Debt refunding may be economically and financially advantageous. You’ve gone through the steps to complete the refunding itself, but there are a few requirements on the accounting side to be aware of before your GASB 34 financial statements are compiled and audited. Let’s take a look …
Review Your Debt Refunding Responsibilities
An advance refunding (most common type) is when the issuer sells new bonds, places proceeds into an escrow account, and pays off bonds at scheduled maturity date or first call date. This transaction must be recorded in the accounting system on a cash-basis. A sample entry is provided below. For assistance with these entries, contact the accounting firm assisting with your financial statement preparation.
Example Advance Refunding Entry:
| Bond issuance cost | $XX |
| Payment to the Refunded Bond Escrow Agent | $XX |
|
Discount on Refunding Bonds |
$XX |
| Sale of Refunding Bonds | $XX |
| Premium on Refunding Bonds | $XX |
For Bond Issuance and Refunding
When issuing a bond or refunding, be aware of the budgetary implications.
According to Ohio Revised Code 5705.41(A) – “…the authorization of a bond issue shall be deemed to be an appropriation of the proceeds of the bond issue …” In other words, a bond issuance or refunding does not require formal appropriation as it is determined to be appropriated through the approval of the bond or refunding. Since this is considered an appropriation by law, it should be updated within the accounting system. Correspondingly, the Certificate of Estimated Resources must be amended to include the issuance or refunding.
During the compilation process, “deemed appropriated” transactions will be included as appropriations as they are legally appropriations and required to be included in Generally Accepted Accounting Principles budgetary statements for financial reporting.
If appropriations are not recorded in the system, and the Certificate was not correspondingly increased, possible material noncompliance may be issued for appropriations exceeding estimated resources.
General Guidelines
Ohio Administrative Code 117-2-02(C)(1) states “all local public offices should integrate the budgetary accounts, at the legal level of control or lower, into the financial accounting system.”
Original budgets and each budget amendment is required to be updated in the accounting system, including Appropriations and Certificates of Estimated Resources to allow for timely and accurate monitoring of budget vs. actual data.
Furthermore, all budget amendments must be passed prior to fiscal year end and appropriation amendments retroactive to the prior year are not allowable.
Being aware of the budgetary and related requirements that come with a debt refunding are critical in minimizing the risk of noncompliance during an audit. For additional answers to your financial reporting questions, feel free to contact us anytime.
By: Jennifer Kasserman, CPA (New Philadelphia office)
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