The system closes the change in fund balances/net assets to different accounts depending on the fund and the trial balance or worksheet. We need to understand the system’s process including data flow and automatic closing accounts to be able to properly code the journal entries that are needed to arrive at the proper amounts in the proper net assets (fund balance) classifications for the various financial statements. By understanding the system defaults, we know when we either need to override the default or enter a reclassification entry as appropriate for the given circumstances.
System Defaults
The Modified Accrual Trial Balance is used to prepare the fund financial statements for the governmental funds using the modified accrual basis of accounting and the current financial resources measurement focus. The system will close the net change in fund balance to unreserved, undesignated fund balance reported in general fund, special revenue funds, debt service funds, capital projects funds, or permanent funds, as appropriate. The system will select the appropriate account by fund based on the fund type selected in the fund setup screen.
The Governmental Restricted Net Assets Trial Balance is used to convert the governmental funds to prepare the governmental activities portion of the entity-wide financial statements using the accrual basis of accounting and the economic resources measurement focus. Based on the fund type selected in the fund setup screen, the system will close the change in net assets and all fund balances accounts (unreserved, reserved for encumbrances, etc.) to unrestricted net assets (general fund), net assets restricted for other purposes (special revenue funds), net assets restricted for debt service (debt service funds), net assets restricted for capital outlay (capital projects funds), or net assets restricted – nonexpendable (permanent funds).
The Full Accrual Trial Balance is used to prepare the fund financial statements for the proprietary funds (enterprise funds and internal service funds) and the fiduciary funds. It is also used to prepare the enterprise funds for entity-wide financial reporting (internal service fund allocations, eliminations, and internal balances as well as other interfund eliminations that may be appropriate). The funds using the full accrual trial use the accrual basis of accounting and the economic resources measurement focus. Based on the fund type selected in the fund setup screen, the system will close the change in net assets to unrestricted net assets for the enterprise funds and the internal service funds and the following accounts for the fiduciary funds - net assets held in trust for pension benefits for pension trust funds, net assets held in trust for pool participants for investment trust funds, and net assets held in trust for scholarships for private purpose trust funds. Since agency funds have no net assets, the difference between additions and deductions is closed to undistributed monies (a liability account).
The Governmental Consolidation Trial Balance receives post closing (ending) balances for assets, liabilities and net assets from the governmental restricted net assets trial balances, from the general capital assets worksheet, and from the general debt consolidation worksheet. In addition to the post closing balances, the revenues and expenses roll to this trial to allow the preparation of the statement of activities.
The General Capital Assets Worksheet is used to prepare capital asset data for the governmental consolidation trial balance. This worksheet includes capital asset additions with the expenditure elimination, the deletions with the elimination of any proceeds and the recognition of any gain or loss on disposal, and depreciation expense. Net change in net assets from this worksheet closes to invested in capital assets, net of related debt.
The General Debt Consolidation Worksheet is used to prepare general long term debt data for the governmental consolidation trial balance. This worksheet includes general long term debt additions (debt issued) with the elimination of the proceeds (other financing source) as well as any premiums, discounts, bond issuance costs, or gain or loss on refunding as appropriate for the issues, payments with the elimination of the debt principal expenditures, amortization of premiums or discounts, amortization of deferred charges, amortization of gain or loss on refundings, and the accrual of interest payable. Net change in net assets from this worksheet closes to the net assets account, invested in capital assets, net of related debt. Again, we will need to understand this to develop appropriate entries so the system can properly report net assets with the appropriate amounts by net assets classification.
Capital Asset and Debt Example
For example, assume a school has issued bonds to construct a new high school building. We want to follow the data through the conversion process and examine the entries that are required in light of the system’s closing processes in the various trial balances. While this is not necessary to get total net assets, it is necessary to do so to get the proper classification of net assets. Default close to accounts are used within the system and override capabilities exist for modified accrual, restricted net assets, and/or full accrual trial balances for individual funds through the fund setup screen. But the system can only direct the change in net assets for any given trial balance to one account. Often, this is all that is necessary. However some circumstances require net assets to be split among more than one net assets account, such as the portion of the debt representing unspent bond proceeds need to be “offset” against the unspent resources (restricted for capital outlay) while the portion of the debt expended for capital assets needs to be “offset” against the capital assets (invested in capital assets, net of related debt).
Assume the school issued $10,000,000 in bonds to construct this new high school. The bonds were issued within the fiscal year for which we are preparing the financial statements. The bonds will be retired evenly over their twenty year life. Proceeds of $9,900,000 were received net of $100,000 of bond issuance costs. $1,000,000 of the proceeds was expended on the capital project and will be reported as construction in process within governmental activities. Assume the bonds were issued at par at 5% and were outstanding for three months by the end of the fiscal year.
Let’s follow this through the system and look at the journal entries we will need to properly report this example in the financial statements.
Initially, we have the receipt of the debt proceeds. Assume the treasurer recorded the receipt of $9,900,000 into a capital funds project fund account 1920, sale of bonds. This cash transaction will be entered into the cash journal, either through the cash upload or a manual cash transaction. We know from Statement 34 paragraph 87 that debt issue costs paid out of debt proceeds should be reported as expenditures and paragraph 88 that proceeds of long-term debt, issuance premium or discount, and certain payments to bond escrow agents for bond refundings should be reported as other financing sources and uses in the governmental fund financial statements. Therefore we need to report proceeds of $10,000,000 (face or par amount of debt issued) and the expenditure of $100,000 for the issuance costs. This would call for two entries in the cash journal in the appropriate capital projects fund. The first would be a receipt of 100,000 into account 1920, sale of bonds and the second would be an expenditure of $100,000 to function 6100, debt service and to object 830, other debt service payments. These should be entered as an adjustment to allow the system to report them in the adjustments column on the budgetary worksheet and to simplify the tracing of the uploaded or manual cash transactions back to the schools financial (USAS) records.
We also have the subsequent expenditure of $1,000,000 toward project costs. This cash transaction will also be entered into the cash journal, either through the cash upload or a manual cash transaction.
The adjusted cash transactions will also roll into the cash transactions columns of the modified accrual trial balance and the restricted net assets trial balance for this capital projects fund. Accrual of any fund liabilities related to the construction project would be entered as adjustments debiting the capital outlay expenditure account and crediting the appropriate liability account or accounts (i.e. accounts payable, contracts payable, retainage payable) in the modified accrual journal for the construction’s capital projects fund. To keep this example simpler, we will assume no accruals of unpaid project expenditures were required.
If the balance of the unspent proceeds or some portion of the balance was encumbered, the encumbrance should be entered through the cash journal as current encumbrances (a field available under add expenses). The cash upload from USAS will also bring the encumbrances. Of course the amount to be reserved for encumbrances (encumbrances less expenditures accrued against those encumbrances) for the fund balance sheet would be entered as a modified accrual adjustment debiting unreserved, undesignated fund balance reported in capital projects funds and crediting reserved for encumbrances.
At this point in the example, we have what we need in relation to issuing the bonds and the subsequent project expenditures to generate the budgetary schedules and the fund financial statement for this capital projects fund. The fund balance resulting from the unspent proceeds and any project expenditures that were accrued that were not reclassified to reserved for encumbrances would be reported as unreserved, undesignated fund balance reported in capital projects funds. This should be pretty straight forward given the old reporting model.
The modified accrual reporting in the fund financial statements would not be appropriate for the accrual basis reporting in the entity-wide statements. For this example we want to capitalize the expenditures for the construction project, recognize the resulting capital asset, recognize the bonded debt and deferred charge resulting from the bond issuance cost, amortize a portion of those bond issuance costs, and accrue interest payable related to the bonds. Finally we want to make sure we are reporting appropriate net assets amounts in the proper classifications.
The restricted net assets trial balance for this capital projects fund will include the adjusted cash transactions, the modified accrual adjustments, and the modified accrual reversing entries, if applicable. The system will reclassify any fund balance account balances to either the default or if applicable, to the override restricted net assets close to account. For example if the modified accrual adjustments include an entry that reclassifies fund balance from unreserved, undesignated to reserved for encumbrances, the system would close these fund balance accounts to net assets for the restricted net assets trial balance. With this process we do not need to enter a journal entry (and keep it current should amounts change) in the restricted net assets journal to move fund balance accounts to net assets.
The total of the governmental funds restricted net assets trial balances will also be reflected in the restricted net assets column of the governmental consolidation trial balance and at this point will include the proceeds other financing source and the capital outlay expenditures.
To enter the construction in process in the general capital assets journal, select the additions transaction type and debit construction in process $1,000,000 and credit the capital outlay expenditure $1,000,000. This entry will cause a change in net assets of $1,000,000, which will close to invested in capital assets, net of related debt.
To enter the debt issue in the general debt consolidation journal, select the additions transaction type and debit proceeds from bond sale $10,000,000 and credit long-term liabilities due in one year $500,000 and credit long term liabilities due in more than one year $9,500,000. Also debit deferred charges $100,000 and credit the other debt service expenditure account that includes the bond issuance costs $100,000.
To enter the amortization of the bond issuance costs in the general debt consolidation worksheet, select the amortization deferred charges transaction type and debit interest and fiscal charges $1,250 ($100,000/20 * 3/12) and credit deferred charges $1,250.
To enter the accrual of the interest payable in the general debt consolidation worksheet, select the accrued interest transaction type and debit interest and fiscal charges $125,000 ($10,000,000 * 5% * 3/12) and credit accrued interest payable $125,000.
These general debt consolidation entries will cause a negative net change in net assets of $10,026,250 (-10,000,000 + 100,000 - 1,250 - 125,000) which will close to invested in capital assets, net of related debt.
If we were to stop here the statement of net assets would report net assets related to this example as net assets restricted for capital outlay in the amount of $8,900,000 and as invested in capital assets net of related debt as a negative $9,026,250, with a total net assets related to this example of negative $126,250 (the amortization of the deferred charges in the amount of $1,250 and the accrual of the interest payable in the amount of $125,000). In total we are fine, but the classifications of net assets are clearly not appropriate.
Statement 34 paragraph 33 states that if there are significant unspent related debt proceeds at year-end, the portion of the debt attributable to the unspent proceeds should not be included in the calculation of invested in capital assets, net of related debt. Rather, that portion of the debt should be included in the same net assets component as the unspent proceeds – for example, restricted for capital projects.
This example has $8,900,000 in unspent proceeds at year end.
Explanation E of Independent School District – Calculation of Net Asset Balances found on page 222 of the Guide to Implementation of GASB Statement 34 on Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments states that accrued interest is a current liability that will be paid from the debt service funds. Therefore, the liability should reduce the restricted for debt service net assets balance.
This example has interest payable of $125,000.
To properly classify the net asset amounts the following reclassification entry in the general capital debt consolidation worksheet:
Debit
Restricted for Capital Outlay 8,900,000 Restricted for Debt Service 125,000 Unrestricted 1,250
Credit
Invested in Capital Assets, Net of Related Debt 9,026,250
This entry will bring the effect of this example on both net assets restricted for capital outlay and invested in capital assets, net of related debt to $0 (asset offset by related debt); net assets restricted for debt service to a negative $125,000 (accrued interest payable); and, unrestricted net assets to a negative $1,250 (amortization of bond issuance costs).