Archive for February, 2009

Proprietary funds have the option to apply all FASB Statements and Interpretations, APB Opinions, and ARBs issued after November 30, 1989, except for those that conflict with or contradict GASB pronouncements. (The significance of the November 30, 1989 date is that it is the date of SAS 69 which set the GAAP hierarchy for governments and nongovernments and is discussed in Chapter 1.) Note that once a proprietary fund elects to apply or not apply these FASB and other pronouncements it must be consistent from year to year. A proprietary fund cannot apply the FASB pronouncements one year and not the next. Nor can a (more…)

The next type of fund that we will examine is the proprietary fund. There are two types of proprietary funds—enterprise funds and internal service funds. Specific uses for these two types of proprietary funds will also be examined.

The first thing to realize about proprietary funds is that they use a different basis of accounting and measurement focus than the governmental funds than have been discussed in this chapter so far. (more…)

Statement No. 7 of the GASB sets the rules for when the debt can be removed from the statement of net assets as a result of an in-substance defeasance. The government must irrevocably place cash or other assets with an escrow agent in a trust to be used solely for satisfying scheduled payments of both interest and principal of the defeased debt, and the possibility that the government will be required to make future payments on that debt is remote. The trust is restricted to owning only monetary assets that are essentially risk-free as to the amount, timing, and collection of interest and principal. The monetary assets should be denominated in the currency in which the debt is payable. Statement No. 7 also prescribes that for debt denominated in US dollars, risk-free monetary assets are essentially limited to (more…)

Transactions known as advance refundings of debt are one of the unique types of accounting transactions often found in the debt service funds. This topic is closely related to the requirements of GAAP as to when the refunded debt can be removed from the government-wide statement of net assets. Statement No. 7 of the GASB “Advance Refundings Resulting in Defeasance of Debt” (GASBS 7), provides the accounting rules for these types of transactions. (more…)

As mentioned, the debt service fund, as a governmental fund, uses the modified accrual basis of accounting. However, generally accepted accounting principles for governments result in debt service expenditures being recorded on an accounting basis similar to the cash basis. Unmatured (meaning that they are not yet due) principal and interest payments on general long-term debt, including special assessment debt for which the government is obligated in some manner, are not recorded as a liability and (more…)

Each of these will be discussed briefly in the following sections.

Whether and When Tax Revenues Should Be Recorded Directly in a Debt Service Fund

This is a fairly narrow issue of situations where a specific revenue source, such as property taxes or sales taxes, is restricted for debt service on general long-term debt. Assuming that the government has established a debt service fund, the accounting question is whether these restricted tax revenues should be recorded directly as revenue of the debt service fund or whether they should be recorded as revenue of the general fund and then recorded as a transfer to the debt service fund. (more…)

Debt service funds are a type of governmental fund that is used to account for—you guessed it—debt service. Debt service is simply a fancy way of saying “making principal and interest payments on the government’s debt.” Once again, the government should determine whether it is legally obligated to establish debt service funds. If it is not, the government should decide whether it would be useful from a managerial perspective to establish such a fund or funds. From a practical perspective, most governments that have long-term debt outstanding do use debt service funds. (more…)

There is a specific GASB Statement (No. 6, “Accounting and Reporting for Special Assessments,” GASBS 6) that discusses the accounting treatment for special assessments and their related debt. Prior to GASBS 6, there was a special fund type that accounted for special assessments, so the good news is that there is one less type of fund to learn about. The big issue with how special assessments are recorded is whether the government is obligated in any manner for the debt. (more…)

Special assessment debt is another type of debt that might be recorded in the capital projects fund. The reader may be wondering why the capital projects fund section is discussing mostly debt-related matters. To reiterate, governments generally finance capital projects with debt and there are a number of accounting
issues that address when that debt is actually recorded as a liability of the capital projects fund. (more…)

To provide for long-term financing in the event that the remarketing agents are unable to sell the redeemed bonds within a specified period, the government issuing demand bonds generally enters into an agreement with a financial institution to convert the bonds to an installment loan that is repayable over a specified period. This type of arrangement is known as a take out agreement and may be part of the letter of credit or may be a separate agreement. (more…)