CHAPTER 7
CAPITAL PROJECTS FUNDS
© Prentice Hall Publishing – Governmental and NonProfit Accounting 7e 1-1 Freeman / Shoulders
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LEARNING OBJECTIVES
Understand the nature, purposes and
use of Capital Projects Funds and the
– Funding sources
– Number of funds required
– Life cycle
Determine the costs that should be
charged to a Capital Projects Fund
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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LEARNING OBJECTIVES
Understand the accounting and reporting for
– General long-term debt issuances to finance
capital projects
– Bond proceeds, premiums and discounts
– Bond issuance costs
– Bond anticipation notes
– Arbitrage and its potential impact
Understand typical budgeting and budgetary
reporting issues of Capital Projects Funds
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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MAJOR TOPICS
1. Overview
2. CPF operations and accounting
standards
3. CPF case illustration - begun
(20X1) and concluded (20X2)
4. Other CPF operations,
accounting, and reporting
matters
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL PROJECTS FUNDS
OVERVIEW
Use of CPFs
– To account for financial resources used
to construct or acquire
Major general government capital projects
– Buildings / parks
– Streets / highways / bridges (Infrastructure)
Nonmajor capital acquisitions if legally or
contractually required
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL PROJECTS FUNDS
OVERVIEW
Use of CPFs – Interpretation of terms relative
to size
– Major and capital projects not defined by GASB
– Example: consider a $10 million street
improvement project may be:
Capital Project Funds in a small city or town
Special Revenue Fund (especially if part grant funded)
or General Fund in a state (if routine maintenance)
assuming no legal or contractual requirements to
record in a Capital Projects Fund
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL PROJECTS FUNDS
OVERVIEW
Use of other funds
– General or Special Revenue Funds
Commonly used for capital asset acquisitions
– Vehicles
– Equipment
– Capital leases
unless legally or contractually prohibited
– Proprietary or Trust Funds
Used for capital acquisitions of those funds
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL PROJECTS FUNDS
OVERVIEW
Purpose is to
– Ensure economical and legal expenditure
of restricted capital resources such as
– Serve as a cost accounting tool
– Control and account for project costs
A choice of many finance officers
Systems designed to transfer or accumulate
multiple resources in a multi-year capital fund
versus an annual operating fund
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL PROJECTS FUNDS
OVERVIEW
Major capital projects
– Often financed with
Long-term bond issue proceeds
Intergovernmental capital grants
– Related agreements plus GAAP often
require use of CPFs to account for project
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
7-9
CAPITAL PROJECTS FUNDS
OVERVIEW
Apply the same basic accounting and
financial reporting standards as:
– General funds
– Special revenue funds
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL PROJECTS AND
DEBT PROCEEDS
Not required for all capital projects or capital
asset purchases
GASB recommends recording in – CPF for general government capital projects
– Debt Service Fund for debt refunding
– Proprietary & Trust Funds if debt serviced
by those funds
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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OTHER DEBT PROCEEDS
GASB standards do not address debt issued for
other purposes, but recording is appropriate as
follows for debt issued to:
– Finance a deficit – the fund having the deficit
– Provide disaster relief, depending on the type of
relief or expenditure has fund options as follows:
Capital Projects – to rebuild capital assets
Special Revenue - to provide individual or city
relief, especially if partially grant reimbursed
General – to provide interim cash flow financing
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL PROJECTS FUNDS
SPECIAL ASSESSMENTS
Some capital projects financed with special
assessments (a special tax) imposed only
against benefited properties
Project examples:
–
–
–
–
Street improvements
Sidewalks
Neighborhood beautification
Street improvements
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL PROJECTS FUNDS
SPECIAL ASSESSMENTS
Long-term debt often issued since
assessments are repaid over 5-10 years
Debt proceeds recorded in CPF
Assessment collections to service the
related debt service transactions are
recorded in a Debt Service Fund
(Chapter 8)
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL PROJECTS FUNDS
SPECIAL ASSESSMENTS
Accounted for like other major general
government capital projects in a Capital
Projects Fund and – Bonds payable in the General Long-Term Debt
Accounts
– Capital assets in the General Capital Asset
accounts in all cases, except business-type activities,
even if no obligation debt finances project
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL PROJECTS FUNDS
SPECIAL ASSESSMENTS
Role of the government
– Provides construction financing (CPF)
(own funds or borrowed funds)
– Levies property assessments (DSF)
(a special property tax)
– Bills / collects assessments (DSF)
(receivable and interest)
– Services the debt (DSF)
(principal and interest)
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL PROJECTS FUNDS
SPECIAL ASSESSMENTS
Almost always used to record – Financial resources
– Capital expenditures
Financial resources (“geography”)
–
–
–
–
OFS - Bond proceeds (government obligation debt)
OFS - Owner contributions (no obligation debt)
OFS - Transfers from other funds (own funds)
Revenues - Assessments - “Pay-go” (rare)
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL PROJECTS FUNDS
DISCUSSION TOPICS
Sources of financing
Required number of funds
Life cycle of capital projects
CPF budget
Interim financing
Costs charged to projects
Intergovernmental revenues
Bond premium/discount & issuance costs
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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FINANCING SOURCES
Revenues (When earned and available):
– Intergovernmental grants
– Investment income (from unspent proceeds)
Other financing sources:
– General obligation debt proceeds
– Special assessment debt proceeds
– Interfund transfers
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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NUMBER OF FUNDS
Common to have a separate CPF for each – Project and debt issue
– Combining statements present financial
operations and financial position of each
Purpose of separation:
–
–
–
–
–
Nature of projects vary widely
Budgeted and financed separately
Legal and contractual requirements vary widely
Demonstrate use only for authorized purposes
Fund balance legal / contractual compliance
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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NUMBER OF FUNDS
However, a single CPF may be used for
similar projects if financed with:
– Single debt issue
– Single grant
– Internal transfers
A single CPF may also be used with different
financing restrictions and projects by using –
– “Sub-funds” or “funds within a fund”
– Still requires proper controls and compliance
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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LIFE CYCLE (Figure 7-1)
Authorized by legislative action
– Life is commonly two or more years
– Fund established by
Project or
Bond issue
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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LIFE CYCLE (Figure 7-1)
Receipt of financial resources
– Long-term debt proceeds
Simultaneous recording of liability in
General Long-Term Liability accounts
– Short-term debt proceeds
Repaid as resources become available
– Interfund transfers (GF / SRF)
– Interest on unspent resources
– Intergovernmental (state/federal) grants
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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LIFE CYCLE (Figure 7-1)
Capital expenditures incurred; usually
over two or more fiscal years
– Contracts encumbered
– Services delivered
– Payments made
Construction in progress / completed
capital assets
– Simultaneous recording in General
Capital Assets accounts
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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LIFE CYCLE (Figure 7-1)
Fund terminated when
– Project completed
– All costs paid
– Disposition of any unspent grant balances
or bond proceeds determined by
Grant agreements / contracts (i.e., pro rata rebate)
Bond indentures (i.e., transferred for debt service)
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CAPITAL BUDGET
Planned in long-term capital
improvement plan CIP
Annual capital budget appropriated
on a project basis
Appropriations do not lapse annually
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CAPITAL BUDGET
Controls without budgetary process
Appropriations not made
Reasons:
– Single project financed from a single fund
– Controls provided by contractual process
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CAPITAL BUDGET
Budget control is important when – Multiple projects in a single fund
– Budgeted in detail
– Government labor forces
– Budgeted annually
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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INTERIM FINANCING
Nature and purpose
– Usually in early stages of the project
– Prior to debt issuance or grant receipts that
are timed with bulk of expenditures
– Other reasons:
Improved bond market conditions
Avoid project delays awaiting bond issuance
– Repaid when bond proceeds or other
resources are received
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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INTERIM FINANCING
Most types are current liability of the CPF
– BANs, interfund borrowing, RANs, notes
– The loan is not “Other financing resources”
– Principal repayment is not an expenditure
– Interest is accrued as an expenditure
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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INTERIM FINANCING
 Criteria for treatment of BANs as longterm debt:
1. BANs were issued pursuant to a legally
authorized bond issue and definitely issuable
2. Two specific GASB refinancing criteria met:
 1. Legal steps taken to refinance the BANs
 2. Intent to refinance supported by ability to do so
–
If criteria not met, BANs must be reported as
a CPF liability
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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INTERIM FINANCING
 BANs that qualify for long-term
debt treatment
– BAN proceeds reported as “Other
financing resources” of CPF
– BAN liability is recorded in the GLTL
accounts; not the CPF
– Interest is recorded as an expenditure
only when due
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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COSTS CHARGED TO PROJECTS
All costs to bring to state of readiness are
appropriate expenditures of CPF
– Direct costs
Land, buildings, materials, labor
A&E fees, transportation, damages
– Overhead / indirect costs
Rarely charged unless reimbursable
– Interest on interim short-term CPF debt
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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INTERGOVERNMENTAL
REVENUES
As “revenues” they are subject to modified
accrual basis for recognition
– Must be measurable and available
– Determined by legal and contractual requirements
Capital grants - most are expenditure driven
– Revenue recognized as expenditures are incurred
– Defer revenue if received prior
– Footnote disclosure if awarded and no receipt or
expenditure
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BOND PREMIUM, DISCOUNT &
ISSUANCE COSTS
Bond proceeds recorded in CPF
– Recorded at par value
– Any bond premium or discount recorded
separately
– Bond issuance costs recorded as expenditure
Above may impact available funds and
project authorization levels
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CASE ILLUSTRATION
Case begun - 20X1
– Establish budgetary entry (B)
– Review transactions and events Entries (1) – (8) & Figure 7-9
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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LIFE CYCLE VERSUS FISCAL
YEAR (Figure 7-3)
Appropriations made for project life
Compliance and project cost reported
upon completion
Fiscal year statements for CPFs are
interim financial statements
Relevant statements are from inception
to completion
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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FINANCIAL STATEMENTS
Two annual statements required
– Balance Sheet (Figure 7-4)
– Statement of Revenues, Expenditures, and
Changes in Fund Balances (Figure 7-5)
Budgetary statement or schedule may
be legally or contractually required
(Figure 7-7)
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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CASE ILLUSTRATION
Case concluded - 20X2
– Review transactions and events Entries (1) – (6)
– See budgetary comparison
statement – Figure 7-7
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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OTHER MATTERS
Investment of idle cash / Arbitrage
– Federal regulations require governments
rebate excess interest to the Federal
government
Interest earned on taxable investments in excess
of
Interest paid on tax-exempt debt issued
– Investment revenues reduced and liability
established for arbitrage liabilities, if any
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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OTHER MATTERS
Disposing of fund balance or deficit
– In absence of legal or contractual
restrictions
Often determined by governing body
Usually transferred to Debt Service Fund
– Makeup of any deficit may come from
the General Fund or through added
bond proceeds
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OTHER MATTERS
Reporting several projects financed
through one fund
– Several projects may be accounted for on
a “funds within a fund” approach
– Financial statements presented in a
series of separate fund statements or
“combining statements” (Figure 7-8)
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