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006.09.1 R1-19-9-201. Long-Term Debt

AR ADC 006.09.1 R1-19-9-201Arkansas Administrative Code

West's Arkansas Administrative Code
Title 006. Department of Finance and Administration
Division 09. Office of Accounting
Rule 1. Rules and Regulations of the Financial Management Guide
Ark. Admin. Code 006.09.1 R1-19-9-201
006.09.1 R1-19-9-201. Long-Term Debt
Article 16, Section 1 of the Constitution of Arkansas states: “Neither the State nor any city, county, town or other municipality in this State shall ever lend its credit for any purpose whatever; nor shall any county, city or town or municipality ever issue any interest bearing evidences of indebtedness, except such bonds as may be authorized by law to provide for and secure the payment of the indebtedness existing at the time of the adoption of the Constitution of 1874, and the State shall never issue any interest-bearing Treasury warrants or scrip. [As amended by Const. Amends. 13 and 62.]”
Amendment 20 to the Constitution of Arkansas states: “Bonds prohibited except when approved by majority vote of electors. - Except for the purpose of refunding the existing outstanding indebtedness of the State and for assuming and refunding valid outstanding road improvement district bonds, the State of Arkansas shall issue no bonds or other evidence of indebtedness pledging the faith and credit of the State or any of its revenues for any purpose whatsoever, except by and with the consent of the majority of the qualified electors of the State voting on the question at a general election or at a special election called for that purpose. This Amendment to the Constitution of Arkansas shall be self-executing and require no enabling act, but shall take and have full force and effect immediately upon its adoption by the electors of the State.”
Bonds shall be the direct general obligations of the State of Arkansas for the payment of the debt service on which the full faith and credit of the State of Arkansas are irrevocably pledged so long as any such bonds are outstanding. The bonds shall be payable from the general revenues of the State as termed in the Revenue Stabilization Law § 19-5-101 et seq., and general revenues that are necessary for the payment of debt service on the bonds shall be and remain pledged for such purposes. (ACA 6-62-718, ACA 15-22-615, ACA 15-22-714)
Authorization to Borrow
The Arkansas Development Finance Authority (ADFA) has been given the authorization to borrow moneys and issue bonds to provide financing for a specific activity or particular project which is secured by and payable solely from the bonds, lease payments or other obligations issued by or payable to the State agencies and political subdivisions of the State. The specific activities or particular projects may include capital improvement facilities, educational facilities or health care facilities. (ACA 15-5-301, ACA 15-5-207)
PLEASE NOTE: If the long-term debt is financed through ADFA, contact the Department of Finance Administration-Office of Accounting-CAFR Section (DFA-OA-CAFR Section) for further instructions.
Long-term obligations may be backed by the full faith and credit of the State or specific revenue as defined in authorizing legislation. Generally, long-term debts are not expected to be paid within the next twelve months.
Depending on the nature of the obligation, long-term obligations of the State are accounted for in one of two ways. Long-term obligations related to and expected to be paid from proprietary and fiduciary fund type funds are accounted for in those funds. All other long-term debt will be identified as a general liability and accounted for in Fund 7006101 for inclusion in the government-wide Statement of Net Assets Financial Statements.
Types of Bonds
General Obligation Bonds are statewide bond issues that are secured by an unconditional pledge of the full faith and credit of the State.
Revenue Bonds are bond issues secured by specific sources of revenue and do not involve a pledge of the full faith and credit of the State but require legislation authorizing the specific revenue. They are payable from identified sources of revenue which are generally derived from the assets acquired or constructed with the bond proceeds.
Refunding Bonds are issued to retire bonds already outstanding. Refundings are classified as current or advance refundings.
New Issues
Generally accepted accounting principles (GAAP) direct that the proceeds from long-term debt be treated as an “other financing source” rather than as revenue in governmental fund types. The amount reported as an “other financing source” should be equal to the face amount of the debt. For accounting and financial reporting purposes, a long-term debt issue is considered to have taken place as of the closing date. Consequently, bond or loan proceeds should be reported as an “other financing source” as of the closing date. Due to withheld underwriter's fees and/or the debt issued at a discount the amount of cash received is typically less than the face amount of the debt. A discount arises when the stated rate of interest on the debt is less than the market rate of interest for similar securities when the debt was issued AASIS uses “6” series general ledger account numbers to record “other financing sources” as well as “other financing uses.”
“Other financing uses” is a category used to isolate certain non-routine outflows that might otherwise distort the analysis of expenditure trends. Discount, premiums, issuance costs such as amounts withheld for underwriters' fees should be recorded as “other financing uses” in governmental fund types.
Modified Accrual
A long-term debt would be recorded at the closing date as:
A debit to a cash account for the amount of the bond or loan proceeds plus or minus the bond premium or discount, respectively, and less the bond issuance costs (actual cash received).
A debit or credit to a bond discount or premium account for the amount of the discount or premium, respectively.
A debit to a bond issuance costs account for the amount of the issuance costs which would include underwriters' fees.
A credit to “proceeds from” bonds or loan account for the amount of the bonds or loan.
Full Accrual
At the end of the fiscal year the bonds or loan proceeds, bond discount or premium, bond issuance costs would be reclassified to bonds or loans payable, unamortized bond discount, unamortized bond premium and unamortized bond issuance costs, respectively, in accounting period “15” using Fund 7006101. The entry to reclassify the proceeds would be done by debiting the “proceeds from” bonds or loan account and crediting the payable account. The amortization of the discounts, premiums and issuance costs are also recorded in accounting period “15” using Fund 7006101. Discounts, premiums and issuance costs are amortized over the life of the debt using the “straight-line method.” Amortization amounts due in the next year need to be reclassified as current. The reclassification is recorded in accounting period “15” using Fund 7006101. Interest owed but not yet due (interest payable) will be accrued and recorded in accounting period “15” using Fund 7006101.
Refunding Issues
When advantageous and permitted by Arkansas code or bond covenants, the State will refund outstanding bond issues. Refundings are transactions to take advantage of changes in interest rates, the maturity date or escape onerous debt covenants by issuing new debt to refinance existing (old) debt. Current refundings immediately apply the proceeds of the refunding debt to redeem the old debt. When the proceeds of the refunding debt are placed into an escrow account pending the call date or maturity of the old debt, the refunding is called advance refunding. Most advance refundings result in the defeasance of the old debt. For accounting purposes, the debt is treated as though it had been redeemed. GAAP directs that the proceeds of refunding bonds, whether used for redemption or placed in escrow, be reported as an “other financing use” rather than as an expenditure (payments to escrow agents).
Modified Accrual
A long-term debt would be recorded as:
A debit to the “payments to refunding escrow agent” account for the amount of the old bond or loan or the amount that was paid to the refunding escrow agent;
A debit to a cash account for the amount of the bond or loan proceeds plus or minus the bond premium or discount, respectively, and less the bond issuance costs and amount paid to the escrow agent;
A debit or credit to a bond discount or premium account, respectively for the amount of the discount or premium, respectively;
A debit to a bond issuance costs account for the amount of the issuance costs;
A credit to “proceeds from” bonds or loan account for the amount of the bonds or loan.
Full Accrual
At the end of the fiscal year the bond or loan proceeds, bond discount or premium, bond issuance costs would be reclassified to bonds or loans payable, unamortized bond discount, unamortized bond premium and unamortized bond issuance costs, respectively, in accounting period “15” using Fund 7006101. The entry to reclassify the proceeds would be done by debiting the “proceeds from” bonds or loan account, crediting the “payments to refunding escrow agent” account and crediting the bonds or loan payable account for the difference. The amortization of the discounts, premiums and issuance costs are also recorded in accounting period “15” using Fund 7006101. Discounts, premiums and issuance costs are amortized over the life of the debt using the “straight-line method.” Amortization amounts due in the next year need to be reclassified as current. The reclassification is recorded in accounting period “15” using Fund 7006101.
If material, the difference between the cost of refunding the old bonds (the outstanding principal of the old debt plus any associated costs) and the proceeds of the refunding bonds is deferred and amortized over the remaining life of the old debt or the life of the refunding debt whichever is shorter (deferred loss on refunding). The amortization of the “deferred loss on refunding” is recorded in accounting period “15” using Fund 7006101. Amortization amounts due in the next year need to be reclassified as current. The reclassification is recorded in accounting period “15” using Fund 7006101.
Interest owed but not yet due (interest payable) will be accrued and recorded in accounting period “15” using Fund 7006101.
New and Refunding Issues
All bond issue payments include principal and interest. The classification of the principal and interest payment as both being expenses or the interest being an expense and the principal reduction of debt is determined by the financial reporting statements.
Modified Accrual
The payment of a long-term debt should be recorded as principal and interest expense following an amortization schedule.
Full Accrual
At the end of the fiscal year the expense for the principal portion will be reclassified as a reduction of the debt. Principal payments due on all long-term debt in the next year need to be reclassified as current. The reclassification is recorded in accounting period “15” using Fund 7006101.
Responsibility of Agencies to Provide DFA-OA-CAFR Long-Term Debt Information
The various State agencies, departments and entities are each responsible for safeguarding assets in its charge, the execution of only properly authorized transactions and the maintenance of the necessary financial information to document the discharge of its responsibilities. Therefore, the primary responsibility for the collection, maintenance, recording and transmission of information to permit the DFA-OA-CAFR Section to prepare GAAP financial statements lies with each agency.
It is imperative that agencies and institutions also maintain:
An adequate internal control structure to reduce the risk that errors or irregularities may occur and not be timely corrected in the normal course of agency staff business.
An audit trail that can readily trace the information transmitted to DFA-OA and amounts recorded in the State Financial Management System to the original source transaction information.
Therefore, each agency and institution should design their process to compile needed GAAP information to its own circumstances and document those processes for future training and audits.
At the close of each fiscal year DFA-OA-CAFR Section will send a debt service packet out to the agencies to gather information needed to compile the State's Comprehensive Annual Financial Report (CAFR).
Journal entries to record long-term debt are found in appendix P1-19-9-201.
Current with amendments received through January 15, 2024. Some sections may be more current, see credit for details.
Ark. Admin. Code 006.09.1 R1-19-9-201, AR ADC 006.09.1 R1-19-9-201
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