All Things Debt

Report
All Things Debt
Accounting and Reporting for
Governmental Debt Transactions
M&J Governmental Client CPE
Stockbridge, GA and Suwanee, GA
April 30, 2012 and May 11, 2012
Types of Debt





General Obligation Bonds
Revenue Bonds
Certificates of Participation
Notes
– GEFA
– Tax Anticipation Notes
– Bond Anticipation Notes
Capital Leases
2
Basis of Accounting

How to account for debt depends on the
fund you are in:
Fund Type
Basis of Accounting
Debt
Governmental
Modified Accrual
No debt on balance
sheet
Proprietary
Full Accrual
Debt on Stmt of Net
Assets
Government-wide
Full Accrual
Debt on Stmt of Net
Assets
3
Full Accrual Accounting
Debt is reported on the Statement of Net
Assets.

Principal
– Current vs. Non-current
– Reduce as paid

Premiums/Discounts
– Accrue at time of issuance
– Amortize over life of debt
– Report net of debt on statement
4
Full Accrual Accounting
Debt is reported on the Statement of Net
Assets (Continued)

Issuance Costs
–
–
–
–
–

Accrue at time of issuance
Amortize over life of debt
Report as an asset
Includes underwriter’s discount
May end up being different than OS
Interest
– Full accrual
– Variable vs. Fixed, Range
5
Official Statement

Offering document used to sell the bonds

Use Final

A lot of information – for accounting
focus on:
– Sources and Uses
– Debt Service Requirements
– Dates of Payments

Example – Revenue Bond
6
Exercise 1

Revenue Bond - Exercise 1

Use the Information provided in first two tabs of
Revenue Bond Exercise to answer the three
questions on Tab 1
– Prepare the journal entry
– Calculate amortization of premium
– Calculate accrued interest payable
7
Bond Refunding

May be undertaken for:
– Change covenants
– Reduce interest rate
– Change variable to fixed rate

Is a “refinancing”

Advance vs. Current

Defeased Debt - no longer reported
8
Deferred Gain/Loss on Refunding Bonds
For current refundings and advance refundings
resulting in defeasance of debt reported by
proprietary activities, the difference between the
reacquisition price and the net carrying amount
of the old debt should be deferred and
amortized as a component of interest expense
over the remaining life of the old debt (had it not
been refunded) or the life of the new debt,
whichever is shorter.
9
Deferred Gain/Loss on Refunding Bonds

Reacquisition Price – the amount required to repay
previously issued debt in a refunding transaction.
– In a current refunding, this includes the principal of
the old debt and any call premium
– In an advance refunding, this is the amount placed in
escrow that, together with interest earnings, is
necessary to pay interest and principal on the old
debt and any call premium.
Premium or discount and issuance costs of the new debt
are not considered part of the reacquisition price, but
instead are separate items related to and amortized
over the life of the new debt.
10
Deferred Gain/Loss on Refunding Bonds

Net Carrying Amount – The amount due at maturity,
adjusted for any unamortized premium or discount
and issuance costs related to the old debt.
For current refundings of prior refundings and
advance refundings of prior refundings resulting in
defeasance of debt, the difference that is
determined in the previous discussion, together
with any unamortized difference from the prior
refundings, should be deferred and amortized over
the shorter of the original amortization period
remaining from the prior refundings or the life of the
latest refunding debt (that is, the new debt).
11
Exercise 2

Revenue Bond - Exercise 2

Use the Information provided in third tab (also
uses information in the first two tabs) of
Revenue Bond Exercise to answer the two
questions on Tab 3
– Calculate the deferred gain or loss
– Prepare the journal entry
12
Arbitrage Rebate

Arbitrage rebate - IRS required calculation on
tax-exempt debt in order to pay penalty if
interest earnings exceed interest paid

Required to be paid, if any due, at 5 years after
issuance and each 5 year increment thereafter

Required to evaluate as a liability every year for
financial reporting.
13
Conduit Debt

Conduit debt is a limited obligation revenue
bond issued for the purpose of providing capital
for a specific third party that is not part of the
issuer’s financial reporting entity.

Issuer has no obligation for such debt beyond
resources provided by a lease or loan with the
specific third party on whose behalf they are
issued.

Debt not reported on issuer’s financial
statements – only disclosed.
14
Footnote Disclosures
Required disclosures related to debt include:
 Future debt service requirements to maturity
– For all outstanding debt, usually by type
– Next 5 years individually and then 5 year increments
– Principal and interest components separately
• If variable rate debt, then use the interest rate in
effect at year-end to disclose interest
• Disclose terms of variable rate including how rate
can change and what the rate is at year-end

Rollforward of each type of debt/long-term
liability
– Gross, rather than net
– Amount due within one year
15
Footnote Disclosures (cont.)
Required disclosures related to debt include:
 If GFOA Certificate participant then:
– Individual details for each issuance (original amount,
range of rates, range of maturities)
– Applicability of arbitrage
– Disclose legal debt limit/requirements
– Any authorized but unissued debt
16
Footnote Disclosures (cont.)
Required disclosures related to debt include:

Capital Leases
– Description of arrangements
– Gross amount of assets under lease
– Minimum payments in total & for each of next 5 years
and then in 5 year increments
– If not stated then imputed interest deducted from total
payments

Operating Leases
– Description and current year rental amounts
– If noncancellable, then amounts due each of next 5
years and then 5 year increments
17
Footnote Disclosures (cont.)
Required disclosures related to debt include:
 Short-term Debt (e.g. Anticipation notes)
– Schedule of changes – gross
– Explanation of purpose
– Disclose even if none outstanding at year-end

Year of Refunding
– Description of refunding transaction
– Aggregate difference in debt service between old & new
– Economic gain or loss on transaction (PV of aggr. diff.)

Aggregate balance of defeased debt at year-end
18
Footnote Disclosures (cont.)
Required disclosures related to debt include:
 Conduit Debt
– General description
– Aggregate amount of all conduit debt outstanding at yearend
– Clear indication that issuer has no obligation

Special Assessment Debt
– Describe nature
– If not obligated for this debt, disclose this and amount

Demand Bonds
– Terms of program
See example disclosure
19
Modified Accrual Accounting
Debt is reported as other financing source
in year of issuance – liability not
recorded on balance sheet
 Usually in a Capital Projects Fund
 Principal
– Other financing source – year of issuance

Premiums/Discounts
– Other financing source/use – year of issuance

Issuance Costs
– Debt service expenditure – year of issuance
20
Modified Accrual Accounting (cont.)
Debt Service is expenditure as it is paid.

Usually in Debt Service Fund

Principal
– Debt service expenditure when due and paid

Interest
– Debt service expenditure when due and paid – no
accrual
Example – GO Bond
21
Exercise

GO Bond - Exercise

Use the Information provided for GO Bond
Exercise to answer the three questions
– Prepare the journal entry
– Where would each item from journal entry be reported
on balance sheet
– Calculate accrued interest payable
22
Government-Wide Statements
GO bonds reported under modified accrual
then have to be converted and reported
under full accrual in GW statements
All full accrual concepts discussed on
previous slides must be utilized and
accounted for in the GW statements
(premiums, discounts, issuance costs)
Conversion will be required
23
Capital Lease Accounting

In governmental funds, an other financing
source and related, equal capital outlay
expenditure for net present value of new capital
lease obligations should be reported.
24
Transaction with Component Units

Issuance through Development Authority which
is a discretely presented component unit
– Should be a lease between the Authority and PG
– Bonds would be in Authority statements and in CU
column in financial statements.
– A capital lease receivable would be recorded in the
Development Authority to offset debt
– PG would have a Capital lease payable to the
Component Unit
25
Interest Rate Subsidy


Interest rate subsidies – such as those received
on GEFA notes financed with ARRA
GASB says subsidy should be evaluated as a
separate transaction from the debt – evaluated
as revenue under GASB 33.
26
Interest Rate Swap Agreements




Often utilized by governments in order to offset
variable rate debt risks by swapping for a fixed
rate.
Can be used to the opposite in order to balance
a debt portfolio
These interest rate swap agreement qualify as
derivatives
Accounting and disclosure requirements fall
under GASB 53.
– Require valuing and reporting on statement of net
assets
– Hedge effectiveness must be determined
– Risk disclosures
27
Capitalized Interest

Addressed by:
– FASB 34, Capitalization of Interest Cost
– FASB 62, Capitalization of Interest Cost in Situations
Involving Certain Tax-Exempt Borrowings and Certain Gifts
and Grants
– Soon to be GASB 62

Only applies to proprietary funds; no capitalization
of interest on capital assets used in governmental
activities

Includes construction undertaken by an enterprise
fund itself, and construction undertaken by others
on the enterprise fund’s behalf (such as
contractors) when deposits or progress payments
are required during construction.
28
Capitalized Interest
FASB 34

Period of capitalization begins when:
– Expenditures have occurred
– Activities necessary to prepare the asset (including admin
activities before construction) have begun
– Interest cost has been incurred

Period of capitalization ends when:
– The asset is “substantially complete and ready for its
intended use”
29
Capitalized Interest
FASB 62

When debt is issued before construction activities
begin, the start of the capitalization period is moved
back to the time of the borrowing.

Period of capitalization ends when:
– The asset is “substantially complete and ready for its
intended use”

Amount capitalized is the net effect of interest
expense and related interest revenue
30
Capitalized Interest
Source of Funding
Tax exempt debt externally
restricted for the acquisition of
specified qualifying assets
Tax-exempt debt not
externally restricted for the
acquisition of specified
qualifying assets (such as
general purpose capital
improvement bonds)
Grants (and related earnings)
externally restricted to the
acquisition of specified
qualifying assets
Authoritative
Guidance
FASB Statement No. 62
Treatment
Capitalize the difference between interest
expense on debt and interest earnings on
reinvested debt proceeds
Capitalize weighted average construction
expenses multiplied by interest rate on the debt
FASB Statement No. 34
Do not capitalize interest
FASB Statement No. 62
Grants (and related earnings)
not externally restricted to the
acquisition of specified
qualifying assets
FASB Statement No. 34
Capitalize interest if debt is outstanding in the
same enterprise fund by multiplying weighted
average construction expenses by weighted
average interest rate of outstanding debt.
Existing resources
FASB Statement No. 34
Capitalize interest if debt is outstanding in the
same enterprise fund by multiplying weighted
average construction expenses by weighted
average interest rate of outstanding debt
31
Questions?
32

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