
• Can be recorded in GLTDAG
• If 12,000,000 of bonds are issued you would
  record
• Cash 12,000,000
• Other financing sources Bond
  Proceeds 12,000,000
• Bond proceeds are considered an Other Financing
  Source on the Statement of Revenues, Expenditures
  and Changes in Fund Balance

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Number of Capital Projects Funds to Use

• Some jurisdictions may require separate CP fund
  for each building project
• Otherwise, may account for all, or at least
  related construction projects, in a single fund
  using the fund within a fund approach
• Separate accounts for
• Expenditures - Project 1,
• Expenditures - Project 2, etc.
• General rulemake sure you can prove funds
  intended to be used on a specific project are
  traceable to the project

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Lease Accounting for state and local governments

• Operating leasestrue rental situation
• Capital leasesthese are in-substance purchases
  of long-term assets on time with interest
• Criteria to be treated as capital lease are same
  as for businesses
• Transfers ownership
• Contains bargain purchase option
• Life greater than 75 of assets life
• Present value of minimum lease payments greater
  than 90 of fair value of asset

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Lease Issues Contd

• At the inception (beginning) of the lease, the
  present value is recorded as follows
• Expenditure Dr PV of payments
• Other Fin. Source Lease Cr PV of payments
• The Expenditure reports the equivalent of an
  asset purchase, and the Other Financing Source
  credit shows the equivalent of issuing a
  long-term note

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Lease Issues Contd

• At the inception of the lease the present value
  of lease payments is recorded as the value of
  the asset and of the liability in the entity-wide
  statements
• Over time, the net asset value in the entity
  wide stmt of net assets is decreased by its
  accumulated depreciation
• Over time, the liability is decreased by the
  amount of the principal portion included in each
  lease payment

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Special Assessments

• Special Assessments are similar to property
  tax payments, but the payer receives direct
  benefits
• Citizens in a limited area may vote or petition
  the government to provide and charge them for
  these benefits

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Special Assessment Types

• Service type
• Example, down town merchants want enhanced police
  protection and are willing to pay for it through
  extra assessments
• Construction type
• Example, residents want their street paved and
  are willing to have the cost charged to them over
  a period of time

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Accounting for Service Assessments

• The state and local government will use whatever
  fund they normally use for that service to record
  the assessment revenue
• For example, if the assessment is for extra
  policing and police costs are in the general
  fund, then the assessments will be treated as
  general fund revenues
• If the assessment were for service normally
  accounted for in a special revenue or enterprise
  fund, then use those funds

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Accounting for Construction Assessments

• Accounting is different for the following two
  scenarios
• The government unit is primarily or secondarily
  liable to pay off the special assessment
  construction loan in the event that taxpayer
  revenues are insufficient
• The government will NOT hold itself liable,
  either legally or by choice, in the event that
  taxpayer payments are insufficient to pay the debt

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Construction Special Assessment Issues

• Government liable on the debt
• Record construction in CP fund as usual
• Record repayment of debt in DS fund as usual
• List assets constructed and the special
  assessment debt in the entity-wide statement of
  Net Assets
• The effect is to treat the debt and related
  project as if it were undertaken by the government

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Construction Special Assessment Issues Contd

• Government not liable for debt
• Debt not listed in entity wide statement of Net
  Assets since it not an obligation of the
  government
• Collections of assessments from taxpayers and
  remittance to bondholders are handled in an
  agency fund

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Purpose of Debt Service Fund

• The debt service fund accumulates resources to
  pay debt principal and interest on long-term debt
  of the overall government
• Debt Service fund is not used for proprietary
  fund debts, those funds carry their own long-term
  debt
• While the debt service fund accumulates money and
  makes principal and interest payments, bonds
  payable is not a liability of the DSF because the
  DSF uses the modified accrual basis/flow of
  current resources approach
• The Bond Liability is in the entity-wide
  statement of Net Assets
• Can also show the liability in the GLTDAG

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Sources of Debt ServiceFinancing

• Taxes or special assessments earmarked for debt
  service
• Transfers from the General fund
• Premiums or accrued interest on bond issuance are
  often transfer to DSF from Capital Project fund
  (CPF)
• Refinancing bond proceeds
• Residual equity transferred from CPF

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Modified Accrual Basis DSF

• Exception to expenditure portion of modified
  accrual definition
• Most expenditures are recorded when the liability
  is incurred
• EXCEPT for interest and principal which is record
  in the DSF as an expenditure when DUE
• But, there is an exception to the exception
• When year ends December 31, 20X1 bond payments is
  due January 1, 20X2 ( or within a month), and the
  money for the payment was provided in the 20X1
  budgetthen an expenditure and liability for the
  upcoming payment may be recorded in fiscal year
  20X1

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Uses of Debt Service Funds

• Sinking fund and payments on term bonds
• May use them for serial bond payments, or can be
  handled in general fund
• Payments on long-term notes
• Payments on capital lease (but could be in GF)

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Types of Debt

• For serial bonds, money is moved in, payments
  made, and little or no balance exists at year end
• Because of this simplicity, some governments may
  actually handle Debt service in General Fund if
  allowed by law
• Term bonds All the principal of the bond comes
  due at end of the term (perhaps after 30 years),
  interest may be paid over time, or all at the end
  as well
• Deferred serial bonds these may not start the
  payments for 2 to 5 years after the bonds are
  used
• Allows time for property taxes to begin coming in
  before payments start

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Types of Debt contd

• In term bond and deferred serial bond situations,
  the DSF acts as a sinking fund
• Money is moved into the fund and invested in
  revenue generating investments
• Present value techniques and amortization tables
  are used to plan the amount of money that must be
  invested so that original money plus revenue
  earned over time equals required bond principal
  and interest payments

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DSF and Lease Payments

• Debt Service Funds are commonly used for capital
  lease payments, though General Fund may sometimes
  be used
• In DSFs both the payment of principal and payment
  of interest result in an EXPENDITURE
• However, should keep the amounts separate,
• Because only the principal portion reduces the
  net liability on the entity wide Statement of Net
  Assets

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Permanent Funds

• Permanent fund characteristics
• A principal amount which is to be invested in
  perpetuity
• Earnings in the fund can be spent for purposes
  that benefit the government or its citizens
• Example Perpetual cemetery fund set up by
  citizen donation

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Review of Fund Financial Statements for
Government Type Funds

• Balance Sheet for all Government funds
• Must list General Fund, Major Funds, and a single
  column for nonmajor funds
• Okay to show nonmajor funds separately if does
  not make the reports too cumbersome
• Note Fund Balance shows Reserved and Unreserved

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Review Contd

• Statement of Revenues, Expenditures, and Changes
  in Fund Balance will have columns for the same
  GF, Major, and Nonmajor funds used in Balance
  Sheet
• Format
• Revenues - Expenditures
• or - Other Finance Sources/Uses
• or - Special Items
• Change in Fund Balance
• Beginning Bal Ending Fund Balance
• Note Character Classifications of
  ExpendituresCurrent, Debt Service, Capital Outlay