Government and NonProfit Accounting Exam 2

Capital Projects Funds - answer--A fund that accounts for and report financial resources that are legally restricted and contractually required for the acquisition of capital assets -the primary purpose is to ensure and demonstrate the expenditure of the dedicated financial resource is both legally and contractually compliant -The total cost of a capital project is accumulated in a single expenditures account, which accumulates until the project is completed, at which time the fund ceases to exist Capital Project Basis of Accounting - answer-Fund Statements - MAB Government-Wide Statements - FAB Capital Projects Fund 2 - answer-Governments must maintain capital projects funds for resources that are legally restricted, committed, or assigned to expenditure for capital outlays 2 Types of Capital Projects - answer-General (Public Benefit) -Examples: public buildings, roads, highways and brdiges, park improvements, sewer systems, plant and equipment, etc. Special assessment (private benefit) Benefits citizens in a specified benefit district -Examples: street improvements, curbs, sidewalks, street lighting, sewage, etc. CPF - Construction - answer-Three Phases 1. Preconstruction (project and financing authorization 2. construction 3. debt servicing Phase 1: Preconstruction - answer-Financing -Acquire extensive, long-term financing (3 types) -Type 1 - tax supported debt (general obligation bonds or special taxes restricted to payment of debt) -Type 2 - Grants -Type 3 - Other forms of financing (special assessments, special assessments claim only 3 phases because financing & construction are a single phase) Type 1 - Tax Supported Debt - answer--Voter approval required -memo entry for bond/tax authorization -proceeds acconted for as "other financing sources" -difference between face value of bonds and cash received is attributable to issue costs and premium and discounts Type 3 - Other forms of financing - answer--most common: special assessments -levied when taxpayers in areas beyond their jurisdiction want to benefit from certain facilities and services Interim Financing - answer-may be necessary to obtain interim financing until proceeds from intended source are received -used often to complete architectural and engineering design during preconstruction phase Budgeting - answer--budgets help ensure control -since CPF have project (not period) focus, it may be unnecessary to make annual budgets -but, since numerous projects are integrated into a single fund, budgetary accounts help control individual project expenditures DSF 1 - answer-Accounts for and report financial resources that are RESTRICTED, COMMITTED, or ASSIGNED to expenditure for principal and interest on all general long-term debt (does not include debt issued for and serviced by enterprise or internal service funds and some trust funds) DSF 2 - answer-accounted for on the MAB -exception: interest and principal are NOT considered current liabilities of DSF until the period in which they must be paid BUT the interest revenue on bonds held as investments is accrued DSF 3 - answer-Resources may come from 2 types: 1. tax supported debt -taxes levied by DSF -taxes levied by GF and transferred to DSF -Special taxes restricted to the payment of debt 3. other means of financing -special assessments 2. grants would not have debt to service DSF 4 - answer-GASB requires DSFs be established when: -legally required -financial resources are being accumulated for principal and interest payment maturing in future years GASB recommends: -a single DSF for all debt serviced by property taxes -Governments hold number of funds to a minimum DSF 5 - answer--Budgets least common for DSFs -If DSF receives fund from other funds, then the other fund maintains controls -Exception: if resources are derived from special taxes or assessments, then an appropriations budget enhances control -Decision of budgetary accounts is uaully decided legislatively Serial bonds - answer--principal matures in annual installments -the amount budgeted for revenues or interfund transfers in, is usually just what is needed that fiscal year for matured pricipal and interest -advantage: self-amortizing; no sinking fund needed Term Bonds - answer--principal matures in one lump-sum amount at end of the bond term ---not used as frequently for municipal financing as serial bonds Disadvantages of Term Bonds - answer--usually requires a sinking fund and therefore investment management -sinking fund investments: reported at Fair Value -Changes in fair value: reported as a component of investment earnings -More complex accounting than for serial bonds Other Forms of Financing - Special Assessment - answer-only benefits only a select group of individuals Other Forms of Financing - Fund Statements - answer--DSF accounted for using MAB -in the DSF, special assessment revenues and receivables are accounted for on a full accrual basis Other Forms of Financing - Government Wide Statements - answer--interest on long-term debt would be accrued and charges as an expense -discounts and premiums on bonds payable would be amortized over the maturity term of the bond -property taxes would be recognized as revenues -property taxes would be recognized as revenues -principal of special assessments would be recognized as both assets and revenues Other Forms of Financing - Special Assessments 2 - answer-governments may or may not be obligated to account for special assessment debt (both interest and principal) Obligated - Special Assessments - answer--government accounts for debt service on special assessment debt in a DSF when the government is obligated in some manner for the debt -GASB states government is obligated if: ---it is responsible for the debt in the event of property owner default OR ---it is legally liable for assuming the debt or gives indication that it may honor the debt in the event of default Nonobligated - Special Assessment - answer--both the special assessment debt and the debt service are accounting for in an agency fund -disclose the amount of debt in the notes to the financial statements Special Assessments overview - answer--special assessments debt is sometimes paid from a proprietary fund ---in this case, all transactions are reported in the proprietary fund -improvements financed with assessments should be capitalized Arbitrage - answer--investment of idle cash -issuance of debt at low tax-exempt interest rates and investment of proceeds in taxable securities yielding a higher return interest receives is exempt from federal taxes provisions to prevent arbitrage abuse - answer--arbitrage restrictions: state and local governments must observe arbitrage regulations -rebate on arbitrage: arbitrage rules and regulations are complex and contain several exemptions and exceptions, investment revenues should be reduced and rebate liabilities established Debt Refunding - answer-means that existing debt is replaced with new issue of debt (hopefully at a lower interest rate) -Bond traded on the open market can be repurchased at the going market rate -Existing debt may have a call feature that lets the government repay face value early (but several years after original issue date) ---bonds without a call feature that are not actively traded are more challenging - this is the situation that leads to use of "in-substance defeasance" Debt Refunding Transactions - answer--Bond refunding -refinance -general rule In-Substance Defeasance - answer--advanced refunding -provision for the government to lock the savings that would result from a decline in the itnerest rates -advance refunding in which the borrower economically satisfies its existing obligations -journal entries are similar to those for regular reufndings In-Substance Defeasance - answer-Conditions to be satisfied 1. debtor must place cash/assets with an escrow agent to be solely used for servicing/retiring the debt -possibility of debtor having to make future payment on the debt must be remote -assets in escrow fund must be investments considered "risk-free" like US treasury bonds -amortize loss (or gain) over future years using the shorter of the original term or the term of the new debt Capital Assets include - answer-1. police cars 2. admin buildings 3. utility lines 4. roads Capital Assets 1 - answer-according to the current model, governments may not charge depreciation in their MAB fund statements but do so in their FAB government-wide statements -MAB = no depreciation on CA -FAB = depreciation on CA General Capital Assets - answer--nonfinancial in nature/character -excluded from governmental funds because the measurement focus of governmental funds is on its financial resources Capital Assets 2 - answer-in governmental funds the costs of capital assets are reported as expenditures when the assets are acquired rather than capitalized as assets and subsequently written off as the assets are consumed most common classifications of general capital assets - answer-1. land 2. buildings 3. equipment 4. improvements to land and building 5. construction in progress 6. works of art 7. historical treasures 8. infrastructure 9. intangible assets Capital Assets 3 - answer-should be reported on the government-wide statement of net position at HC net of AD CA 4 - answer-AD may be reported on face of B/S or in notes CA 5 - answer-inexhaustible items (land, works of art, historical treasures) do not need to be depreicated CA 6 - answer-infrastructure assets do not need to be depreciated if the government can prove they are preserving the assets in a specific condition