Capital Issues
1
Revenue Available for Capital Additions/Acquisitions
1 Earmarked External Resources
• Student Fees • Government Appropriations • Private Gifts • Investment Gains
Internally Available Resources
Unrestricted Net Assets Current Funds/Other • Annual Operations • Resources Functioning as Endowment • Reserves
2 Borrowing
• Internal Advances • Temporary • Long Term • External Indebtedness
Expenditures Construction In Progress
o Architecture Fees o Site Work o Construction o Fixed/Movable Equipment o Interest During Construction
3 Other Expenditures
• Acquisitions • Investment Losses
Renovation Expenditures
Extraordinary Repairs-Improvements Capitalize If: Increase Capacity, Efficiency, Useful Life --- Benefits Future Ordinary Repairs – Maintenance Expense Typically Current Operations
4 Renovation Expenditures (Con’t)
Replacements Capitalize Remove Replaced Assets from Inventory
External Resources To Retire Debt Earmarked – External Student Fees Gifts Investment Gains
5 Internal Resources to Retire Debt
Current Operations Reserves
Debt Related Expenditures
Interest Trustee Fees Investment Losses
6 Payment of Principal
Balance Sheet Transaction
Private Institutions • Gifts/Pledges for Acquisition of Capital Assets • Unrestricted Net Assets • Alternatively – Adopt Institutional Policy • Temporarily Restricted • Reclassified As Economic Utility Of Asset Is Consumed
7 Capitalized Assets
Donated Capital Assets Acquisitions Current Operations Construction Renovation Purchase Construction In Progress
Capital Assets
• Real Property – Land/Buildings/Other Improvements/Infrastructure (Publics) • Personal Property – Equipment/Library Books/Museums/Art Collections/Livestock • Construction In Progress
8 Infrastructure Land Improvement • Street/Road • Landscaping • Sidewalks • Tennis Courts • Traffic Lights • Bleachers • Street Signage • Athletic Fields • Street Lighting • Golf Courses • Bridges • Pools • Tunnels • Fountains • Distribution Systems • Fencing • Water/Sewer/Electrical/ • Parking Lots Steam/Chilled Water/Gas
Capitalization Policy
Acquisition Value In Excess of Stated Dollar Amount Expected Useful Life In Excess of Stated Number of Years Identity Does Not Change Over Time
9 Capitalization Policy
Variances Exceptions Constant Review
Depreciation
• Concept of Capital Maintenance – Financial Capital – Physical Capital
10 Maintenance of Physical Capital Expense Based on Current/Future Asset Value
21
Maintenance Of Financial Capital
. Measures Economic Wealth/Performance . Did Revenues Exceed Expenses . Were Payments to Owners ---- . Return OF Capital
. Return ON Capital
11 Maintenance Of Financial Capital
. Accrual Accounting . Matching Concept . Depreciation of Fixed Assets Based On Cost
Depreciation
Matches Expense With Revenue Measurement of Reduction of Capital
Indirect Means of Asset Replacement Does Not “Fund” Asset Replacement
12 • Ritratto di Frà Luca Pacioli (1495). Luca Pacioli (1445 - 1517) is the central figure in this painting exhibited in the Museo e Gallerie di Capodimonte in Napoli (Italy). The painter is unknown, although some people are convinced the painter is Jacopo de' Barbari (1440-1515). • Table is filled with geomerical tools: slate, chalk, compas, a dodecahedron model and a rhombicuboctahedron half-filed with water is hanging in the air. Pacioli is demonstrating a theorem by Euclid. • Source: Wikipedia – art in the public domain
Does Depreciation Provide For Asset Replacement?
13 Jerry’s Juice Company Cash 50 Equity 50 Initial Investment
Asset 50 Cash 50 Purchase Capital Asset Five Year Life/ Salvage Value -0-
Year One Operations Cash 25 Sales 25 Expenses 25 Cash 25 Depreciation Expense 10 Accumulated Depreciation 10
14 Jerry’s Juice Company Income Statement Year One
Sales 25 Expenses (Cash) <25> Depreciation <10>
Profit/Loss <10>
Jerry’s Juice Company Balance Sheet Year One Cash -0- Asset 50 Accumulated Depreciation <10> Total Assets 40
Liability -0- Equity 50 Operating Profit/Loss <10> Total Liabilities and Equity 40
15 Operations Year One Year Two Cash 25 35 Sales 25 35 Expenses 25 25 Cash 25 25 Depreciation Expense 10 10
Accumulated Depreciation 10 10
Jerry’s Juice Company Income Statement
Year One Year Two Sales 25 35 Expenses (Cash) <25> <25> Depreciation <10> <10>
Profit/Loss <10> -0-
16 Jerry’s Juice Company Balance Sheet Year One Year Two Cash -0- ? Asset 50 ? Accumulated Depreciation <10> ? Total Assets 40 ?
Liability -0- ? Equity Profit 50 ? Operating Profit/Loss <10> ? Total Liabilities and Equity 40 ?
Jerry’s Juice Company
Balance SheetYear One Year Two Cash -0- 10 Asset 50 50 Accumulated Depreciation <10> <20>
Total Assets 40 40
Liability -0- -0- Equity 50 50 Operating Profit/Loss <10> <10> Total Liabilities and Equity 40 40
17 Operations Year One Year Two Year Three Cash 25 35 45 Sales 25 35 45 Expenses 25 25 25 Cash 25 25 25 Depreciation Expense 10 10 10
Accumulated Depreciation 10 10 10
Jerry’s Juice Company Income Statement
Year One Year Two Year Three Sales 25 35 45 Expenses (Cash) <25> <25> <25> Depreciation <10> <10> <10>
Profit/Loss <10> -0- 10
18 Jerry’s Juice Company Balance Sheet Year One Year Two Year Three Cash -0- 10 ? Asset 50 50 ? Accumulated Depreciation <10> <20> ? Total Assets 40 40 ?
Liability -0- -0- ? Equity Profit 50 50 ? Operating Profit/Loss <10> <10> ? Total Liabilities and Equity 40 40 ?
Jerry’s Juice Company Balance Sheet Year One Year Two Year Three Cash -0- 10 30 Asset 50 50 50 Accumulated Depreciation <10> <20> <30> Total Assets 40 40 50 Liability -0- -0- -0- Equity 50 50 50 Operating Profit/Loss <10> <10> -0- Total Liabilities and 40 40 50 Equity
19 Funding Asset Replacement
Accumulate Resources in Operating Accounts Accumulate Resources in Reserve Accounts May Not Reflect Designations On Stm’ts Reservations Of Unrestricted Net Assets Previously Referred To As Renewals And Replacement Accounts
Depreciation Required Privates And Publics
20 Depreciation Accounting Identify/Record Historical Cost (or FMV) Age/Date Acquired Types of Assets Select Guideline/Life Methodology Composite Grouping Class Life Specific Asset Identification
Asset Life
. Period of Existence . Physical Life . Period of Time A Thing May Be Capable of Use
. Economic Life . Period of Time A Thing May Be Profitably Used
21 Accounting and Reporting o Depreciation o Select Method o Select Convention o Calculate
Recording Depreciation
Expense For Period Balances of Major Asset Classes Accumulated Depreciation Describe Computational Methods In Footnotes
22 Disposal of Capital Assets
•Loss • Retirement/Replacement •Sale
Remove Asset Balance and Accumulated Depreciation
Fund Accounting Plant Funds • Unexpended • Renewals and Replacements • Retirement of Indebtedness • Investment in Plant
46
23 Fund Accounting Plant Funds Accounts For Similar Types of Transactions: Construction In Progress New Construction Renovation Funds To Retire Indebtedness Capital Accounts Buildings Equipment Infrastructure Land Improvements
Capital Reporting
Capital Transactions Acquisitions Are Balance Sheet Transactions -- - Exchange Cash For Asset Debt Is Liability --- Associated With Capital Asset Principal Payment Is Balance Sheet Transaction
24 Special Problems
• Bond Premium Discount/Issue Cost • Extinguishment of Debt • Capitalization of Interest • Capital Leases
49
Bond Premium/Discount
• Difference Between Cash/Face Value – Discount Viewed as Prepayment – Premiums Viewed as Advance • Amortization to Interest Expense Over Life – Adjusts Effective Interest Rate
• Early Retirements 50
25 Bond Premium/Discount
• Direct Reduction From Or Addition To Face Amount Of Debt • NOT A Separate Asset Or Liability
FASB ASC 835-30-45 GASB S-62
• Issue Cost – Legal – Financial Advisor – Printing – Rating • Amortize Cost Over Life of Debt
52
26 Issue Cost
•Private . Amortize To Interest Expense Over Life Of The Debt Public . Period Cost Charged To Interest Expense
FASB ASC 835-30-45-3 GASB S - 65
Exhibit A
Bond: Premiums/Discount/Issue Cost
The Bond Issue Cash 9,700,000 Issue Cost 100,000 Discount 200,000 Debt 10,000,000 Issue 20 year debt for construction
FINANCIAL STATEMENTS
Private Institutions Public Institutions Unrestricted Net Assets
Cash 9,700,000 Cash 9,700,000 Debt (Discount) 200,000 Debt (Discount) 200,000 Deferred Issue Cost 100,000 Issue Cost Expense 100,000 Debt 10,000,000 Debt 10,000,000
Interest Expense 15,000 Interest Expense 10,000 Non-operating Deferred Issue Cost 5,000 Debt (Discount) 10,000 Debt (Discount) 10,000
27 Exhibit A-1
Bond: Premiums/Discount/Issue Cost
Annual Amortization of Issue Cost/Discount
Cash 8,100,000 Capitalized Interest 700,000 Debt Service Reserve 1,200,000 Debt 10,000,000
Construction in Progress Accounts Debt Service Accounts
Cash 8,100,000 Cash – Trustee 1,200,000 Debt 8,100,000 Cash - Cap. Int. 700,000 Debt 1,900,000
Exhibit A-1
Bond: Premiums/Discount/Issue Cost
FINANCIAL STATEMENTS
Private Institutions Public Institutions Unrestricted Net Assets
Cash Cash 8,100,000 Cash-Debt Service Cash-Debt Service 1,200,000 Cash-Reserved Cash-Reserved 700,000 Debt Debt 10,000,000
28 Extinguishment of Debt
• Reacquisition of Debt Before Maturity –Debt Repaid –Legal Release –In-Substance Defeasance
57
Extinguishment of Debt Guidance • FASB ASC 405-470 –SFAS #76 –APB #26 –SFAS # 145 (Rescinds SFAS #4 and #64) –SFAS # 125 (More later)
• GASB S-62 58
29 In-substance Defeasance (Advanced Refunding) • Create Trust • Irrevocably Fund Trust • Trust Cash Flows Cover Debt Service
59
Strict Requirements
• Specified Maturities/Fixed Payments • Irrevocable Risk Free Assets in Trust • Future Payments - Remote • No One May Gain Access to Assets • May Only Refund ONCE
60
30 Callable Debt
• Call Debt When Mandatory Unless Specified at Time of Refunding • Cannot Exercise Optional Call
61
Instantaneous Defeasance
• New Debt Issued • Old Debt Immediately Extinguished • Simultaneous Borrowing/Investing
62
31 Accounting for Extinguishments
Amount to Reacquire Less Net Carrying Amount -Gain or Loss-
63
Display Extinguishments Public Reported As Deferred Outflows (Debits) Reported As Deferred Inflows (Credits)
GASB S-65
32 Exhibit B
FINANCIAL STATEMENTS
Private Universities Public Universities Unrestricted Net Assets
Cash 9,700,000 Cash 9,700,000 Deferred Issue Cost 100,000 Issue Cost Expense 100,000 Debt (Discount) 200,000 Debt (Discount 200,000 Debt 10,000,000 Debt 10,000,000
Interest Expense 15,000 Interest Expense 10,000 Deferred Issue Cost 5,000 Non-operating Debt (Discount) 10,000 Debt (Discount) 10,000
CIP 9,700,000 CIP 9,700,000 Cash 9,700,000 Cash 9,700,000
Bldgs & Equipment 9,700,000 Bldgs & Equipment 9,700,000 CIP 9,700,000 CIP 9,700,000
Exhibit C
Extinguishment of Debt Issue New Debt to Refund Old Debt Cash 8,900,000 Issue Cost 100,000 New Debt 9,000,000
FINANCIAL STATEMENTS
Private Universities Public Universities Unrestricted Net Assets
Cash Deposited with Trustee Cash Deposited w/Trustee 9,700,000 Deferred Issue Cost Issue Cost Expense 100,000 New Debt New Debt 9,000,000
Gov’t Securities w/Trustee Interest Expense 10,000 Cash-Deposited w/Trustee Non-operating
Old Debt 10,000,000 Old Debt 10,000,000 Gain 815,000 Deferred Inflow 910,000 Issue Cost(original) 95,000 Discount 190,000 Discount 190,000 Gov’t Securities w/Trustee 8,900,000 Gov’t Securities w/Trustee 8,900,000
33 GASB S-7 GASB S-23
67
GASB S-7 Disclosures
• General Description of Transaction – Difference Between Cash Flows of Old and New Debt – Economic Gain or Loss Based on Present Value • Report Amount of Defeased Debt Outstanding 68
34 Revised FASB Guidance ASC 405-470 (SFAS #125) (SFAS # 145)
69
Extinguished Liability Derecognize If:
• Pay Creditor • Reacquisition by Debtor • Legally Released
70
35 SFAS #125 Disclosures
• In-substance Defeasance General Description Amount Extinguished • Nature of restrictions on assets set aside for future payments
71
Capitalized Interest Guidance
ASC 835 (FASB SFAS #34/SFAS #62)
72
36 Capitalized Interest • Concept - Include All Cost of Readying Asset • Capitalization Period • Borrowed Funds Restricted to Asset Acquisition • Interest Capitalized – Actual Interest Cost Less Interest Earned 73
Exhibit D
Capitalization of Interest
Construction Expenditures 9,700,000 Average during period 4,850,000 Interest Rate 10% Average T-bill rate 7%
Designed Plant Accounts
Construction Retirement of Capital in Process Indebtedness Assets
Interest Expense 970,000 Buildings 970,000 Cash 970,000 Equity 970,000 Equity Mand. Transfer 970,000 Interest Expense 970,000
Cash 339,500 Equity 339,500 Interest Income 339,500 Buildings 339,500
37 Exhibit D
FINANCIAL STATEMENTS
Private Universities Public Universities Unrestricted Net Assets
Interest Expense Interest Expense - non operating 970,000 Cash Cash 970,000
Buildings & Equipment Buildings & Equipment 970,000 Interest Expense Interest Expense - non operating 970,000
Cash Cash 339,500 Interest Income Interest Income - non operating 339,500
Interest Income Interest Income - non operating 339,500 Buildings & Equipment Buildings & Equipment 339,500
Accounting For Leases FASB ASC 840-10-25 (SFAS# 13/22/98) GASB S-13/62
FASB Has A Major/Multiple Year Project Underway To Increase Transparency And Comparability By Recognizing Assets And Liabilities Of A Leasee
38 Accounting for Leases • Capital Lease • Non-cancelable and one of: – Ownership Transfer – Bargain - Purchase Option – Term - 75% of Life – PV Payments 90% FMV
77
Capitalization
Record as Asset and Liability Amount Equal to PV Minimum Payments During Term
78
39 Amortization
• Allocate Payments – Liability – Interest Expense • Depreciate
79
Exhibit E
Accounting for Leases (1)
Capital Lease
20 year lease agreement annual payments 19,105.00
Present value minimum lease payments 20 equal rental payment 19,105.38 Present value of amount of $1 due for 20 periods at 5% x13.0853 Amount to be capitalized 250,000.00
PV minimum lease payment 250,000.00 Less: payment on date lease consummated 19,105.00
Balance of Lease outstanding during first year 230,895.00 Discount rate .05 Interest in year two payment 11,545.00 Principal in year two 7,560.00 Annual Payment 19,105.00
40 Exhibit E
Designated Plant Accounts
Current Unrestricted Capital Assets
Leased Asset 250,000 Long-Term Lease Payable 250,000 Cash 19,105 Equity 19,105
Int. Exp. 11,454 Cash 11,454 Long-Term Lease Payment-Prin. 7,560 Payable 7,560 Cash 7,560 Equity 7,560
Exhibit E
FINANCIAL STATEMENTS
Private Universities Public Universities Unrestricted Net Assets
Lease Asset Lease Asset 250,000 Long-Term Lease Long-Term Lease Payable Payable-Non-current 250,000
Interest Expense Interest Expense-Operating 11,545 Cash Cash 11,545
Long-term Lease payable Long-term Lease payable- non-current 7,560 Cash Cash 7,560
41 Fiscal Funding Clause
83
Exhibit A
Bond: Premiums/Discount/Issue Cost
The Bond Issue
Cash 9,700,000 Issue Cost 100,000 Discount 200,000 Debt 10,000,000 Issue 20 year debt for construction
Construction in Progress Accounts Debt Service Accounts
Cash 9,700,000 Issue Cost 100,000 Debt 9,700,000 Discount 200,000 Debt 300,000
Interest Expense 15,000 Issue Cost 5,000 Discount 10,000
42 Exhibit A
Bond: Premiums/Discount/Issue Cost
FINANCIAL STATEMENTS
Private Institutions Public Institutions Unrestricted Net Assets
Cash Cash 9,700,000 Discount Discount 200,000 Issue Cost Issue Cost 100,000 Debt Debt 10,000,000
Interest Expense Interest Expense 15,000 Non-operating Issue Cost Issue Cost 5,000 Discount Discount 10,000
Exhibit B
Extinguishment of Debt
Issue Original Debt
Cash 9,700,000 Issue Cost 100,000 Discount 200,000 Debt 10,000,000
Issue 20 year debt for construction.
Construction-in-Progress Debt Service Accounts Capital Assets
Cash 9,700,000 Issue Cost 100,000 Debt 9,700,000 Discount 200,000 Debt 300,000
CIP 9,700,000 Interest Expense 15,000 Cash 9,700,000 Issue Cost 5,000 Discount 10,000
Debt 9,700,000 Buildings 9,700,000 CIP 9,700,000 Debt 9,700,000
43 Exhibit B FINANCIAL STATEMENTS
Private Universities Public Universities Unrestricted Net Assets
Cash Cash 9,700,000 Issue Cost Issue Cost 100,000 Discount Discount 200,000 Debt Debt 10,000,000
Interest Expense Interest Expense 15,000 Issue Cost Non-operating Issue Cost 5,000 Discount 10,000
CIP CIP 9,700,000 Cash Cash 9,700,000
Bldgs & Equipment Bldgs & Equipment 9,700,000 CIP CIP 9,700,000
Exhibit C Extinguishment of Debt
Issue New Debt to Refund Old Debt Cash 8,900,000 Issue Cost 100,000 New Debt 9,000,000
Designated Plant Accounts
Retirement of Indebtedness Capital Assets
Cash-Deposit with Trustee 8,900,000 Equity 8,900,000 Equity 8,900,000 New Debt 8,900,000
Issue Cost 100,000 Equity 100,000 Equity 100,000 New Debt 100,000
Gov't Securities 8,900,000 Cash-Deposit with Trustee 8,900,000
Loss 285,000 Old Debt 10,000,000 Issue Cost 95,000 Gain 1,100,000 Discount 190,000 Equity 8,900,000
44 Exhibit C
FINANCIAL STATEMENTS
Private Universities Public Universities Unrestricted Net Assets
Cash-Deposited with Trustee Cash-Deposited with Trustee 8,900,000 Issue Cost Issue Cost 100,000 New Debt New Debt 9,000,000
Gov't Securities w/Trustee Gov't Secruities w/Trustee 8,900,000 Cash-Deposited w/Trustee Cash-Deposited w/Trustee 8,900,000
Old Debt Old Debt 10,000,000 Gain Gain 815,000 Issue Cost(original) Issue Cost(original) 95,000 Discount Discount 190,000 Gov't Securities w/Trustee Gov't Secruities w/Turstee 8,900,000
45