1. 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

2. 2 Types of Debt n General Obligation Bonds n Revenue Bonds n Certificates of Participation n Notes –GEFA –Tax Anticipation Notes –Bond Anticipation Notes n Capital Leases

3. 3 Basis of Accounting n How to account for debt depends on the fund you are in: Fund TypeBasis of AccountingDebt GovernmentalModified AccrualNo debt on balance sheet ProprietaryFull AccrualDebt on Stmt of Net Assets Government-wideFull AccrualDebt on Stmt of Net Assets

4. 4 Full Accrual Accounting Debt is reported on the Statement of Net Assets. n Principal –Current vs. Non-current –Reduce as paid n Premiums/Discounts –Accrue at time of issuance –Amortize over life of debt –Report net of debt on statement

5. 5 Full Accrual Accounting Debt is reported on the Statement of Net Assets (Continued) n 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 n Interest –Full accrual –Variable vs. Fixed, Range

6. 6 Official Statement n Offering document used to sell the bonds n Use Final n A lot of information – for accounting focus on: –Sources and Uses –Debt Service Requirements –Dates of Payments n Example – Revenue Bond

7. 7 Exercise 1 n Revenue Bond - Exercise 1 n 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

8. 8 Bond Refunding n May be undertaken for: –Change covenants –Reduce interest rate –Change variable to fixed rate n Is a “refinancing” n Advance vs. Current n Defeased Debt - no longer reported

9. 9 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.

10. 10 Deferred Gain/Loss on Refunding Bonds n 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.

11. 11 Deferred Gain/Loss on Refunding Bonds n 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).

12. 12 Exercise 2 n Revenue Bond - Exercise 2 n 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

13. 13 Arbitrage Rebate n Arbitrage rebate - IRS required calculation on tax-exempt debt in order to pay penalty if interest earnings exceed interest paid n Required to be paid, if any due, at 5 years after issuance and each 5 year increment thereafter n Required to evaluate as a liability every year for financial reporting.

14. 14 Conduit Debt n 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. n 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. n Debt not reported on issuer’s financial statements – only disclosed.

15. 15 Footnote Disclosures Required disclosures related to debt include: n 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 n Rollforward of each type of debt/long-term liability –Gross, rather than net –Amount due within one year

16. 16 Footnote Disclosures (cont.) Required disclosures related to debt include: n 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

17. 17 Footnote Disclosures (cont.) Required disclosures related to debt include: n 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 n Operating Leases –Description and current year rental amounts –If noncancellable, then amounts due each of next 5 years and then 5 year increments

18. 18 Footnote Disclosures (cont.) Required disclosures related to debt include: n Short-term Debt (e.g. Anticipation notes) –Schedule of changes – gross –Explanation of purpose –Disclose even if none outstanding at year-end n 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.) n Aggregate balance of defeased debt at year-end

19. 19 Footnote Disclosures (cont.) Required disclosures related to debt include: n Conduit Debt –General description –Aggregate amount of all conduit debt outstanding at year- end –Clear indication that issuer has no obligation n Special Assessment Debt –Describe nature –If not obligated for this debt, disclose this and amount n Demand Bonds –Terms of program See example disclosure

20. 20 Modified Accrual Accounting Debt is reported as other financing source in year of issuance – liability not recorded on balance sheet n Usually in a Capital Projects Fund n Principal –Other financing source – year of issuance n Premiums/Discounts –Other financing source/use – year of issuance n Issuance Costs –Debt service expenditure – year of issuance

21. 21 Modified Accrual Accounting (cont.) Debt Service is expenditure as it is paid. n Usually in Debt Service Fund n Principal –Debt service expenditure when due and paid n Interest –Debt service expenditure when due and paid – no accrual Example – GO Bond

22. 22 Exercise n GO Bond - Exercise n 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

23. 23 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

24. 24 Capital Lease Accounting n 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.

25. 25 Transaction with Component Units n 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

26. 26 Interest Rate Subsidy n Interest rate subsidies – such as those received on GEFA notes financed with ARRA n GASB says subsidy should be evaluated as a separate transaction from the debt – evaluated as revenue under GASB 33.

27. 27 Interest Rate Swap Agreements n Often utilized by governments in order to offset variable rate debt risks by swapping for a fixed rate. n Can be used to the opposite in order to balance a debt portfolio n These interest rate swap agreement qualify as derivatives n Accounting and disclosure requirements fall under GASB 53. –Require valuing and reporting on statement of net assets –Hedge effectiveness must be determined –Risk disclosures

28. 28 Capitalized Interest n 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 n Only applies to proprietary funds; no capitalization of interest on capital assets used in governmental activities n 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.

29. 29 Capitalized Interest FASB 34 n 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 n Period of capitalization ends when: –The asset is “substantially complete and ready for its intended use”

30. 30 Capitalized Interest FASB 62 n When debt is issued before construction activities begin, the start of the capitalization period is moved back to the time of the borrowing. n Period of capitalization ends when: –The asset is “substantially complete and ready for its intended use” n Amount capitalized is the net effect of interest expense and related interest revenue

31. 31 Capitalized Interest Source of Funding Authoritative Guidance Treatment Tax exempt debt externally restricted for the acquisition of specified qualifying assets FASB Statement No. 62 Capitalize the difference between interest expense on debt and interest earnings on reinvested debt proceeds Tax-exempt debt not externally restricted for the acquisition of specified qualifying assets (such as general purpose capital improvement bonds) FASB Statement No. 34 Capitalize weighted average construction expenses multiplied by interest rate on the debt Grants (and related earnings) externally restricted to the acquisition of specified qualifying assets FASB Statement No. 62 Do not capitalize interest Grants (and related earnings) not externally restricted to the acquisition of specified qualifying assets FASB Statement No. 34Capitalize 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 resourcesFASB Statement No. 34Capitalize interest if debt is outstanding in the same enterprise fund by multiplying weighted average construction expenses by weighted average interest rate of outstanding debt

32. 32 Questions?