SU 7: Debt Service Funds Flashcards
Debt service funds
Account for financial resources restricted, committed, or assigned for expenditures on long-term debt (principle and interest).
NOT used for debt for/serviced by proprietary funds and some trust funds
Types of debt repaid by debt service funds
Tax supported bonds
other financing (special assessments)
When does GASB require debt service funds
1) when legally required
2) when financial resources are being accumulated for principal and interest payments maturing in futures
number of DSFs
GASB reccomends both a single, separate DSF for all debt served by property taxes
AND
to try to keep number of DSFs to a minimum
Controlled by: culture of agency and the law
Are budgets used in DSFs
not typically
- contract for debt dictates spending
- money received from other funds (general, special revenue) already has a budget attached
Sources of funding for debt service funds
- Transfers from a general fund or CPF
- investment revenue
- tax revenue
- special assessments (imposed non-exchange transactions)
Serial bonds
- principal matures in annual installments
- budgeted revenues or transfers in are the amounts needed to cover principal and interest for the current year
Term bonds
Principal matures in one amount at the end of the bond term
some disadvantages:
- requires sinking fund & investment management
- sinking fund investments reported at FMV
- makes changes in FMV a component of investment earnings
- creates more complex bookkeeping
Bond Journal entries
Discount and premium amortization happen ONLY in the government-wide entries. fund entries just show interest and principal expenditure
What fund holds special assessment debt
most often a CPF + DSF
but also could be: general fund, special revenue fund, enterprise fund
When government is obligated to account for special assessment debt
- GOV is responsible if property owner defaults
- GOV legally liable for assuming the debt
- GOV gives indication it may honor the debt in default
- DEFAULT: Obligated, unless prohibited or clear lack of liability
accounting if government is not obligated to account for special assessment debt
Use an agency fund + disclose amount holding in notes
way for governments to refinance debt
1) bond refunding
2) in-substance defeasance
In- substance defeasance
A provision in a loan removing it from a balance sheet if cash or a portfolio is set aside for debt service. Usually, defeasance occurs when a borrower owns a portfolio of Treasury securities whose coupons are used to service a debt. When the borrower has set aside sufficient assets to cover the debt, the debt does not need to be recorded on a balance sheet.1
Continues for in-substance defeasance
1) must place cash/assets with escrow agent to require old debt
2) secure arrangement that makes need for future payments small
3) assets in escrow must be “risk-free” (treasury bonds)
bond refunding
early retirement of bonds and replacement with lower-interest debt
may be facilitated by callable bonds
sometimes it’s st imply not affordable to buy back old bonds
Process of in-substance defeasance
If conditions are met
1) gov locks in savings from a decline in interest rates
2) original bonds put in trust for guaranteed repayment
3) new bonds issued to fund old bonds placed in trust
4) advance refunding satisfies obligations
4) government can eliminate old bonds from schedule of LT obligations and add new bonds
5) gain or loss calculated by cash to redeem old debt - book value of old debt
6) gain or loss amortized in government-wide or proprietary fund using the shorter of original term or term of new debt
Amortization period for in substance defeasance gain or loss
shorter of
- original term
or
- term of new debt
Gain or loss on in-substance defeasance
= cash to redeem old debt - Book value of old debt
Bond defeasance DSF JE
DR Cash
CR other financing source - new bond proceeds
DR Other financing use - payment to trustee
CR cash
(issuing new bonds and transferring payment of old bonds to trustee)
Bond defeasance government-wide JE
DR Cash
DR Bond Discount or CR Bond Premium
CR Bond Payable
(issuing new bonds)
DR Bonds payable
Dr interest expense
DR deferred loss on defeseance or CR deferred gain
DR bond premium amoritzation
CR cash
(paying off old bonds)
JE for amortization of loss or gain on bond defeasance
No entry in DSF
Government wide
Dr Loss on Defeasance
Cr Deferred Loss on Defesance
(loss)
Dr Deferred Gain on Defeasance
CR Gain on defeasance
(gain )
