A major goal of governmental financial reporting is assessing financial
performance, that is, how well the government is doing with the money entrusted
to it. From the standpoint of making judgments about the performance of
government funds and government finance, the financial reports are a good place
to start. These reports can provide a considerable amount of the information for
gauging financial compliance, success, and health. Governmental and nonprofit
accounting both use the concept of fund accounting. In fund accounting, the
entity is divided into subsets or “funds” each with its own self-balancing set
of accounts. Even though GASB Statement #34 will dramatically change the
reporting format, the concept of fund accounting will remain the key difference
between governmental and private sector accounting. A look at the various types
of funds can lead to a better understanding of the impact they have on
accounting disciplines. The funds are grouped into three fund types:
governmental, proprietary, and fiduciary. There are also account groups, but
account groups are not funds because they do not have transactions in the
ordinary course of business. Instead, they are holding places for items such as
fixed assets and long-term debt. Our focus is on one example of a governmental
fund called a debt service fund.
Codification section 1300.104a(4) defines a debt service as a fund to
account for the accumulation of resources for, and the payment of, general
long-term principal and interest. Debt service funds are used for the
accumulation of monies to make required payments on principal and interest for
such liabilities as bonds and capital lease payments. General long-term
liabilities are those that arise from activities of Governmental funds and that
are not accounted for as fund liabilities of a proprietary or fiduciary fund.
General long-term liabilities are reported in the governmental activities column
of the government-wide statement of net assets, but are not reported as
liabilities of governmental funds. Governmental fund types account for only
short-term liabilities to be paid from fund assets. The proceeds of long-term
debt issues may be placed in a governmental fund, but the long-term liability
must be recorded in the governmental activities at the government-wide level.
The Reporting Long-Term Liabilities principal states that long-term liabilities
to be serviced from the revenues of a proprietary fund should be accounted for
by the proprietary fund along with service of such debt. However, long-term debt
to be serviced by tax levies, or special assessments, should be accounted for at
the government-wide level. Revenues raised by taxes or special assessment for
the specific purpose of debt service (as well as any expenditures of debt
service) should be recorded in a debt service fund, which is the topic of this a
presentation. Types of obligations whose payment of interest and principal may
be accounted for by the debt service fund include serial bonds, term bonds, and
notes. Serial bonds are obligations whose principal is repaid over a number of
years. Interest payments are typically made on a semi-annual basis from the time
of issue, while the principal repayments are not made until after the passage of
a number of years, but then made at regular intervals.
