Accounting for long term debt in governments

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Accounting for long term debt in governments

  1. 1. Long-Term Debt
  2. 2. Objectives• Accounting for debt transactions- – Governmental Funds – Proprietary Funds• Reporting debt transactions- – Government-Wide Financial Statements – Fund Financial Statements• Question and Answers2
  3. 3. Types of Debt Covered• Long-Term Obligations• Zero-Interest-Rate Bonds• Debt Refunding / Defeasance• Capital Leases3
  4. 4. Introduction• Accounting standards used to determine how debt transactions are recorded depends on whether the liability is presented in: – Governmental Funds – Proprietary or Fiduciary Funds, or – Government-Wide Financial Statements4
  5. 5. Basis of Accounting and Measurement Focus Basis of Measurement Fund Type Accounting FocusGovernmental Funds Modified Accrual Basis Current Financial ResourcesProprietary Funds Accrual Basis Economic ResourcesFiduciary Funds Accrual Basis Economic Resources5
  6. 6. Differences Between the Two Methods Modified Accrual AccrualRevenues & Recorded When Recorded WhenReceivables Earned & Realized Earned Within a Specified Number of DaysExpenditures & Recorded When Recorded WhenLiabilities Incurred and Payable Incurred with Current Resources6
  7. 7. Differences Between the Two Methods Modified Accrual AccrualLong-Term Debts Not Recorded in the Recorded In the Balance Sheet Balance Sheet When IncurredCapital Assets Not Recorded in the Recorded In the Balance Sheet Balance Sheet Net of Accumulated Depreciation7
  8. 8. Long-Term Obligations• Face Amount of the Debt, Any Related Premium or Discount, and Debt Issuance Costs Should Be Reported Separately• When Bonds Issuance Does Not Coincide With an Interest Payment Date, Proceeds Should Include Accrued Interest. Accrued Interest Should Be Recorded as a Liability8
  9. 9. Long-Term Obligations Governmental Funds Proprietary FundsDebit – Cash (Asset) Debit – CashDebit – Bond Issuance Cost Debit – Unamortized Bond Issuance(Expenditure) Cost (Deferred Charge)Credit – Accrued Interest Payable Credit – Accrued Interest Payable(Liability) (Liability)Credit – Proceeds From Issuance of Credit – Bonds Payable (Long-TermBonds (Other Financing Source) Liability)Credit – Proceeds From Premium on Credit – Unamortized BondIssuance of Bonds (Other Financing Premiums (Long-Term Liability)Source)Entry to record issuance of long-term debt.9
  10. 10. Long-Term Obligations Governmental Funds Proprietary FundsDebit – Debt Service - Principal Debit – Bonds Payable (Long-Term(Expenditure) Liability)Debit – Debt Service - Interest Debit – Debt Service - Interest(Expenditure) (Expense)Credit – Cash (Asset) Credit – Cash (Asset)Entry to record bond principal and interest payments.10
  11. 11. Long-Term Obligations Governmental Funds Proprietary Funds Debit – Unamortized Bond Premiums (Long-Term Liability) Debit / Credit – Debt Service - Interest (Expenditure) Credit – Unamortized Bond Issuance Cost (Deferred Charge)Entry to amortize bond premium and bond issuance cost.11
  12. 12. Example Sources and Uses of Funds12
  13. 13. Journal Entry – Example Question #114
  14. 14. Zero-Interest-Rate Bonds• Issued at a Deep Discount• Difference Between the Initial Price and Maturity Value Represents Interest• Proceeds of Debt (Including Underwriter’s Discount and Other Issuance Costs) are Reported as Other Financing Sources in Governmental Funds15
  15. 15. Debt Refunding / Defeasance• Refunding Can Be Accomplished as Either a Current Refunding or an Advance Refunding• Current refunding – Old Debt Is Paid Before It’s Maturity Date (Within 90 Days of Issuance of the Refunding Debt) and the Retirement is Financed by Issuing New Debt16
  16. 16. Debt Refunding / Defeasance• Advance Refunding – Cash and Other Assets Are Placed Into an Irrevocable Trust That Is to be Used Exclusively to Service the Future Debt Requirements of the Old Debt. – Old Debt is Considered Defeased17
  17. 17. Treatment of Refundings in Governmental Funds Item Current Advance Refunding Refundings Legal or In- No Defeasance substance DefeasanceIssuance of Other Financing Other Financing Other FinancingRefunding Bonds Source Source SourceRedemption / Expenditure Other Financing Use Cash With FiscalPayment to Escrow Agentfrom Bond ProceedsRedemption / Expenditure Expenditure Cash With FiscalPayment to Escrow Agentfrom Other Sources18
  18. 18. Debt Refunding / Defeasance Governmental Funds Proprietary FundsDebit – Bond Issuance Cost Debit – Unamortized Bond Issuance Cost(Expenditure) (Deferred Charge)Debit – Payment to Refunded Debt Debit / Credit – Bonds Payable (Long-Escrow Agent (Other Financing Use) Term Liability)Credit – Proceeds From Issuance of Credit / Debit – (Gain) Loss onRefunding Bonds (Other Financing Refunding (Long-Term Liability)Source)Credit – Proceeds From Premium on Credit – Unamortized Bond PremiumsIssuance of Bonds (Other Financing (Long-Term Liability)Source)To record issuance of long-term bonds and payment to the escrow agent for debtdefeasance.19
  19. 19. Debt Refunding / Defeasance Governmental Funds Proprietary Funds Debit – Interest Expense Debit – Unamortized Bond Premiums (Long-Term Liability) Credit / Debit – (Gain) Loss on Refunding (Long-Term Liability) Credit – Unamortized Bond Issuance Cost (Deferred Charge)To record amortization of bond issuance cost, bond premium or discount, and net(gain) loss on refunding.20
  20. 20. How to Calculate Deferred Gain (Loss)Book Value of Retired Debt: Maturity Value of Debt Add Unamortized Premium Deduct Unamortized Discount Deduct Unamortized Bond Issuance Costs Equals Book Value of Retired Debt21
  21. 21. How to Calculate Deferred Gain (Loss)Gain (Loss) on Refunding: Book Value of Retired Debt Deduct Reacquisition Price Equals Gain (Loss) on Refunding22
  22. 22. Debt Refunding / Defeasance• Deferred Gain or Loss is Amortized Over the Original Remaining Life of the Old Debt or the Life of the New Debt• Bond Issuance Costs and Premiums or Discounts on Issuance is Amortized Over the Life of the New Debt23
  23. 23. Example Sources and Uses of Funds24
  24. 24. Refunded Bonds25
  25. 25. Journal Entry – Example Question #227
  26. 26. G.A.S.B. #34 Entry – Example Question #228
  27. 27. Capital Leases Governmental Funds Proprietary FundsDebit – Capital Outlay (Expenditure) Debit - Equipment Under Capital Lease (Capital Asset)Credit – Proceeds From Capital Credit – Capital Leases PayableLease (Other Financing Source) (Long-Term Liability)Entry to record capital lease29
  28. 28. Capital Leases Governmental Funds Proprietary FundsDebit – Capital Lease Principal Debit - Capital Leases Payable(Expenditure) (Long-Term Liability)Debit – Capital Lease Interest Credit – Cash (Asset)(Expenditure)Credit – Cash (Asset)Entry to record capital lease payments made during the year30
  29. 29. Questions31

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