Capital projects funds
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Capital Projects Funds. Chapter 7. Learning Objectives. Understand nature of and when to use CPFs Understand typical CPF financing sources, how many CPFs are required, and life cycle of CPF Determine costs to be charged to CPF Understand basic budgeting and budgetary reporting for CPFs

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Capital projects funds

Capital Projects Funds

Chapter 7


Learning objectives

Learning Objectives

  • Understand nature of and when to use CPFs

  • Understand typical CPF financing sources, how many CPFs are required, and life cycle of CPF

  • Determine costs to be charged to CPF

  • Understand basic budgeting and budgetary reporting for CPFs

  • Understand accounting for long-term debt issued in CPF, including bond proceeds and bond anticipation notes

  • Examine typical journal entries of CPF

  • Prepare CPF financial statements.


Why use capital projects funds

Why Use Capital Projects Funds?

  • CPFs used to account for financial resources that are used to construct / acquire major, long-lived general capital facilities

  • Examples

    • Buildings

    • Highways & bridges

    • Storm water drainage systems


Typical capital asset acquisitions not using a cpf

Typical Capital Asset Acquisitions Not Using a CPF

  • Routine capital asset purchases – school buses and other equipment

  • Capital leases

  • Purchases of fund-specific capital assets to be used in Proprietary Funds or Trust Funds


Issues related to a cpf

Issues Related to a CPF

  • Sources of financial resources

  • Number of CPFs required

  • CPF life cycle

  • Budgeting for a CPF

  • Interim financing

  • Costs charged to projects

  • Intergovernmental revenues

  • Bond premiums, discounts, & issuance costs


Cpf life cycle

CPF Life Cycle


Life cycle step by step

Life Cycle: Step-by-step

  • Project authorization and duration

  • CPF extends over life of project

  • Financing

  • Expenditures

  • Termination of CPF

  • Records retention


Financing capital projects

Financing Capital Projects

  • General Long-term Debt

    • Account for the issuance in CPF

    • Debt Service Fund used to repay debt

  • Short-term borrowing (if necessary)

  • Interfund transfers

  • Interest and other revenues

  • Intergovernmental grants

  • Special assessments


Other notes on life cycle

Other Notes on Life Cycle

  • CPF may last for several fiscal years – whatever if the life of the project

  • Expenditures are typically all capital outlay

  • Upon termination, any necessary funds returned to providers of financing and remainder transferred to service debt (DSF) or to General Fund


Budgeting for a capital project

Budgeting for a Capital Project

  • Usually prepared for the life of the project – appropriations do not lapse at end of fiscal year

  • Separate budget may not be required if one project financed by single CPF and project costs are controlled through specifications


Interim financing

Interim Financing

  • Authorized bond issue may take considerable time to issue

  • Interim financing used to fill the void – known as bond anticipation notes (BANs)

  • If properly used, may be long-term rather than short-term debt

    • BANs issued in conjunction with legally authorized bond issue

    • BANs are to be repaid (or have been repaid) from proceeds of bond issue


Interim financing comparison

Interim Financing Comparison


Interim financing comparison continued

Short-Term Borrowing

Recorded as liability of fund

Expenditure is for capital outlay

May result in artificial deficit in Fund Balance

BAN Financing

Recorded as OFS

Expenditure is for capital outlay

OFS and expenditure cancel out – no artificial deficit

Interim Financing Comparison(continued)


Project costs

Project Costs

  • Direct materials and labor, for self-constructed assets

  • Overhead

    • General government overhead rarely charged unless reimbursable

    • Other overhead may be charged – costs from ISFs or incremental overhead from project

  • Interest

    • Short-term debt interest is not capitalized

    • Long-term debt interest not capitalized


Intergovernmental revenues

Intergovernmental Revenues

  • Unrestricted grants usually recognized as revenues in General Fund or SRF – proceeds may be transferred to CPF

  • Restricted (capital) grants normally recognized as revenues in CPF, once it is earned (grantee incurred expenditures that are authorized for reimbursement)


Bonds issued to finance project

Bonds issued to finance project

  • Face amount recorded as OFS

  • For bonds not issued at par

    • Premium recorded as OFS – usually transferred to DSF

    • Discount recorded as OFU

  • Issuance costs are debt service expenditures

  • Discounts and issuance costs may require additional funding from other sources


Cpf case illustration

CPF Case Illustration


Budget entry page 270

Budget entry [Page 270]


1 sign contract page 271

#1 Sign Contract [Page 271]


2 issue bonds at a premium page 271

GCA

GLTL

=

NA

#2 Issue Bonds at a Premium[Page 271]

$2,000

– $911,000

– $909,000

NOTE: Bond issue costs are not GCA, but are reported as noncurrent assets in the government-wide financial statements.


3 supplemental order page 271

#3 Supplemental Order [Page 271]


4 financing received page 271

#4 Financing Received [Page 271]

The State Grant is obviously not expenditure-driven – that is why it was all received up front. The funding from the General Fund (GF) may be received all at once or at various times, as is the case here.


5a invoices received reverse the estimate page 271

#5a Invoices received – reverse the estimate [Page 271]


5b invoices received record the actual page 271

GCA*

GLTL

=

NA

#5b Invoices received – record the actual [Page 271]

$1,130,000

$1,130,000

*Construction in Progress


Notes on the invoices

Notes on the Invoices

  • Fuel and materials had been encumbered for $48,000, but actual cost was $49,000

  • Machine Time is an allowable overhead cost

  • Construction in progress would be recorded in the General Capital Assets accounts


Notes on invoices continued

Notes on Invoices(continued)

Retained Percentage

  • Done to insure completion of the project per the contract

  • Will be paid to contractor when final project is accepted

  • Alternate methods of insuring completion

    • Insurance policies

    • Certificates of Deposit (not subject to fair value rules from Chapter 5)

    • Bonding


Cash disbursements

GCA*

GLTL

=

NA

Cash Disbursements

$140,000

$140,000

*Construction in Progress


Federal grant reimbursement

Federal Grant Reimbursement


Note on federal grant reimbursement

Note on Federal Grant Reimbursement

  • Could be billed each time allowable charge incurred

  • Amount received may be less than amount billed if Federal Government does not allow all expenditures


Interest on investments

Interest on Investments


Closing entries

Closing Entries

  • Year-end closing entries not particularly relevant to CPFs – more concerned with life of project than by end of year

  • Financial statements then become interim statements for CPFs


Options for closing entries

Accounts Not Closed

Use worksheet to create pro forma closing entries which aren’t posted to accounts

Financial statements prepared from worksheet – just like normal

Accounts Closed

Use same routine as used in earlier chapters

Closing entries typically result in artificial deficits

Appropriated fund balance reported for unexpended amounts

Options for Closing Entries


Cpf financial statements

CPF Financial Statements

  • Required

    • Balance Sheet

    • Statement of Revenues, Expenditures, and Changes in Fund Balance [Operating Statement]

  • Optional

    • Budgetary statement or schedule

    • Not required under GAAP but may be required by government, rating agencies, or bondholders


Balance sheet

Balance Sheet

  • Note different sections in the Fund Balance section

    • Appropriated

    • Unappropriated

  • Unrealized estimated revenues or transfers from other funds are not assets – leads to Unreserved Fund Balance artificial deficit – need to explain deficit in notes to financial statements


Operating statement

Operating Statement

  • Same format as used for other Governmental Funds

  • Negative excess causes some readers to think change in financial position is poor – artificial since much of financing comes from “other” sources


Completing the bridge year 2

Completing the Bridge: Year 2

Reverse some of adjusting/closing entries made in previous year – gets budgetary accounts back in balance


1a invoices received reverse the estimate page 280

#1a Invoices Received – reverse the estimate [Page 280]


1b invoices received record the actual page 280

GCA*

GLTL

=

NA

#1b Invoices Received – record the actual [Page 280]

$1,561,000

$1,561,000

*Construction in Progress


2 cash receipts page 280

#2 Cash Receipts [Page 280]


3 cash disbursements page 280 1

GCA*

GLTL

=

NA

#3 Cash Disbursements [Page 280-1]

$129,000

$129,000

*Construction in Progress


Settlement with the feds part i page 281

Settlement with the Feds: Part I [Page 281]


Settlement with the feds part ii page 281

Settlement with the Feds: Part II [Page 281]


4 amount owed to feds page 281

#4 Amount Owed to Feds [Page 281]


5 final settlements page 281

#5 Final Settlements [Page 281]


Project operating statement

Project Operating Statement

  • Governments usually report one year at a time

  • With completed project, reporting all revenues and expenditures could be useful – helps explain the artificial deficits from earlier year(s)


Other cpf issues

Other CPF Issues

  • Bond anticipation notes

  • Investment of idle cash

  • Disposing of fund balance (deficit)

  • Reporting several projects in single fund

  • Combining CPF financial statements


Bond anticipation notes bans

Bond Anticipation Notes (BANs)

Reasons for use

  • Time lag in issuing approved bond issue when cash is needed immediately to start the project

  • Interest rates on the decline, so postponing issuing bonds will save the government money


Issue the bans

GCA

GLTL*

=

NA

Issue the BANs

$500,000

– $500,000

*BANs Payable


Notes on issuing bans

Notes on Issuing BANs

  • BANs issued at par – since the term is short, this is usually the case

  • Issuance can be recorded as if it is long-term debt so long as two conditions exist:

    • The project has an authorized bond issue

    • The government will repay the BANs from the bonds, once they are issued

  • There is a corresponding liability in the GLTL accounts for the BANs


Issue bonds same entry from page 271

Issue Bonds(Same entry from Page 271)

Recall that as a result of this event, the Bond Issue Costs, Bond Payable, and Bond Premium are recorded in the GCA and GLTL accounts.


Repay the bans

GCA

GLTL*

=

NA

Repay the BANs

–$500,000

$500,000

*BANs Payable


Investments arbitrage

Investments & Arbitrage

  • A significant amount of cash can flow through a CPF – cash flow planning is a must

  • Issuing bonds early in project may be mandated – need to invest proceeds to maximize interest


Arbitrage

Arbitrage

The difference in the amount earned on investing bond proceeds and amount paid in interest on the bonds – since most governments issue tax-exempt debt, this amount can be significant.


Arbitrage and taxes

Arbitrage and Taxes

  • Tax rate on arbitrage is simple: 100%

  • Penalty rate on not paying tax correctly is almost as simple: 50%

  • Rules are quite complex: governments must manage money and watch arbitrage requirements to minimize problems


Remaining fund balance

Remaining Fund Balance

  • If cash is left over when project is complete, difference is usually transferred to DSF to assist in repaying amounts borrowed

  • If project is in deficit (not enough cash)

    • Additional transfers needed from other funds

      OR

    • Scope of the project must be cut back


Reporting multiple projects

Reporting Multiple Projects

  • Government may elect to use single CPF to report many projects

  • Easiest way to combine information is to prepare separate statements for each project, then consolidate for reporting purposes


Combining cpf statements

Combining CPF Statements

  • Used when government uses separate CPF for each project

  • Individual statements must still be prepared to complete other statements included in CAFR (see CAFR preparation process in Chapter 2)

  • Combining statements prepared to facilitate this process – may be part of other combining statements for all governmental funds


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