1. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders8 - 1 CHAPTER 8 DEBT SERVICE FUNDS

2. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 2 LEARNING OBJECTIVES To understand –Debt Service Funds Purposes When required Types of liabilities commonly serviced –Recognition of Financing methods Expenditures Conditions permitting principal and interest expenditure accrual before maturity

3. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 3 LEARNING OBJECTIVES (Continued) To understand –Accounting and reporting for Special assessment Debt Service Funds Debt service on term bonds Debt service on deep discount debt Refundings of general long-term liabilities –How to Record debt service transactions Prepare Debt Service Fund financial statements

4. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 4 DEBT SERVICE FUNDS Purpose –Used to account for accumulation of resources for and payment of GLTD (not debt of specific funds) principal and interest Required only if - –Legally mandated –Accumulating resources for future years (Common due to bond indenture requirements)

5. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 5 DEBT SERVICE FUNDS OPTIONAL USE Use is optional if not required DSF preferred in order to –Service all debt in a single fund –Improve control and accountability General or Special Revenue Fund may directly pay debt service –For example, capital leases

6. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 6 TYPES OF DEBT SERVICED General obligation bonds –“Full faith and credit” of government pledged for repayment Revenue bonds –Repaid from specific revenue sources such as gas or sales taxes, special assessments Other –Capital lease obligations –Notes and warrants payable

7. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 7 DEBT NOT SERVICED BY DSF Liabilities of specific governmental funds –Short-term debt –Capital leases Enterprise funds –Water, sewer, electric, airport Internal service funds Trust funds

8. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 8 TYPES OF DEBT SERVICED Bonds (most common) –A promise to pay principal and interest at a specific future date –Common features $1,000 and $5,000 denominations 15 to 25 year maturities Interest paid annually or semi-annually –Term bonds Principal payable in a single maturity –Serial bonds (most widely used) Periodic (usually annual) maturities May not be equal maturities

9. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 9 TYPES OF DEBT SERVICED Notes payable –Less formal documents with obligation to repay borrowing at specified interest rate –Single maturity most common –Term of the note typically ranges from 30 – 90 days 3 – 5 years

10. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 10 TYPES OF DEBT SERVICED Capital lease obligations –Capital leases –Lease-purchase agreements –Installment purchase contracts –Certificates of participation (COPs) –A “carving up” of a lease into shares Shares sold to individual investors –If transaction is a purchase, it is accounted for like long-term debt; recorded as General capital assets General Long-Term Liabilities

11. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 11 TYPES OF DEBT SERVICED Deep discount / zero coupon bonds –Low or zero stated interest –Issued at significant discount from par –No interest payments during bond term –One-time payment of P&I at maturity Accrued during bond term (effective rate) Common to require –Annual deposits with trustee or –Annual transfers to DSF

12. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 12 TYPES OF INTEREST RATES Fixed rate –Set on bond issue date –Initial rate remains constant during term –Benefit - simpler to plan and budget –Negative - higher rate Variable rate –Initial rate fluctuates every 6 to 12 months –Benefit - lower rate –Negative - harder to budget changing rate

13. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 13 PLAYERS IN BOND ISSUES Financial advisor / feasibility consultant –Assist in bond structuring and issuance Bond counsel –Prepare legal documents / provide legal opinion Bond underwriters –Purchase bonds and sell to investors Bond rating agencies (S&P, Moody’s, Fitch) –Rate bonds regarding repayment Insurance firms (MBIA, FGIC, AMBAC) –Insure principal and interest payment Registration / fiscal agents –Register bonds - collect / disburse debt service

14. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 14 REQUIRED DSF RESERVES Many bond agreements require funded reserves to provide added assurance Common provisions: –Net assets equal to highest debt service –May be funded over several (2-5) years When expended for debt service –In case of difficulty during term of bond –Final payment Held by trustee or the government

15. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 15 DEBT FINANCING SOURCES Common sources to provide debt service –General obligation bonds Property taxes Result from voter approval in bond election –Revenue bonds (specific revenue streams) Sales taxes Gas taxes Hotel taxes

16. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 16 DEBT FINANCING SOURCES Fund recording receipt from the source –General Fund - General levy (1st call on $) –Special Revenue Fund - Multi restriction Recorded initially in SRF Transferred to DSF for debt service –Debt Service Fund - Specific tax levy

17. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 17 DSF INVESTMENTS From accumulation of resources prior to payment of debt service –Debt service reserve funds –Periodic transfers from other funds –Invested until required

18. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 18 DSF INVESTMENTS Bond indenture / state law requirements control type of permitted investments Compliance with requirements and auditing for compliance Arbitrage considerations may influence –Excess earnings rebated to U.S. Treasury –State & Local U.S. Governments (SLUGS) Accounting in compliance with GASB No. 31

19. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 19 DEBT SERVICE EXPENDITURE RECOGNITION Three types of debt-related payments 1.Interest on outstanding long-term debt 2.Principal as it matures 3.Other debt-related fees

20. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 20 DEBT SERVICE EXPENDITURE RECOGNITION Debt service on GLTL usually not accrued at year end, but optional Recognize when due (most common) –Report principal and interest as expenditures when they mature or legally payable (even if not paid) –Do not accrue unmatured principal or interest

21. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 21 DEBT SERVICE EXPENDITURE RECOGNITION Four (4) reasons for “when due” recognition 1.Budget vs. GAAP consistency as many appropriate only when due 2.Interest (main accrual) commonly not budgeted separate from principal 3.Transfer to DSF made only when due and accrual would cause artificial deficit in DSF 4.Without transfer, no financial resources available in DSF, therefore no current liability exists in DSF

22. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 22 DEBT SERVICE EXPENDITURE RECOGNITION Accrual option available as some governments appropriate for debt service due early next year Accrual of total debt service expenditure (both principal and interest) allowed in DSF, if: –Resources provided in DSF by year end and –Payment due early (first month) next year –Debt principal removed from GLTL accounts

23. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 23 SERIAL BOND ISSUE CASE STUDY $1,000,000 5% serial bonds Issued January 1, 20X1 $100,000 annual principal retirement plus interest Debt service financed by property tax levy $150,000 required debt service reserve –Accumulate in two installment payments –$80,000 in 20X1 & $70,000 in 20X2 $80,000 GF transfer authorized to fund first debt service reserve installment

24. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 24 SERIAL BOND ISSUE CASE STUDY Record annual budget (Entry 1) –Estimated revenues $162,000 property taxes $6,000 investment income –Appropriations $100,000 bond principal retirement $50,000 annual bond interest $10,000 fiscal agent fees

25. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 25 SERIAL BOND ISSUE CASE STUDY Record transfer and investment (Entries 2 & 3) –Transfer $80,000 transfer from General Fund Also, requires entry in GF –Investment of transferred funds $80,000 investments purchased $80,000 debt service reserve established

26. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 26 SERIAL BOND ISSUE CASE STUDY Record property taxes (Entries 4 & 5) –Taxes levied $165,000 total taxes receivable - current $3,000 allowance for uncollectible current taxes –Taxes collected $158,000 taxes receivable - current

27. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 27 SERIAL BOND ISSUE CASE STUDY Record investment income (Entries 6 & 10) –Receipt of interest $4,000 cash received –Year end adjustments $2,700 interest accrued $300 change in fair value of investments

28. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 28 SERIAL BOND ISSUE CASE STUDY Record bonds first maturity (Entries 7 & 8) –Fund liability for bonds when due $100,000 principal payable (Also removed as General Long-Term Liability) $50,000 interest payable $10,000 fiscal agent fees payable –Payment of liabilities $160,000 cash payment Entries frequently combined if paid to fiscal agent prior to bond maturity

29. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 29 SERIAL BOND ISSUE CASE STUDY Record year end property taxes (Entry 9) –Reclassify delinquent taxes $7,000 taxes receivable current to delinquent $3,000 allowance from current to delinquent –Defer taxes not collected within 60 days of next fiscal year (considered not available) $2,000

30. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 30 DEBT SERVICE FUNDS FINANCIAL STATEMENTS Balance Sheet (Figure 8-1) Statement of Revenues, Expenditures, and Changes in Fund Balance (Figure 8-2) –GAAP basis operating statement Statement of Revenues, Expenditures, and Changes in Fund Balance –Budget comparison operating statement –Internal use; not required by GAAP

31. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 31 SPECIAL ASSESSMENT DEBT SERVICE FUNDS What are special assessments? –Special tax levies imposed on certain properties To repay the financing of the “special assessment” projects of defined property owners Total assessment made when project is completed However, commonly payable over 5 - 10 years The financing proceeds (bonds or “pay go”) are accounted for in Capital Projects Funds

32. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 32 SPECIAL ASSESSMENT DEBT SERVICE FUNDS DSF used to account for servicing GLTD (principal and interest) when: –Debt was issued to finance special assessment capital improvement projects –Government is obligated to repay debt –Underlying financing source is the special assessments

33. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 33 SPECIAL ASSESSMENT DEBT SERVICE FUNDS Debt financing role of the government: –Form special assessment (taxing) district –Issue its own bonds or –Issue special assessment bonds –Guarantee repayment of bonds –Levy assessments to repay bonds & interest –Bill and collect assessments –Service the debt

34. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 34 SPECIAL ASSESSMENT DEBT SERVICE FUNDS Uniqueness is that most of the assessment (tax) is not currently due Differences from property taxes 1.Assessments payable over several years 2.Levied only against benefited properties

35. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 35 SPECIAL ASSESSMENT DEBT SERVICE FUNDS Revenue accounting for debt-related special assessments –Follows same principles as property taxes –Receivable recorded in fund servicing debt –Revenue recognized (1) when measurable and (2) only when available –Long-term special assessments Special assessments receivable – deferred Offset by deferred revenues

36. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 36 SPECIAL ASSESSMENT DEBT SERVICE IN OTHER FUNDS Enterprise funds –Examples – Water and sewer lines –Used if the government chooses –Usually chosen when the Enterprise Fund resources will repay the debt Agency funds –When government is not obligated in any manner on the special assessment revenue debt

37. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 37 SPECIAL ASSESSMENT DEBT SERVICE IN OTHER FUNDS Agency Funds – no obligation debt –Not debt of the government –Therefore, DSF is not used to record debt service –Debt not reported in financial statements –Agency Fund used to account for fiduciary responsibility

38. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 38 SPECIAL ASSESSMENT DEBT SERVICE IN OTHER FUNDS Agency Funds – no obligation debt The government is not obligated if - –It is prohibited from assuming debt in case of default –It is not legally liable for assuming debt –It makes no statement or indication that it will honor any defaulted debt

39. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 39 SPECIAL ASSESSMENT DEBT SERVICE IN OTHER FUNDS Agency Funds – no obligation debt –Construction costs (not the capital asset itself) reported in CPF –Difference in reporting the “other financing sources” in the CPF Called “Contributions from property owners” Not “General long-term debt proceeds”

40. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 40 SPECIAL ASSESSMENT DEBT SERVICE FUNDS Illustrative entries assumptions –5-year, special assessment $1 million, 6% bonds backed by full faith and credit of government –Government will contribute $260,000 –$1 million costs accounted for in CPF –Capital asset capitalized in GCA accounts –Bonds payable in GLTL accounts Illustrative entries for DSF follow

41. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 41 SPECIAL ASSESSMENT DEBT SERVICE FUNDS Illustrative entries for DSF 1.$800,000 4-year levy (deferred) 2.$200,000 current assessment recognized 3.$260,000 transfer from General Fund 4.$260,000 payment of debt service 5.$240,000 assessments & interest collected 6.$ 20,000 delinquent assessments & interest

42. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 42 SPECIAL ASSESSMENT DEBT SERVICE FUNDS Financial statements –Balance sheet (Figure 8-3) noting the following: Deferred receivables Offsetting deferred revenues –Operating statement (Figure 8-4) Assessment revenues (meeting recognition criteria) and interest Debt service expenditures General Fund transfer

43. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 43 DEBT SERVICE FUNDS OTHER MATTERS Nonaccrual of interest payable Combining financial statements Number of debt service funds

44. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 44 DEBT SERVICE FUNDS OTHER MATTERS Nonaccrual of interest payable –Not permitted on long-term debt unless 1.Resources received in DSF by year end and 2.Debt service payment is due within the first month of the next year

45. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 45 DEBT SERVICE FUNDS OTHER MATTERS Combining financial statements –Prepared when there are two or more DSFs –Balance Sheet (Figure 8-5) Example combines Figure 8-1 and 8-3 –Operating Statement (Figure 8-6) Example combines Figure 8-2 and 8-4

46. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 46 DEBT SERVICE FUNDS OTHER MATTERS Number of debt service funds –Guiding principle is to hold to a minimum Single DSF for multiple bond issues Common if secured similarly –Bond agreement or local law may require a separate fund for each bond issue

47. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 47 DEBT SERVICE FUNDS TERM BOND ISSUE Difference from serial bonds –Serial bonds: Interest and principal paid annually –Term bonds: 1.Interest paid annually (same in both) 2.Principal paid in full at end of term

48. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 48 DEBT SERVICE FUNDS TERM BOND SINKING FUNDS Bond indentures (agreements) require –Establishing debt service fund for –Ensuring timely principal payment –Requiring - Accumulation of required funded reserves Payment of annual interest Accumulation of a sinking fund sufficient to retire bond principal at end of term

49. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 49 DEBT SERVICE FUNDS TERM BOND SINKING FUNDS Requirements illustrated for $1 million term bond for 20 years (Figure 8-7) –Computed at origin of the bond issue –Required annual additions to sinking fund invested over term life of the bonds $17,460 annual addition plus annual interest Sufficient to retire bonds at end of term –Activity and balances recorded in DSF

50. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 50 DEBT SERVICE FUNDS DEEP DISCOUNT BONDS Issue price (proceeds) discounted from par (fraction of the face value) at issuance date –Provides for Very low or 0% stated interest No payment of principal or interest prior to maturity Principal paid at “par” upon maturity along with accumulated interest

51. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 51 DEBT SERVICE FUNDS DEEP DISCOUNT BONDS No GASB guidance results in debt service accounting problems 1.Fund liabilities not incurred for principal of the debt until maturity 2.Fund liabilities incurred for interest not a reasonable measure of the interest cost Many governments recognize debt service expenditures “when due” upon maturity

52. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 52 REFUNDINGS OF DEBT Governments may issue new debt to pay (or service) old debt prior to maturity –Termed “advance refundings” –Accounted for as substitutions vs. payments Reasons for a refunding 1.Lower effective interest rates 2.Extend maturity dates 3.Revise payment schedules 4.Remove or modify restrictions

53. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 53 BOND REFUNDINGS Refunding definition (Illustrated in Figure 8-8) –Issuance of new debt to finance payment of existing debt interest and principal –Current refunding - use refunding proceeds to retire debt immediately –Advance refunding - place proceeds in escrow and use to pay future interest and principal 1.Proceeds placed in an irrevocable trust 2.Invested in allowable securities 3.Maturing securities plus interest pay P&I on old debt

54. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 54 DEFEASANCE OF DEBT Defeased debt means “terminated” debt –Defeased debt removed from accounts –Not reported in the balance sheet Current refundings actually retires debt –Old debt paid off at scheduled maturity Advance refundings of old debt –Payoff may not be possible or advantageous –However, old debt considered terminated, if Legally defeased or In-substance defeased

55. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 55 DEFEASANCE OF DEBT Legal defeasance –Compliance with original debt agreement by placing sufficient proceeds in an irrevocable trust for benefit of the bondholders to pay off old debt –Debt is legally satisfied even though not paid In substance defeasance –Without defeasance provisions in bond agreements –GASB standards treat as defeased if sufficient sum is placed in an irrevocable trust for benefit of the bondholders to pay off the old debt

56. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 56 NONDEFEASANCE OF DEBT When old debt is not defeased either legally or in-substance 1.Both the old and the new debt must be –Recorded in GLTL accounts and –Reported in the balance sheet 2.The amounts deposited in escrow must be –Recorded as investments in the DSF –Reported in the balance sheet

57. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 57 DEBT SERVICE FUNDS FOR REFUNDINGS Refundings generally involve two entries 1.Receipt of refunding bond proceeds –Reported in DSF as “Other Financing Sources - Proceeds of Refunding Bonds" 2.Payment of proceeds to escrow trustee –Reported in DSF as “Other Financing Uses – Payments to Refunding Escrow Agent” –Payment differs from regular debt retirement Reported in DSF as “Expenditures – Bond Principal Retirement”

58. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 58 DEBT SERVICE FUNDS FOR REFUNDINGS Source(s) of financial resources to retire or defease debt determines –Reporting of the payment (Figure 8-9) –Recording of transactions illustrated Current refunding – retirement of old debt Advance refunding – defeasance of old debt Use of both existing resources and new debt proceeds in refundings

59. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 59 REPORTING REFUNDINGS AND DEFEASANCES If solely from refunding proceeds, report as: –“Other financing uses - payment to refunded bond escrow agent” (for in-substance defeasance in advance refunding) –“Other financing uses - bond retirement” (for actual retirement in current refunding)

60. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 60 DEBT SERVICE FUNDS REFUNDING TRANSACTIONS Current refunding – retirement of old debt 1.Proceeds from issuance of refunding bonds –Recorded as “Other Financing Source” –Old debt removed from GLTL accounts –New refunding debt recorded in GLTL accounts 2.Payment to retire old bonds –Recorded as “Other Financing Use” –Note the absence of recording revenue, expenditure or gain / loss for the refunding –Consistent with “flow of current financial resources”

61. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 61 DEBT SERVICE FUNDS REFUNDING TRANSACTIONS Advance refunding – defeasance of old debt 1.Proceeds from issuance of refunding bonds (same) –Recorded as “Other Financing Source” –Old debt removed from GLTL accounts –New refunding debt recorded in GLTL accounts 2.Payment to escrow agent to defease old bonds –Recorded as “Other Financing Use” –Again, note the absence of recording revenue, expenditure or gain / loss for the refunding –Consistent with “flow of current financial resources”

62. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 62 REPORTING REFUNDINGS AND DEFEASANCES If partly from refunding proceeds and partly from existing government resources, report as: –Other financing uses for portion paid from refunding proceeds (i.e., from borrowed resources) –Expenditures to extent payment is from existing resources, (i.e., other than from refunding (or borrowed) proceeds

63. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 63 DEBT SERVICE FUNDS REFUNDING TRANSACTIONS Advance refunding – defeasance of old debt, but refunded with multiple resources 1.Cash transfer and refunding bond proceeds –Both recorded as “Other Financing Source” as follows Transfer from General Fund Refunding bond proceeds –The non-borrowed resources 2.Payment to escrow agent to defease old bonds –Recorded as “Expenditures”– the non-borrowed resources –Recorded as “Other Financing Use”- bond proceeds

64. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 64 DSF FINANCIAL STATEMENT PRESENTATION OF REFUNDINGS Reflected in operating statements Figures 8-10 (Phoenix) and 8-11 (Garden Grove) –Proceeds shown in “Other Financing Sources” –Escrow payments in “Other Financing Uses” –Note equal $ in Phoenix Streets & Highways Any escrow payments from existing resources would be reported in expenditures (not illustrated)

65. © 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 8 - 65 ADVANCE REFUNDING REQUIRED DISCLOSURES In year of advance refunding –Description of bonds refunded –How financed (e.g., refunding bonds or existing financial resources) –Legal or in-substance defeasance –Name of escrow agent –Difference in old and new debt service As long as in-substance defeased debt is outstanding –Amount outstanding at year end –No requirement to disclose retired or legally defeased debt