Capital Projects
Objectives:
• Why governments use capital project funds
• Why governments use debt service funds
• How to account for special assessments
Why Capital Project Funds
• Funds are legally
restricted to be
used on capital
projects by:
Debt Covenants
Legislatures
City Council
Capital Projects
•Short term accounting for the funds, then
closed out. If included in general fund,
might distort trends in the general fund.
• Also allows creditors to track the project
• Allows special audits if necessary
Capital Projects
• Modified Accrual basis
• A fund is created for each project
• Combine all capital project funds for CAFR
• Budgetary entries not required but useful
• Holds proceeds of debt issued to fund project
• Also holds grants, transfers, taxes, etc.
• Less underwriting costs
• May use encumbrances
• Cash sources bonds, debt, grants, or general
Issue Debt
Issue Debt:
Cash
101,000
Expenditure
9,000
OFS-bond proceeds
OFS Bond Premium
100,000
10,000
OR other funding
Cash
100,000
OFS -Transfer in
100,000
Premiums & Discounts
• If bonds sold at a premium and the project
is restricted to a maximum level, the
premium is transferred to the debt service
fund to pay interest or principal. ( due to/
due from)
• If bonds sold at a discount, lower the
expenditures on the project or make up
difference from general fund. (OFS)
• No amortization of premiums or discounts
in governmental funds.
Premiums
Cash
101,000
Expenditures (fees)
9,000
OFS - bond proceeds
OFS - bond premium
100,000
10,000
OFU – Non-reciprocal transfer 1,000
Cash
1,000
Debt Service Fund
Transfer in Debt Service:
Cash
1,000
OFS- Transfer In
1,000
Must keep track of bonds payable in the
Schedule of long term debt.
If debt service funds invested, the securities
are marked to market, including accrued interest
Grants for Capital Projects
Restricted grant is expenditure driven:
Cash
10,000
Deferred Revenue
10,000
Expenditures
10,000
Cash
10,000
Deferred Revenue 10,000
Revenue
10,000
If expenditures made before grant received:
Grant Receivable
5,000
Revenue
5,000
Spending on project
• Use expenditures
• When asset finished keep track in schedule
of long term assets
•Can use percentage of completion if self
constructed
End of Project
Transfer remaining funds out:
Residual Equity transfer out $5,000
Cash
$5,000
Can be transferred to debt service fund or
general fund. Excess monies from grants
would be returned to grantor.
Closing entries
• Close budgetary accounts. If these are for
the project, they must be re-established.
• Close revenue and expenditures if statement of
revenue, expenditures, etc needed.
• If reports only for cumulative revenue and
expenditure, no need to close accounts.
Accounting for Debt Service
• Modified Accrual but interest on long term
debt not accrued because it must be
appropriated and this may not happen in
advance.
• If appropriated in one year for payment in
the next, then interest is accrued and the
liability is recognized.
• May not be budgetary entries unless a
special assessment fund.
Debt Service Fund
• Pays interest and principal of long term
debt
• The listing of the debt is schedule of long
term debt.
• Must be used when legally required and
resources are accumulated for payment
• May be one debt fund for each issue
• Inflows include transfers from general
fund, special taxes used to retire debt, or
special assessments.
Entries, Debt Service
Budgetary entries:
Estimated revenues - investments
Estimated revenues - taxes
Estimated transfers in
Appropriations - interest
Appropriations - principal
Fund Balance
Entries, con’t
Transfer in Bond Premium:
Cash
1,000
OFS - operating transfer in 1,000
capital projects (general)
Invest money:
Investment
1,000
Cash
1,000
Recognizing earnings:
Investment (cash)
100
Investment revenue
100
Entries, Con’t
Recognize Tax revenue:
Cash
20,000
Property Taxes receivable 5,000
Property tax revenue
25,000
Record transfers:
Cash
15,000
OFS -operating transfer in
15,000
Entries, Con’t
Payment of interest and principal:
Expenditures - debt service interest 6,000
Matured interest payable
6,000
Matured interest payable
6,000
Cash
6,000
Expenditures - debt service principal 10,000
Matured bonds payable
10,000
Matured bonds payable
10,000
Cash
10,000
Earnings on funds held
If investments purchased:
Marketable securities
Cash
Adjusting entries:
Marketable securities
Investment revenue
50,000
50,000
750
750
Securities are marked to market, interest accrued.
Closing
Appropriations - interest
Appropriations - principal
Estimated revenues - property tax
Estimated revenues –investments
Estimated transfers in
OFS - Operating transfers
Property Tax revenue
Investment revenue
Expenditure - interest
Expenditures - principal
Fund balance
Arbitrage
• When government bonds are tax free, the
interest rates are lower than comparable
investments, so governments could invest
the proceeds of bond issue and earn extra
interest.
• IRS rulings generally make any incremental
interest due to the IRS
• Some safe havens
• Paying the IRS either reduces revenues or
is recognized as an expenditure.
Refinancings
• Bonds may have call provisions
• In substance defeasance substitutes a new
bond issue for an existing one.
• Criteria for in substance defeasance.
• Places cash or assets with escrow to pay
• Additional future payments remote
• Risk-free assets
• Details in notes
• Usually government defers the loss and
recognizes it over future years.
Special Assessments
• A capital project which benefits only some
taxpayers, like water and sewer.
• Follows accounting for capital projects and
debt service funds.
• Assessments receivable are deferred revenue
• Revenue when collected.
• Need not be reported unless
•Government issues debt
•Government guarantees debt
• Takes responsibility for the debt
• Shares in the costs of the project
Special Assessment funds
• Debt is obligation of assessed parties but
government is agent
• Record debt and payment under current
standards unless prohibited from
assuming the debt and the government is
not legally liable.
• Governments can choose to account for
special assessments as an enterprise fund
Government-wide statements
 Assets reported on statement of net
assets
 If funds still held, then show as
restricted to use for capital projects
 Bond discounts and premiums will be
amortized
 Need to be set up on a depreciation
schedule
Review
How governments use capital projects
funds
Learn entries
Capital projects funds
Debt service funds
Special assessments