Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 8: Long-term obligations

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Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 8: Long-term obligations. Chapter 8 - Long-term obligations. In this chapter, the learning objectives are: Importance of information on long term debt, significance of bankruptcy, accounting for LTD in both fund and government-wide statements, demand bonds,...
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Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 8: Long-term obligations. Chapter 8 - Long-term obligations. In this chapter, the learning objectives are: Importance of information on long term debt, significance of bankruptcy, accounting for LTD in both fund and government-wide statements, demand bonds,....

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Click icon to add picture Chapter 8 Long – Term Obligations Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 8 | 1 All rights reserved. Thought to Ponder: Chapter 8 "The budget should be balanced; the treasury should be refilled; public debt should be reduced; and the arrogance of public officials should be controlled." Cicero. 106-43 B.C. The Outstanding Public Debt as of 01 February 2016 is: $18.99 trillion. The National Debt has continued to increase an average of $2.41 billion per day since September 30, 2012! http://en.wikipedia.org/wiki/National_Debt_Clock#cite_note-NYT_2009-0 Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 8 | All rights reserved. Learning Objectives Importance of information on Long Term Debt Significance of bankruptcy Accounting for LTD in both Fund and Government-wide Statements Demand Bonds RANs, TANs, BANs Capital & Operating Leases Miscellaneous Topics Revenue bonds Overlapping debt Conduit debt Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 8 | All rights reserved. Long-Term Obligations-Overview What is General Long-term Obligations Debt? Issued by almost every government. Takes form of liabilities, usually bonds, that are secured by the “full faith and credit” of the governmental unit. Arises from the governmental funds’ activities not proprietary or fiduciary funds*. o *If debt reported in a proprietary or fiduciary fund also has general obligation (“full faith and credit”) backing of the government, then the government’s contingent liability needs to be disclosed in the notes to the financial statements Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 8 | All rights reserved. Examples of General Long-term Liabilities • Tax-supported bonds • Long-term warrants • Long-term notes • Capital lease obligations • Unfunded compensated absences (vacation and sick leave) • Unfunded pension obligations • Long-term portion of judgments and claims Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 8 | All rights reserved. Importance of Long-Term Debt Failure to make timely payments can have profound repercussions. Creditor incurs losses Governments and non-profits will face loss of credit Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 8 | All rights reserved. Bankruptcy Bankruptcy: ultimate fiscal failure Failure to satisfy claims results in bankruptcy. Many cities avoided bankruptcy by being under ‘financial control boards.’ Governments can either raise tax or cut back services when in bankruptcy Agovernment in bankruptcy transfers control to independent trustee. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 8 | All rights reserved. Accounting for Long-Term Obligations Government-wide Statements: • All general long-term debt is reported in the governmental activities column of the government-wide Statement of Net Assets. • General LT obligations are recorded either at face value or at the amortized issue price. • GASB Std. # 34 requires governments to report bonds and LT obligations at present value. o Certain claims and judgments are also recorded at present value. o Present values more faithfully captures the economic substance of debt than face values do. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 8 | All rights reserved. Accounting for LT Obligations (cont’d) Fund Statements: NOT reported as long term liabilities of governmental funds. Recorded in schedule of Long Term Debt. Recall that a debt service fund (a governmental fund), is generally established to account for the principal and interest payments on general long-term debt. LT obligations are not reported as a liability Instead, it is offset by “other financing sources—bond proceeds.” Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 8 | All rights reserved. Accounting for LT Obligations (cont’d) RECALL: ONLY debts resulting from past transactions for which government has already received a benefit are recognized. Excludes commitments for payments of interest for which no benefit was enjoyed. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 8 | All rights reserved. Example – Vacation Leave City employees earned $300,000 in vacation leave they did not take in 2016. The leave vests and can be taken at any time up to retirement. The liability should be reported only in a schedule of long-term liabilities and the government-wide statements and should be based on wage and salary rates in effect on the balance sheet date (and hence adjusted each year). It should not be recognized as an expenditure. Government-wide (Stmt of Net Assets)*: Would be accrued and reported as a long-term liability: Vacation pay expense $300,000 Accrued vacation payable $300,000 *This is not an actual journal entry. It is the conversion done on the WP at the end of the year. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 8 | All rights reserved. Example – Sick Leave City employees earned $500,000 in sick leave that they did not take in 2016. City employees are permitted to accumulate up to 120 days sick leave. Any unused sick leave cannot be taken as a termination benefit. Sick leave should only be reported as a liability in a schedule of long-term liabilities and the government-wide statements only to the extent that it will be paid as a termination benefit. Hence, the sick leave earned need not be reported as a liability or an expenditure.

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