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6. Chapter. Accounting for Capital Projects and Debt Services. Capital Projects Funds. Two types of capital projects: General (public benefit) Examples: public buildings; roads, highways and bridges; park improvements; etc. Special assessment (private benefit)

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slide1

6

Chapter

Accounting for Capital

Projects and Debt

Services

slide2

Capital Projects Funds

Two types of capital projects:

  • General (public benefit)
    • Examples: public buildings; roads, highways and bridges; park improvements; etc.
  • Special assessment (private benefit)
    • Examples: street improvements, curbs, sidewalks, street lighting, sewage, etc. Deemed to benefit citizens in a specified benefit district.
slide3

Capital Projects Funds (Cont’d)

Characteristics of capital projects:

  • Involves long-lived assets (e.g, buildings, roads and bridges, etc.)
  • Usually involves a construction project
  • Usually requires long-range planning and extensive financing
  • Have a project-life focus, rather than a year-to-year
slide4

Capital Projects Funds (Cont’d)

Reasons for maintaining separate funds

  • Often funds are legally restricted
  • Commonly financed with bonds not taxes
  • Accounted for on the modified accrual basis of accounting
  • Budgets are typically project based not fiscal based
  • Reminder: Long term bonds not recorded in the capital projects fund
  • Most bonds are issued at either a premium or a discount ! Bond accounting never goes away!!!!!
slide5

Capital Projects Bonds

  • Premium Bonds
    • All premiums are transferred to the debt services fund
  • Discount Bonds
    • Amount of discount must either:
      • Be transferred in from the general fund
      • The project must reduce its costs by the amount of the discount

See examples on page 206-209

slide6

Illustrative Transactions for Capital Projects Funds

Project authorization/preconstruction phase

  • Usually planned for in a multiyear capital improvement plan
  • Usually requires long-term financing
    • Voter approval required for general obligation (tax-supported) bonds or special taxes for capital projects (memo entry only for bond/tax authorization)
    • Apply for and obtain grants
    • Obtain other forms of financing
slide7

CPF - Illustrative Transactions (Cont’d)

Assume approval is obtained for a federal grant as partial funding for a city’s office building project. Upon approval the following journal entry would be made:

Capital Projects Fund: Dr. Cr.

Due from other Governmental Units 100,000

Revenues 100,000

Governmental Activities:

Due from Other Governmental Units 100,000

Program Revenues

100,000

slide8

CPF - Illustrative Transactions (Cont’d)

It may also be necessary to obtain interim financing, particularly to complete architectural and engineering design. Assume for the office building project, $50,000 was borrowed from the General Fund, to be repaid later from bond proceeds.

Capital Projects Fund: Dr. Cr.

Cash 50,000

Due to General Fund 50,000

Governmental Activities:

No entry needed.

slide9

CPF - Illustrative Transactions (Cont’d)

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.

Capital Projects Fund: Dr. Cr.

Encumbrances 50,000

Reserve for Encumbrances 50,000

Governmental Activities:

No entry needed.

slide10

CPF - Illustrative Transactions (Cont’d)

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.

Capital Projects Fund: Dr. Cr.

Construction Expenditures 48,000

Reserve for Encumbrances 50,000

Cash 48,000

Encumbrances 50,000

Governmental Activities:

Construction Work in Progress 48,000

Cash 48,000

slide11

CPF - Illustrative Transactions (Cont’d)

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- Bonds Proceeds 5,050,000

Other Financing Uses – Transfer of Premium 50,000

Due to Debt Service Fund 50,000

Governmental Activities:

Cash 5,050,000

Bonds Payable 5,000,000

Premium on Bonds Payable 50,000

slide12

CPF - Illustrative Transactions (Cont’d)

Project implementation/construction phase. The amount due from the federal government for the previously recorded capital grant was received in full

Capital Projects Fund: Dr. Cr.

Cash 100,000

Due from Other Governmental Units 100,000

Governmental Activities:

Cash 100,000

Due from Other Governmental Units 100,000

slide13

CPF - Illustrative Transactions (Cont’d)

The $50,000 due to the General Fund was repaid and $50,000 transferred to the debt service fund

Capital Projects Fund: Dr. Cr.

Due to General Fund 50,000

Due to Debt Service Fund 50,000

Cash 100,000

Governmental Activities:

No entry needed.

slide14

CPF - Illustrative Transactions (Cont’d)

A contract was signed with Capital Construction Company in the amount of $5,050,000.

Capital Projects Fund: Dr. Cr.

Encumbrances 5,050,000

Reserve for Encumbrances 5,050,000

Governmental Activities:

No entry needed.

slide15

CPF - Illustrative Transactions (Cont’d)

A partial billing of $3,000,000 was received from Capital Construction Company.

Capital Projects Fund: Dr. Cr.

Construction Expenditures 3,000,000

Reserve for encumbrances 3,000,000

Contracts payable 3,000,000

Encumbrances 3,000,000

Governmental Activities:

Construction Work in Progress 3,000,000

Contracts Payable 3,000,000

slide16

CPF - Illustrative Transactions (Cont’d)

Capital Construction Company completed the city office building project and tendered its final bill in the amount of $2,000,000.

Capital Projects Fund: Dr. Cr.

Construction Expenditures 2,000,000

Reserve for Encumbrances 2,050,000

Contracts Payable 2,000,000

Encumbrances 2,050,000

Governmental Activities:

Construction Work in Progress 2,000,000

Contracts Payable 2,000,000

slide17

CPF - Illustrative Transactions (Cont’d)

The project being complete the City closed all temporary accounts and transferred the residual equity to the debt service fund.

Capital Projects Fund: Dr. Cr.

Other Financing sources -Bond Proceeds 5,050,000

Revenues 100,000

Construction Expenditures 5,048,000

Fund Balance 52,000

Other Financing Uses – Bond Proceeds 50,000

cpf illustrative transactions cont d
CPF - Illustrative Transactions (Cont’d)

To close the accounts at the government-wide level

Governmental Activities: Dr. Cr.

Program Revenues-Capital Grant and

Contributions-General Government 100,000

Net Assets-Invested in Capital Assets,

Net of Related Debt 100,000

Building 5,048,000

Construction Work in Progress 5,048,000

NOTE: The premium on the bond payable should be amortized at the government-wide level, using the effective interest rate method (not shown here).

slide19

General Capital Assets-Required Financial Statements

For the illustrative transaction:

  • The building is included in the governmental activities Statement of Net Assets as a capital asset, net of accumulated depreciation.
  • The long-term liabilities are reported in the governmental activities column of the Statement of Net Assets.
  • Depreciation expense is reported at the government-wide level on the Statement of Activities as a direct expense of the General Government function.
slide20

Special Assessments

What is a special Assessment?

  • When the government constructs projects or provides services that primarily benefit a particular group of property owners rather than the citizens at large.
      • Citizens of that area must approve by voting (simple majority vote required).
      • Must pay the capital and interest portion
      • Example – St. Joseph City water being provided to farms & residents in Royalton Township
slide21

Government Obligations for Special Assessments

Government must account for this debt as its own as long as it is obligated in some manner to assume responsibility for the debt even if the owner defaults!!!

  • Governments are obligated unless:
    • Prohibited by constitution, charter, contract, or statute
    • Publicly indicates that it will not honor the debt in the event of default
slide22

Government Obligations for Special Assessments

If the government is not obligated for the debt then do the following:

  • Report debt in Agency fund
  • Report construction in Capital improvements fund
  • Report capital assets in the Government-wide statements
  • Disclose in footnote amount of debt & governments role as tax collection agency
  • DO NOT REPORT DEBT IN LONG TERM OBLIGATIONS OF THE GOVERNMENT-WIDE STATEMENTS
slide23

Miscellaneous Topic: Arbitrage

Arbitrage defined:

The issuance of debt at relatively low, tax-exempt rates of interest and then investing the proceeds in a taxable security yielding a higher return!

Arbitrage undermines the federal governments rational for exempting state and local debt from federal taxation! Today Arbitrage earnings are usually remitted back to the federal government!

slide24

Miscellaneous Topic: Debt Refunding

Debt Refunding:

Governments don’t buy their bonds back on the open market.

Usually only pay off bonds early when bonds have a call option

When bonds are paid off early, any gain or loss on the bonds is amortized over the life of the new bonds

slide25

Miscellaneous Topic: Debt Refunding

  • Generally no economic gains for debt refunding
  • Accounting gains and losses will probably need to be recognized
    • Recognize over the life of the new debt or can also recognize over the life of the old debt.
    • This gain is recognized at the governmental activities level not in the funds