© prentice hall publishing – governmental and nonprofit accounting 7e 1-1 freeman / shoulders7 -...

© Prentice Hall Publishing – Governmental and NonProfit Accounting 7e 1-1 Freeman / Shoulders 7 - 1

CHAPTER 7CHAPTER 7

CAPITAL PROJECTS FUNDSCAPITAL PROJECTS FUNDS

© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 7 - 2

LEARNING OBJECTIVESLEARNING 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


LEARNING OBJECTIVESLEARNING 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


MAJOR TOPICSMAJOR TOPICS

1. Overview2. CPF operations and accounting

standards3. CPF case illustration - begun

(20X1) and concluded (20X2)4. Other CPF operations,

accounting, and reporting matters


CAPITAL PROJECTS FUNDSCAPITAL PROJECTS FUNDSOVERVIEWOVERVIEW

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



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



Use of other funds

– General or Special Revenue FundsCommonly used for capital asset acquisitions– Vehicles– Equipment– Capital leases

unless legally or contractually prohibited

– Proprietary or Trust FundsUsed for capital acquisitions of those funds



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 officersSystems designed to transfer or accumulate

multiple resources in a multi-year capital fund versus an annual operating fund



Major capital projects

– Often financed withLong-term bond issue proceedsIntergovernmental capital grants

– Related agreements plus GAAP often require use of CPFs to account for project



Apply the same basic accounting and financial reporting standards as:

– General funds

– Special revenue funds


CAPITAL PROJECTS AND CAPITAL PROJECTS AND DEBT PROCEEDSDEBT 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


OTHER DEBT PROCEEDSOTHER 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 assetsSpecial Revenue - to provide individual or city

relief, especially if partially grant reimbursedGeneral – to provide interim cash flow financing


CAPITAL PROJECTS FUNDSCAPITAL PROJECTS FUNDSSPECIAL ASSESSMENTSSPECIAL 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



Long-term debt often issued since assessments are repaid over 5-10 years

Debt proceeds recorded in CPFAssessment collections to service the

related debt service transactions are recorded in a Debt Service Fund (Chapter 8)



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



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)



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)


CAPITAL PROJECTS FUNDS CAPITAL PROJECTS FUNDS DISCUSSION TOPICSDISCUSSION TOPICS

Sources of financingRequired number of fundsLife cycle of capital projectsCPF budgetInterim financingCosts charged to projectsIntergovernmental revenuesBond premium/discount & issuance costs


FINANCING SOURCESFINANCING 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


NUMBER OF FUNDSNUMBER OF FUNDSCommon 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


NUMBER OF FUNDSNUMBER 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


LIFE CYCLELIFE CYCLE (Figure 7-1)(Figure 7-1)

Authorized by legislative action–Life is commonly two or more years–Fund established by

Project orBond issue



Receipt of financial resources– Long-term debt proceeds

Simultaneous recording of liability in General Long-Term Liability accounts

– Short-term debt proceedsRepaid as resources become available

– Interfund transfers (GF / SRF)– Interest on unspent resources– Intergovernmental (state/federal) grants



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



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)


CAPITAL BUDGETCAPITAL BUDGET

Planned in long-term capital improvement plan CIP

Annual capital budget appropriated on a project basis

Appropriations do not lapse annually



Controls without budgetary process

Appropriations not made

Reasons:– Single project financed from a single fund– Controls provided by contractual process



Budget control is important when -

– Multiple projects in a single fund

– Budgeted in detail

– Government labor forces

– Budgeted annually


INTERIM FINANCINGINTERIM 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 conditionsAvoid project delays awaiting bond issuance

– Repaid when bond proceeds or other resources are received



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



Criteria for treatment of BANs as long-term 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



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


COSTS CHARGED TO PROJECTSCOSTS CHARGED TO PROJECTS

All costs to bring to state of readiness are appropriate expenditures of CPF

– Direct costsLand, buildings, materials, laborA&E fees, transportation, damages

– Overhead / indirect costsRarely charged unless reimbursable

– Interest on interim short-term CPF debt


INTERGOVERNMENTAL INTERGOVERNMENTAL REVENUESREVENUES

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


BOND PREMIUM, DISCOUNT & BOND PREMIUM, DISCOUNT & ISSUANCE COSTSISSUANCE 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


CASE ILLUSTRATIONCASE ILLUSTRATION

Case begun - 20X1– Establish budgetary entry (B)– Review transactions and events -

Entries (1) – (8) & Figure 7-9


LIFE CYCLE VERSUS FISCAL LIFE CYCLE VERSUS FISCAL YEAR YEAR (Figure 7-3)(Figure 7-3)

Appropriations made for project lifeCompliance and project cost reported

upon completionFiscal year statements for CPFs are

interim financial statementsRelevant statements are from inception

to completion


FINANCIAL STATEMENTSFINANCIAL 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)


CASE ILLUSTRATIONCASE ILLUSTRATION

Case concluded - 20X2– Review transactions and events -

Entries (1) – (6)– See budgetary comparison

statement – Figure 7-7


OTHER MATTERSOTHER 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



Disposing of fund balance or deficit

– In absence of legal or contractual restrictions

Often determined by governing bodyUsually transferred to Debt Service Fund

– Makeup of any deficit may come from the General Fund or through added bond proceeds



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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