Accounting for General Long-Term Liabilities and Debt Service

Introduction

The use of these debts is part of the fiscal policy of state, specifically for financing the acquisition of general capital assets. The operating statement of the capital projects fund reports increases and decreases in spendable resources (Ruppel, 2015). In general terms, long-term liabilities are financial obligations that become due over one year. Once a government determines to establish capital projects funds, then it decides how many capital projects fund needs.

As a governmental fund type, capital projects funds use the modified accrual basis of accounting. The acquisitions of general capital assets cannot be financed from general funds when there is considerable amount of money. Years ago governmental issues of long-term debt used to mature in total on a given date which resulted in a large “balloon” payment. Most cases, governments are permitted, but not required, to establish capital projects funds to be used for major acquisition and construction of assets.

Long-term debt and other obligations are normally not reported in the governmental funds. In other words, capital assets accounted for in the proprietary funds (trust funds) are considered capital assets used in governmental activities. Long-lived assets used by activities financed by the general fund or other governmental funds are called general capital assets (Reck, 2016). There is a distinction between general capital assets and capital assets and that is they are associated with activities financed by fiduciary funds and by proprietary. The extent to which debt may overlap depends on the number of governments represented within an area authorized to incur long-term indebtedness (Reck, 2016).

Accounting for General Capital Assets and Capital Projects

 Long-lived assets used by activities financed by the General Fund or other governmental funds are called general capital assets (Reck, 2016). There is a distinction between general capital assets and capital assets and that is they are associated with activities financed by fiduciary funds and by proprietary. Due to the nature of governmental financial reporting and operations, capital assets are reported in the government-wide statement of net position but are not reported in the fund financial statements. On other words, capital assets accounted for in the proprietary funds (trust funds) are considered capital assets used in governmental activities.

 The acquisitions of general capital assets cannot be financed from general funds when there is a considerable amount of money. Thus, the most common way to finance them is through the issue of long-term debt to be repaid from tax revenues, transfers from other funds, capital leases, grants from other governments, or a combination of several of these sources.

 General capital assets follow the Governmental Accounting Standards Board (GASB) reporting net of accumulated depreciation wide-level, capitalizing activities account at the government wide-level and debiting to expenditures in the appropriate governmental fund.

 The more common classes used to categorized capital assets by governments are: (Ruppel, 2015)

• Land
• Buildings
• Equipment
• Improvements other than buildings
• Construction in progress
• Intangible assets
• Infrastructure assets

Governments often use the capital projects fund type to account for and report major capital acquisition and construction activities (Ruppel, 2015). If money is restricted and received from activities such as gifts from individuals or organizations, capital leases, transfers from other funds, etc, it is recommended the use of capital projects fund because are related to long-term debt and can be recorded in the governmental activities at the government-wide level.

As a governmental fund type, capital projects funds use the modified accrual basis of accounting. Revenues are recorded when they are become measurable and available; expenditures are recorded when the liability is incurred. Although, they are some exceptions to recognize the expenditure such as inventories, claims, prepaid items, etc.  The operating statement of the capital projects fund reports increases and decreases in spendable resources (Ruppel, 2015).

Most cases, governments are permitted, but not required, to establish capital projects funds to be used for major acquisition and construction of assets. It is possible to use one or more capital projects funds for these activities, also are used for special revenues that relate to capital projects and for capital improvements financed by special assessments. Once a government determines to establish capital projects funds, then it decides how many capital projects fund needs.

Neither the capital assets acquired nor any long-term debt incurred is recorded in capital projects funds; they should be recorded in the governmental activities at the government-wide level (Reck, 2016).

Accounting for General Long-Term Liabilities and Debt Service

Long-term debt and other obligations are normally not reported in the governmental funds. They are reported as liabilities on the government-wide statement of net position or as liabilities of proprietary funds (Ruppel, 2015). The use of these debts is part of the fiscal policy of state, specifically for financing the acquisition of general capital assets. In general terms, long-term liabilities are financial obligations that become due over one year.

Examples of long-term liabilities related to operating activities include pensions and other postemployment benefits, obligations related to landfills and pollution remediation, claims and judgments, compensated absences (Reck, 2016).  Reporting liabilities within the government-wide statement of internet position needs new each of the following:

• The amount due in one year (current portion)
• The amount due in more than one year (non-current portion)

It is common for new debt issues to schedule detailing changes through long-term liabilities disclosures. According to the GASB, need to provide detail about the beginning of the period – regardless of whether prior year data are presented on the government-wide financial statements -, additions to and reductions made them, ending liabilities, and the portion of the liabilities payable in one year.

Debt limit, known also as the debt ceiling is a limit that Congress imposes on how much debt the federal government can carry at any given time (Amadeo, 2019). When the ceiling is reached, the U.S. Treasury Department cannot issue any longer Treasury bills, bonds, or notes. It can only pay bills as it receives tax revenues. If the revenue is not enough, the Treasury Secretary should choose from paying federal worker salaries, Social Security benefits, or the interest on the debt. 

Congress imposes the debt on the statutory debt ceiling. That’s the outstanding debt in U.S. Treasury notes after adjustments. The changes embrace unamortized discounts, old debt, and secure debt. There are two types of U.S. debt. The first is what the government owes to itself. Most of that is the Social Security monetary fund and federal worker retirement funds. The debt that is owed to everybody else is the public debt. It’s 70% of the total debt. The importance of raising the debt ceiling happens when the President and Congress cannot agree on fiscal policy to protect property owners from confiscation taxation.

 Also, there is a debt margin or borrowing power, which is the difference between the amount of the debt limit and the net amount of outstanding indebtedness subject to the limitation (Reck, 2016).  All those debts authorized but not issued at the end of the fiscal year should be disclosed under debt margin due to may be sold at any time. Debt information disclosed, in terms of governmental financial statements, is monitored closely.

Each separate governmental entity affected by the laws has debt limitation laws that may not be exceeded. This means the county may incur indebtedness to the legal limit, a township may do the same within that county, and a city also may become do likewise because of debt already owed by a territory in which is located. When this situation happens it is called overlapping debt. In other words, Overlapping debt refers to the financial obligations of one political jurisdiction that also falls partly on a nearby jurisdiction (Chen, 2018). Overlapping debt is very common in most states because they are divided into many jurisdictions for different tax purposes; for instance, the project of construction for a new building or a new public school. Two government bodies may incur in overlapping jurisdictions, like a state and a city or a city and county.

The extent to which debt may overlap depends on the number of governments

represented within an area that are authorized to incur long-term indebtedness (Reck, 2016).

A very common way to raise money to pay for major expenses that will benefit all the residents in a jurisdiction is issuing debt in the form of municipal bonds and notes.

Years ago governmental issues of long-term debt used to mature in total on a given date which resulted in a large “balloon” payment. Nowadays, bond issues are serial bond which the principal matures in installments (Reck, 2016). A serial bond is structured by a portion of the outstanding bond matures gradually at regular periods and they are used to finance projects provide income for bond repayment.

There are four types of serial bond issues: (Reck, 2016)

• Regular serial bond
• Deferred serial bonds
• Annuity serial bonds
• Irregular serial bonds

Conclusion

If money is restricted and received from activities such as gifts from individuals or organizations, capital leases, transfers from other funds, etc, it is recommended the use of capital projects fund because related to long-term debt and can be recorded in the governmental activities at the government-wide level.

The more common classes used to categorize capital assets by governments are: land, buildings, equipment, improvements other than buildings, construction in progress, intangible assets, infrastructure assets (Ruppel, 2015).  Neither the capital assets acquired nor any long-term debt incurred is recorded in capital projects funds, they should be recorded in the governmental activities at the government-wide level (Reck, 2016). It is possible to use one or more capital projects funds for these activities, also are used for special revenues that relate to capital projects and for capital improvements financed by special assessments. Once a government determines to establish capital projects funds, then it decides how many capital projects fund needs.

General capital assets follow the Governmental Accounting Standards Board (GASB) reporting net of accumulated depreciation wide-level, capitalizing activities account at the government wide-level and debiting to expenditures in the appropriate governmental fund.

References

• Amadeo, K. (2019). The Balance. US Debt Ceiling and Its Current Status. Retrieve from https://www.thebalance.com/u-s-debt-ceiling-why-it-matters-past-crises-3305868
• Chen, J. (2018). Investopidea. Overlapping Debt. Retrieve from https://www.investopedia.com/terms/o/overlappingdebt.asp
• Reck, J. and Lowensohn, S. (2016). Accounting for Governmental and Nonprofit Entities. Accounting for General Capital Assets and Capital Projects. Chapter 5. (17^th ed.). New York, NY. USA. McGraw-Hill Education. 167-194.
• Reck, J. and Lowensohn, S. (2016). Accounting for Governmental and Nonprofit Entities. Accounting for General Long-Term Liabilities and Debt Service. Chapter 6. (17^th ed.). New York, NY. USA. McGraw-Hill Education. 205-240.
• Ruppel, W. (2015). GAAP for Government 2015. Capital Project Funds; Capital Assets. United Kingdom. Wiley and Sons. 77-81, 321-344.
• Ruppel, W. (2015). GAAP for Government 2015. Debt and Other Obligations. United Kingdom. Wiley and Sons. 352-385.