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Liabilities represent financial obligations of an entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. Although governments are required to record liabilities in the period in which they are incurred, it is necessary to distinguish between obligations that represent fund liabilities, which are amounts that are due and payable, from unmatured long-term indebtedness, which represents a general long-term liability. GASB Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements, provides that governmental fund liabilities include those that are due and payable in full when incurred. Additionally, the matured portion of long-term indebtedness to the extent that it is expected to be liquidated with expendable available financial resources should also be recorded as a fund liability. This applies to the matured portions of formal debt issues as well as to other forms of general long-term indebtedness, such as compensated absences, capital leases, and claims and judgments. The unmatured portion of the long-term indebtedness represents a general long-term liability. Interpretation No. 6 clarifies financial reporting guidance relative to governmental funds. Because proprietary funds use an accrual basis of accounting for liability recognition, all obligations of the fund should be reflected as fund liabilities. The following sub-section identifies the primary obligations typical of most governments. Accounts Payable Salaries and Related Benefits Payable Due to/From Other Funds Compensated Absences Paragraphs 31 and 119 of Statement 34 provide guidance for the accounting and financial reporting of compensated absences on both a short-term and a long-term basis. Compensated absences include future vacations, sick leave, sabbatical leave, and other leave benefits.
Deferred Compensation and Pension Plans A deferred compensation plan allows employees to defer the receipt of a portion of their salary and, therefore, the associated tax liability on that salary. Authorization for deferred compensation plans is established by the Internal Revenue Service (IRS) and is listed in Internal Revenue Code Chapter 457. Employees of many school districts participate in statewide retirement systems. However, districts may establish deferred compensation plans and other pension plans at their discretion, some of which are locally funded. School districts may also provide pension benefits to employees through locally funded pension plans. Locally funded pension plans should be accounted for in a Pension and Other Employee Benefits Trust Fund. If the school district has significant administrative or fiduciary responsibility for a deferred compensation plan, such as managing the plan's investments, a pension and other employee benefits trust fund should be used. This is not the case for most school districts. If a governmental entity does not have significant administrative or fiduciary responsibility, the plan should not be reported in the entity's funds. Debt Governmental entities borrow money on a short-term basis either to meet operating cash needs or in anticipation of long-term borrowing at later dates. School districts usually borrow money on a long-term basis to finance capital acquisitions or construction or infrastructure improvements. Borrowings may also occur for the initial funding of a risk-retention program, the payment of a claim or judgment, or the financing of an accumulated operating deficit. Short-term debt obligations and long-term debt obligations are defined (based on the initial maturity of the obligation) as follows:
Recording of Long-Term Debt in Different Types of Funds The accounting for debt-related transactions differs depending on whether the debt is related to proprietary and fiduciary funds or a governmental fund. Long-Term Liabilities in Proprietary and Fiduciary Funds.GASB Codification Section 1500.102 states: Bonds, notes and other long-term liabilities directly related to and expected to be repaid from proprietary funds and fiduciary funds should be included in the accounts of such funds. These are specific fund liabilities, even though the full faith and credit of the governmental unit may be pledged as further assurance that the liabilities will be paid. Too, such liabilities may constitute a mortgage or lien on specific fund properties or receivables. The proceeds of the debt will thus be recorded as an increase in cash and long-term debt accounts; there will be no effect on operations. If the debt was issued at a discount, the discount should be recorded as a reduction from the face value of the debt and amortized over the term of the debt. All debt issue costs should also be recorded as a deferred charge and amortized over the term of the debt. Currently, the only specific accounting guidance on debt transactions in proprietary funds is Statement 23, Accounting and Reporting for Refundings of Debt Reported by Proprietary Activities, discussed later in this chapter. Therefore, generally accepted accounting principles for commercial enterprises should be followed for debt transactions in proprietary and fiduciary funds. Long-Term Liabilities in Governmental Funds.A clear distinction should be made between long-term fund liabilities and general long-term liabilities. Long-term liabilities of proprietary funds and fiduciary funds should be accounted for in those funds and presented in the fund financial statements. Long-term liabilities for the proprietary funds, but not the fiduciary funds, should also be reported in the governmentwide statements. However, general long-term liabilities of the entity should be accounted for and reported only in the governmentwide statement of net assets. Types of Debt Instruments Debt instruments have different characteristics, terms, legal authority, and so forth. A summary description of the types of debt follows. [back to top] Bonds
Generally accepted accounting principles require governmental entities to disclose a range of information related to both capital and operating leases in the annual financial statements. The GASB Codification should be consulted for detailed disclosure requirements. Extinguishment of Debt GASB has established a range of accounting and reporting requirements for debt refundings. These requirements are presented primarily in GASB Codification Section D20 and GASB Statement 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities. The extinguishment of debt is the reacquisition or calling of the debt or the removal of the debt prior to or at the maturity of the debt. When debt is extinguished, the entity either has no further legal responsibilities under the original debt agreement or continues to be legally responsible for the debt but the extinguishment is considered an in-substance defeasance (retirement). GASB Statement 23 concludes that debt is considered to be extinguished when one of the following criteria is met:
Advance Refunding.In an advance refunding transaction, new debt is issued to provide funds to pay principal and interest on old, outstanding debt as it becomes due, or at an earlier call date. An advance refunding occurs before the maturity or call date of the old debt, and the proceeds of the new debt are invested until the maturity or call date. Debt may be advance refunded for a variety of reasons, including to
Debt Defeasance. Defeasance of debt can be either legal or in-substance. A legal defeasance occurs when debt is legally satisfied on the basis of certain provisions in the debt instrument even though the debt is not actually paid. An in-substance defeasance occurs when debt is considered defeased for accounting and financial reporting purposes, as discussed below, even though a legal defeasance has not occurred. When debt is defeased, it is no longer reported as a liability on the face of the balance sheet; only the new debt, if any, is presented in the financial statements. Debt is considered defeased in-substance for accounting and financial reporting purposes if the school district irrevocably places cash or other assets with an escrow agent in a trust to be used solely for satisfying scheduled payments of both interest and principal of the defeased debt and when the possibility that the debtor will be required to make future payments on that debt is considered remote. The trust that is created should be restricted to monetary assets that are essentially risk-free as to the amount, timing, and collection of interest and principal. Certain disclosures are required on defeasance of debt. GASB Codification Section D20.111 requires that a general description of the transaction should be provided in the notes to the financial statements in the year of refunding and that the disclosure should include at a minimum the following:
[back to top] CONTINUED<< BACK 1 2 3 4 5 >> NEXT Are capital assets recorded in proprietary fund accounting?Capital assets do appear in proprietary fund financial statements because they are presented using the economic resources measurement focus and the accrual basis of accounting.
What is accounting for proprietary funds?Accounting for proprietary funds is similar to that of investor-owned businesses. Proprietary funds focus on the flow of economic resources recognized on the accrual basis of accounting. These funds account for all assets and liabilities related to their operations, both short-term and long-term.
What is included in proprietary fund?Proprietary funds ÷ Total assets. Or. Net worth ÷ Total assets Or Proprietary funds ÷ Total funds A proprietary fund means equity (i.e., share capital, free reserves of the firm, net of losses, and fictitious assets like preliminary expenses).
Which of the following is correct with respect to proprietary funds?Which of the following is correct with respect to proprietary funds? -Proprietary funds must be adjusted when preparing the government-wide statements.
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