Chapter 5:

Accounting for Other Government Fund Types -- Capital Projects, Debt Service

and Permanent

5-2

Overview of Chapter 5

• Review of common characteristics of governmental type funds

• Capital Projects Funds

• Debt Service Funds

• Permanent Funds

• Review of Fund statements—Governmental 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 fund—

Treated 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

5-7

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 rule—make sure you can prove funds intended to be used on a specific project are traceable to the project

5-8

Lease Accounting for state and local governments

• Operating leases—true rental situation

• Capital leases—these are ‘in-substance’ purchases of long-term assets on time with interest

• Criteria to be treated as capital lease are same as for businesses

o Transfers ownership

o Contains bargain purchase option

o Life greater than 75% of asset’s life

o Present value of minimum lease payments greater than 90% of fair value of asset

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Lease Issues Cont’d

• 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 Cont’d

• 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

5-12

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 Cont’d

• 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 budget—then 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 cont’d

• 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

5-23

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

5-25

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 Cont’d

• 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 Expenditures—Current, Debt Service, Capital Outlay