Revised January 2005 PUBLISHED BY THE

Transcription

1 ACCOUNTING AND FINANCIAL REPORTING FOR LOANS BETWEEN CALIFORNIA CITIES AND RELATED REDEVELOPMENT AGENCIES Revised January 2005 PUBLISHED BY THE CALIFORNIA COMMITTEE ON MUNICIPAL ACCOUNTING (a joint committee comprised of representatives of the League of California Cities and the California Society of Certified Public Accountants)

2 I. INTRODUCTION Purpose of Paper ACCOUNTING AND FINANCIAL REPORTING FOR LOANS BETWEEN CALIFORNIA CITIES AND RELATED REDEVELOPMENT AGENCIES One of the most significant transactions occurring between California cities and their redevelopment agencies is loans (or advances) from the City to the redevelopment agency. Millions of dollars in loans are made and repaid each year subject to a variety of loan repayment provisions. As a result, questions have arisen regarding the accounting and financial reporting treatment of these loans. In April of 1987, the California Committee on Municipal Accounting published its white paper on this topic, entitled Accounting and Financial Reporting for Loans Between California Cities and Related Redevelopment Agencies. In May of 1996, this white paper was revised and reissued. The position of these prior white papers was that long-term loans from the City to the Redevelopment Agency should be reported as a liability in the Agency s General Long-term Debt Account Group. As a result of GASB Statement No. 34 and certain recommendations made by GFOA, this accounting will no longer be appropriate. GASB Statement No. 34 requires that loan transactions between the primary government and a blended component unit be accounted for in the same manner as interfund advances within the reporting context of the financial statements of the reporting entity as a whole. The purpose of this white paper is to provide recommendations regarding the accounting and financial reporting for loan transactions between the city and the redevelopment agency in that reporting context. Section V of this white paper provides recommendations regarding the financial reporting applicable to the separate component unit financial statements of the redevelopment agency. Materiality The provisions of this paper need not be applied to immaterial items. Consistency The accounting principles discussed in this paper should be followed consistently from year to year. The implementation of these principles and changes in the application of these principles from year to year, if material, could result in prior period adjustments and a consistency qualification in the independent auditors report. Authoritative References The following authoritative references relate to the accounting and reporting issues discussed herein and are provided for the convenience of the reader: a. Measurement Focus of Governmental Funds (GASB Cod. Sec a):...The governmental fund measurement focus is on determination of financial position and changes in financial position (sources, uses, and balances of financial resources), rather than on net income determination. The statement of revenues, expenditures, and changes in fund balance is the primary governmental fund 1

3 operating statement. It may be supported or supplemented by more detailed schedules of revenues, expenditures, transfers, and other changes in fund balance. Accounting for Fund Balance Reserves (GASB Cod. Sec ):...The use of the term reserve should be limited to indicating that a portion of the fund balance is not appropriable for expenditure or is legally segregated for a specific future use. b. Revenue Recognition Criteria (GASB Cod. Sec ): Generally, revenues are not recognized unless they are both measurable and available. Available means received during the current fiscal year, or soon enough after year end to be used to pay liabilities of the current year. Each governmental unit should adopt its own policies to implement the measurable and available criteria, and apply them consistently. Revenues earned by Proprietary Funds are recognized in essentially the same manner as in commercial accounting, i.e., on the accrual basis. c. Transfers Between Component Units (GASB Cod. Sec ): Transfers between the primary government and its component units have historically been reported as intergovernmental revenues, operating revenues/expenditures/expenses and/or as interfund transfers. For presentation within the financial statements of the reporting entity, such transfers should be reported as if they were between funds of the primary government. d. Related Receivables and Payables (GASB Cod. Sec ): Related receivables and payables between what were previously separately reported governmental units, which are included as component units of a reporting entity, should be reclassified as amounts due to and due from other funds. The opinions expressed in this white paper are the opinions of the members of CCMA and do not have authoritative status. Rather, the guidance in this white paper is suggestive to assist California cities in the application of generally accepted accounting principles. Other positions on these matters may be defended as appropriate applications of generally accepted accounting principles. II. RECOMMENDED ACCOUNTING WITHIN THE CONTEXT OF THE REPORTING ENTITY FINANCIAL STATEMENTS The accounting and reporting set forth in this white paper addresses the accounting required for loans between the primary government (a city) and a blended component unit (a redevelopment agency) within the context of the financial statements of the reporting entity as a whole (e.g., the CAFR). Recommendations regarding financial reporting in the context of the separate standalone component unit financial statements for the redevelopment agency are discussed in Section V of this white paper. This section has been divided to address the following accounting issues: 1. Short-term loans 2. Long-term loans 3. Revolving loans 1. SHORT-TERM LOANS 2

4 Short-term loans are those which are to be repaid from available current financial resources. Such resources would typically include proceeds from the sale of land held for resale or interest earnings on investments, but would not include tax increment revenue. The required entries to record short-term loans are as follows: Due from Redevelopment Agency 1,000,000 RDA CAPITAL PROJECTS FUND Due to City of 1,000,000 When the loans are repaid, the entries above would be reversed. Occasionally, the City may make a loan to the Agency which is to be repaid within the same fiscal year or shortly after year end from tax increment monies to be received by the Agency during the fiscal year. In these cases, the short-term borrowing would be treated similar to revenue anticipation debt (i.e., as a fund liability). However, since the source of repayment is normally received in the debt service fund, additional entries are required to record the transfer of funds from the debt service fund to the capital projects fund as follows: Transfers out 1,000,000 RDA CAPITAL PROJECTS FUND Transfers in 1,000, LONG-TERM LOANS Long-term loans are those which are to be repaid from future resources, i.e., not from available current financial resources. A reserve of fund balance is made for the long-term receivable in the City Fund (lender) as these funds are not available to finance current operations. The RDA should not record the receipt of the loan proceeds as an other financing source, as was done prior to the implementation of GASB Statement No. 34. After the implementation of GASB Statement No. 34, the RDA s receipt of the loan proceeds should be recorded as a liability of the fund responsible for repayment, i.e. the debt service fund. The cash associated with this borrowing should then be transferred to the capital projects fund so that it can be expended for project purposes as required by state law. [Some agencies may prefer to record this liability in the capital project fund of the agency. This is also an acceptable manner in which to record the liability.] The required entries to record long-term loans are as follows: (if the liability is recorded in the fund providing repayment, i.e. the debt service fund): 3

5 Advances receivable 1,000,000 Fund balance Unreserved 1,000,000 Fund balance Reserved for long-term advances 1,000,000 Advances payable 1,000,000 Transfers out 1,000,000 RDA CAPITAL PROJECTS FUND Transfers in 1,000,000 When the advance is repaid, the following entries are required: Advances receivable 1,000,000 Fund balance Reserved for long-term advances 1,000,000 Fund balance Unreserved 1,000,000 Advances payable 1,000, REVOLVING LOANS Revolving loans are those loans made on an ongoing basis, where repayment is sporadic or otherwise unscheduled. Typically, these loans are associated with administrative charges made by the City to the Agency for salary and overhead costs allocable to the Agency. The loans usually accumulate and are repaid from future tax increment revenues as they become available. The required entries to record revolving loans are as follows: Advances receivable 1,000,000 Administrative costs recovered (revenue) 1,000,000 Fund balance Unreserved 1,000,000 Fund balance Reserved for long-term advances 1,000,000 4

6 As an alternative, the credit above to revenue could be made against the appropriate expenditure accounts, particularly in the financial statements, in order to avoid the double counting of administrative and overhead expenditures. The liability is recorded in the Redevelopment Agency fund responsible for repayment (the debt service fund). An interfund transfer out is then recorded into the capital projects fund in order to provide for the recording in that fund of the administrative costs being incurred for the project: Transfers out 1,000,000 Advances payable 1,000,000 RDA CAPITAL PROJECTS FUND Administrative costs 1,000,000 Transfers in 1,000,000 When advances are repaid from tax increment revenue, the entries required are the same as shown above for long-term loans. Entries to record direct charges to the Redevelopment Agency: When administrative costs are charged directly to the Redevelopment Agency Capital Projects Fund through automated payroll journal entries, etc., additional entries must be made in the City and Agency funds to record the loan and effects on cash at the time of the payroll journal entry. Assume a direct monthly charge of $10,000. Advances receivable 10,000 Cash 10,000 Fund balance Unreserved 10,000 Fund balance Reserved for long-term advances 10,000 Cash 10,000 Advances payable 10,000 Transfers out 10,000 Cash 10,000 RDA CAPITAL PROJECTS FUND Cash 10,000 Transfers in 10,000 III. UNPAID ACCRUED INTEREST 5

7 Unpaid accrued interest on loans between a City and a Redevelopment Agency can result from the following: 1. The accrued interest is due, but will not be paid currently as sufficient funds are unavailable to meet the interest payment (i.e., the interest payment is delinquent); or 2. The accrued interest is not due, but payable in future years. Each of these scenarios are discussed below. 1. ACCRUED INTEREST DUE BUT UNPAID When accrued interest is due but goes unpaid because of unavailable Redevelopment Agency funds, the City will typically agree to add the unpaid interest to the outstanding balance through a refinancing of, or an amendment to, the existing loan. Subsequent interest will be calculated based on the adjusted balance (which includes the accumulated unpaid accrued interest). However, the recommended treatment discussed below is not affected by the method used to calculate subsequent accrued interest (compound vs. simple method). Based on the above, the unpaid accrued interest would be recorded when incurred as an addition to the recorded liability in the debt service fund, as shown in the following entries: Interest expenditures 100,000 Advances payable 100,000 Advances receivable 100,000 Deferred revenue 100,000 Because the interest included above within the Advances Receivable is not available to finance current operations, it is offset by a corresponding entry to deferred revenue. Footnote disclosures of both Advances Receivable and Advances Payable balances in the City and Agency financial statements, respectively, may disclose the accumulated accrued, but unpaid, interest amounts included within the respective balances. When the accumulated unpaid accrued interest is ultimately repaid, the following entries are required: Cash 100,000 Advances receivable 100,000 Deferred revenue 100,000 Interest revenue 100,000 Advances payable 100,000 6

8 Cash 100,000 As a less preferable alternative, the unpaid accrued interest can be disclosed in the footnotes each year, but not added to the liability recorded in the debt service fund. The interest would then be recorded as an expenditure in the debt service fund only in the year paid. The government-wide financial statements, in that case, would of course report the accrued interest in the statement of net assets. 2. ACCRUED INTEREST NOT DUE AND UNPAID Loan agreements between a City and its Redevelopment Agency may provide that interest on loans is payable at a specified date in the future or otherwise when sufficient tax increment revenues are available. In general when accrued interest is not paid simply because it is NOT DUE, then the Redevelopment Agency should apply the same treatment described above for unpaid interest which is due (i.e., treating the interest as accrued and added to the liability recorded in the fund responsible for repayment the debt service fund). IV. CONSIDER RECLASSIFICATION OF LOAN AS TRANSFER Paragraph 112(a)(1) of GASB No. 34 states in part with respect to interfund loans (including loans between the primary government and blended component units): If repayment is not expected within a reasonable time, the interfund balances should be reduced and the amount that is not expected to be repaid should be reported as a transfer from the fund that made the loan to the fund that received the loan. Agencies should support the likelihood of repayment by preparing cash flow projections that demonstrate repayment of the loan plus accrued interest over the expected lifetime of the agency. If repayment is not likely because of the insufficiency of resources to provide for repayment (after meeting the other obligations of the Agency), the Agency should consider reclassifying the loan balances as transfers, as described above in paragraph 112(a)(1) of GASB No. 34. A careful assessment of the possibility of repayment should be made. Absolute certainty is not required in this assessment. However, if it is probable that an agency will not repay its obligation to the City as demonstrated by reasonable cash flow projections, the advance should be reclassified as a transfer at the time that that determination is made. On the other hand, agencies should avoid the premature writing off of its liability to the City that might be followed by an eventual repayment of that indebtedness. The entries to record the transfer would be as follows: CITY FUND RECORDING THE RECEIVABLE Transfer out 1,000,000 Advances receivable 1,000,000 RDA FUND RECORDING THE LIABILITY Advances payable 1,000,000 Transfer in 1,000,000 Some agencies may wish to keep track of the loan payable and receivable on the balance sheet of the respective funds with an offsetting allowance account in the full amount of the loan balance. In that event, the entries to record the transfer would be as follows: CITY FUND RECORDING THE RECEIVABLE 7

9 Transfer out 1,000,000 Allowance for loans not likely to be repaid 1,000,000 RDA FUND RECORDING THE LIABILITY Allowance for loans not likely to be repaid 1,000,000 Transfer in 1,000,000 V. FINANCIAL REPORTING IN THE CONTEXT OF THE SEPARATE REDEVELOPMENT AGENCY FINANCIAL STATEMENTS The above accounting sets forth the accounting to be followed in the fund financial statements of the reporting entity as a whole. In the context of the financial statements of the reporting entity as a whole, GASB Statement No. 34 requires that loans between the primary government and its blended component units be accounted for as fund liabilities in the fund financial statements of the reporting entity. Prior to November 2004, there was no guidance with respect to how transactions between the primary government and its blended component units should be accounted for in the context of the separate stand-alone financial statements of the component unit. CCMA had previously recommended that these transactions be reported as fund liabilities in both the reporting entity financial statements and the component unit financial statements. This was done to avoid confusion that might arise as a result of certain funds reporting different fund balance amounts in the reporting entity financial statements and the component unit financial statements. In November 2004, this matter was addressed by question that was added to the 2004 GASB Comprehensive Implementation Guide. This new guidance indicates that in the context of the component unit financial statements, debt owed to the primary government would be considered to be external debt that is reported only in the government-wide financial statements of the component unit. In the reporting entity financial statements (CAFR), this debt would be reclassified as interfund debt reported as a liability on the balance sheet of the fund obligated for repayment. The accompanying chart sets forth the journal entries to demonstrate the required accounting for both the component unit financial statements and the CAFR It also presents the worksheet entries necessary to convert the component unit presentation to the CAFR presentation. 8

10 Comparison of Entries for Reporting City Advances to Redevelopment Agency in RDA Financial Statements and in City CAFR (along with worksheet entries necessary to reclassify City advances as a fund liability in the City's CAFR) Balance at beginning of year $ 1,000,000 Current year additions 300,000 Current year principal payments (200,000) Interest accrued and added to liability balance (due at maturity) 80,000 Balance at end of year $ 1,180,000 Worksheet Entries Entries for RDA Financial Statements (to convert RDA presentation to CAFR presentation) Recording receipt of advance proceeds in current year: To restate beginning fund balance as a result of recording beginning of year advances as liability in debt service fund: In debt service fund: Fund balance 1,000,000 Advances payable 1,000,000 *Entries for City CAFR Presentation In debt service fund: In debt service fund: Transfers out 300,000 Cash 300,000 Advances payable 300,000 Advances payable 300,000 Transfers out 300,000 Cash 300,000 In capital projects fund: In capital projects fund: In capital projects fund: Cash 300,000 Proceeds of advances 300,000 Cash 300,000 Proceeds of advances 300,000 Transfers in 300,000 Transfers in 300,000 Accrual of interest due at maturity: In debt service fund: In debt service fund: In debt service fund: Interest expenditures 80,000 Proceeds of advances 80,000 Interest expenditures 80,000 Proceeds of advances 80,000 Advances payable 80,000 Advances payable 80,000 Recording principal payments made in current year: In debt service fund: In debt service fund: In debt service fund: Principal exp 200,000 Advances payable 200,000 Advances payable 200,000 Cash 200,000 Principal exp 200,000 Cash 200,000 * The "Entries for CAFR Presentation" are presented for the sole purpose of displaying the accounting methodology reflected in the City CAFR. The worksheet entries shown above convert the RDA accounting to this presentation.

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