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 are those liabilities incurred in the normal course
of business for which goods or services have been received but payment
has not been made as of the end of the fiscal year.
Salaries and Related Benefits Payable
Expenditures should be recorded and reported in the period in which
the liability has been incurred. Therefore, unpaid salaries and
related benefits that have not yet been paid at the close of the
accounting period should be accrued.
Due to/From Other Funds
Each fund is a separate self-balancing set of accounts. Therefore,
amounts due to/from other funds generally arise from interfund loans
or interfund services used/interfund services provided between funds.
For instance, one fund may make an advance to another fund, or one
fund may provide services to another without payment at the time
the services are provided. Although interfund receivables and liabilities
may be classified as current or noncurrent depending on the terms
for repayment, all such transactions must be reflected as fund receivables
and liabilities. The advancing fund should reserve fund balance
for the noncurrent portion of amounts due from another fund.
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.
The need for a governmental entity to accrue a liability for vacation
leave or other similar compensated absences is based on the following
Requirements for accruing a liability for
sick leave or similar compensated absences is attributed to services
already rendered and it is probable that payment will be made at termination.
Therefore, sick leave benefits that have been earned but will only
be used as sick leave should not be accrued. Liabilities for compensated
absences should be calculated at the end of each fiscal year and adjusted
(and recorded) to current salary rates, unless payment will be made
at rates other than the current salary rate. This liability also includes
the employer's share of social security and Medicare taxes as well
as others. A fund liability for the governmental funds may be recorded
only when amounts are due and payable. Any liability not due and payable
is recorded as a governmentwide liability. For proprietary funds,
all of the liability is a fund liability.
- The government's obligation relating to employees'
rights to receive compensations for future absences is attributable
to employees' services already rendered.
- It is probable that the entity will compensate
employees for the benefits through paid time off or some other
means (e.g., cash payments at termination or retirement).
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.
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
Short-term debt obligations and long-term debt
obligations are defined (based on the initial maturity of the obligation)
The following sub-section concentrates on
long-term debt presentation in different types of funds and the related
accounting requirements and disclosures. It is organized as follows:
- Short-term obligations are loans, negotiable
notes, time-bearing warrants, or leases with a duration of 12
months or less, regardless of whether they extend beyond the fiscal
year. Using the current financial resources measurement focus,
short-term debt should be reflected in the balance sheet of the
governmental fund that must repay the debt. The presentation of
the liability on the balance sheet of a governmental fund implies
that the debt is current and will require the use of current financial
resources. Bond anticipation notes may be classified as long-term
debt if the criteria of FASB Statement No. 6, Classification
of Short-Term Obligations Expected to be Refinanced, are met.
- Long-term obligations are loans, negotiable
notes, time-bearing warrants, bonds, or leases with a duration
of more than 12 months. Noncurrent obligations that will be repaid
from revenues generated by proprietary funds should be recorded
in the related proprietary fund, whereas noncurrent obligations
to be repaid from governmental funds should be reported only on
the governmentwide statement of net assets.
- Recording of long-term liabilities in different
types of funds
- Types of debt instruments
- Extinguishment of debt
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
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.
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Other Types of Debt
- General obligation bonds are
issued for the construction or acquisition of major capital assets.
The security pledged for the bonds is the general taxing power
of the government. General obligation bonds are usually either
term bonds, which are due in total on a single date, or serial
bonds, which are repaid in periodic installments over the life
of the issue.
- Revenue bonds are issued to acquire,
purchase, construct, or improve major capital facilities. The
revenue generated by the facility or the activity supporting the
facility is pledged as security for the repayment of the debt.
When a lease satisfies one of the criteria
above, an asset and a liability should be recorded. If the lease obligation
is incurred by a governmental fund, the asset and the liability will
be reported in the governmentwide statement of net assets. The initial
value of the asset should be recorded as the lesser of the fair value
of the leased property or the present value of the net minimum lease
- Tax anticipation notes and other revenue
anticipation notes are often issued to pay current operating
expenditures prior to the receipt of the revenues. The proceeds
from the revenue sources are pledged as security for the notes.
- Installment financing may be
used for either constructing or acquiring property. The security
for the financing is the property being acquired or constructed.
- Leases are agreements between
two parties that convey the use of property for a specified period
of time. A lease must be classified as capital if it meets the
criteria of FASB Statement 13, Accounting for Leases, or
as operating if it does not qualify as a capital lease. Capital
leases are considered to be debt financing; operating leases are
not. Capital leases are in substance an acquisition of an asset.
This determination is made using the following criteria:
- The ownership of the property transfers to the lessee at
the end of the lease term, or
- The lease contains a bargain purchase option, or
- The lease term is equal to 75 percent or more of the estimated
useful life of the leased property, or
- At the inception of the lease, the present value of the
minimum lease payments is equal to 90 percent or more of the
fair value of the leased property.
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:
The most common method of debt extinguishment
is an advance refunding.
- The debtor pays the creditor and is relieved
of all its obligations with respect to the debt, or
- The debtor is legally released as the primary
obligor under the debt either judicially or by the creditor, and
it is probable that the debtor will not be required to make future
payments with respect to the debt under the guarantees, or
- The debtor 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 the possibility that the debtor will be required to
make future payments on that debt is remote. In this circumstance,
usually referred to as "in-substance defeasance," debt is extinguished
even though the debtor is not legally released as the primary
obligor under the debt obligation.
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
Some advance refundings are intended to achieve
short-term budgetary savings by extending debt service requirements
further into the future. In these cases, total debt service requirements
over the life of the new debt may be more or less than total service
requirements over the life of the existing debt. Advance refundings
undertaken for other reasons, such as to remove undesirable covenants
of the old debt, may also result in higher or lower total debt service
requirements. It may be necessary in an advance refunding to issue
new debt in an amount greater than the old debt. In these cases, savings
may still result if the total new debt service requirements (interest
and principal payment) are less than the old debt service requirements.
Most advance refundings result in defeasance of debt.
- take advantage of lower interest rates,
- extend maturity dates,
- revise payment schedules, or
- remove or modify restrictions contained in
the old debt agreements.
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:
- The difference between the cash flows required
to service the old debt and the cash flows required to service
the new debt and complete the refunding.
- The economic gain or loss resulting from the
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