Transfers to the debt service fund should expect the normal interest payments
as well as various “serial” principal repayment dates in order to spread the
repayment of the obligation ratably over the life of the bond. Term bonds have
no principal repayment until the single maturity date of the bond. As with
serial bonds, interest payments are usually made currently on a semiannual
basis. Use of a debt service fund is particularly important with term bonds to
ensure that adequate resources are set-aside during the bond’s term to provide
for repayment of principal at the maturity date. The amount of resources to set
aside every year to transfer to the debt service fund depends on the present
value of the future repayment obligation, which in turn depends on the selection
of an appropriate and realistic discount rate. This discount rate should
approximate the expected investment return on funds transferred to the debt
service fund. Notes differ from bonds in that their maturity dates are
frequently much shorter and the debt agreements are less formal. The
requirements placed on the borrower are less burdensome than those for
longer-term obligations.
If the note’s maturity date is less than one year, the
payments should be accounted for as current liabilities of the general fund and
not accounted for by the debt service fund. However if the maturity date exceeds
one year and the obligation is accounted for in the GLTDAG, principal and
interest payments should be accounted for by the debt service fund.
Monies used to pay for the bonds can be revenues, such as taxes
earmarked specifically for the bond issue or from transfers from other funds.
One example might be a transfer from the highway fund to pay road improvement
bonds. Governmental funds differ from conventional accounting because they use a
financial measurement focus and a modified accrual basis of accounting rather
than a full accrual basis. Therefore, governmental funds do not have fixed
assets in them and they do not show long-term debt or depreciation. The four
sub-funds within the basic governmental category and the account groups can
actually be designed to work together to operate and account for the diverse
activities of government. For instance, the capital project funds can be used to
account for the construction or purchase of a large building. This capital
project fund might be used to track the money borrowed and spent for the
building. The debt incurred would be recorded in the account group. The long
term or fixed asset, i.e., the building, would be listed in the account groups.
As interest expense and principal came due, money could be transferred from the
general fund to the debt service fund to pay the debt. That year the general
fund would, presumably, have to raise enough revenue to transfer to the debt
service fund to pay any interest expense and principal due. This fund,
inter-fund, and account group accounting is designed for control. The
legislature wants a building; a capital projects fund is set up to track money
going in and out to acquire the building. Lenders want to be sure money is being
put away to pay the debt, so a debt service fund is established. Since
short-term activities are placed in different accounting device, other funds and
account groups must come into play, such as the long term fixed assets group and
the long-term debt accounts.
The debt service fund is a governmental type fund and shares many of
the basic characteristics of governmental funds; however, the nature of its
transactions and the activities it accounts for make it unique. Debt service
funds employ the modified accrual basis of accounting: Revenues and transfers-in
are recognized when measurable and available, and expenditures are recognized
when a liability is incurred. There are certain unique aspects of the modified
accrual basis of accounting in relation to debt service funds that warrant some
clarification. When a transfer of funds is made to a fiscal agent for payment of
principal and interest to the debt holder, the actual satisfaction of the debt
has not occurred. The transfer, however, is treated as an expenditure in the
debt service fund. If such a transfer of funds for principal and interest
payments is made prior to the maturity date or interest payments date, the
transfer is not recognized as an expenditure until it is due to be paid GASB
statement #34 states that special assessment long-term debt for which a general
government is obligated in some manner is expected to be serviced from
collections of assessments and interest thereon.
