Accounting for Capital Projects and Debt Service
Questions for Review and Discussion
Budgets, and hence budget comparisons, are not as essential for capital projects and
debt service funds because they are often on a project, rather than an annual, basis
and spending is typically authorized on that basis.
When bonds are issued for more than their par value, the premium can be
interpreted as an adjustment of the interest rate and transferred to the debt service
fund — the fund in which resources for the payment of debt will be accumulated.
Although the same interpretation can be placed upon bond discounts, there may be
no funds available in the debt service fund (or any other fund) for transfer to the
capital projects fund. Therefore, the project must be scaled back or additional means
of financing secured.
Interest (on investments) is generally recognized as revenue is earned, i.e., on a full
accrual basis. Interest expenditure, by contrast, should not be accrued; it should be
reported as an expenditure only as due. The rationale for recognizing the
expenditure only as the interest is due is that most jurisdictions will not appropriate
the resources to pay the interest, or transfer them to the debt service fund, until then.
“To accrue the debt service fund expenditure and liability in one period but record
the transfer of financial resources for debt service purposes in a later period would
be confusing and would result in overstatement of debt service fund expenditures
and liabilities and understatement of the fund balance,” according to GASB
standards. However, if the resources have been transferred in to the debt service
fund, then interest may
(it does not have to) be accrued.
Today, governments account for special assessments the same as they do other
projects. Thus, the resources earmarked for construction are accounted for in a
capital projects fund; those dedicated for the repayment of debt are accounted for in
a debt service fund. The long-term debt and the construction in process are not
given fund balance sheet recognition. They are reported only in government-wide
statements and in schedules of long-term debt and capital assets. Assessments
receivable are reported in the debt service fund.
Even though the government may not, in economic substance (and sometimes even
in legal form), be responsible for special assessment debt, it is generally linked to
the debt in some manner (e.g., it will probably not allow the issue to default).
Therefore, per current standards, it should report the debt as its own unless:
(by constitution, charter, contract, or statute) from assuming the
debt in the event of property owner default, or