3 Accounting
3.9 Interfund Activities
3.9.1 Interfund Loans
3.9.1.10 This section does not attempt to determine which moneys of a local government may or may not be available for interfund lending, since the special character of some moneys involves commitments and restrictions which would require individual consideration. As a rule of thumb, however, it may be considered permissible to make interfund loans of those moneys which are clearly inactive or in excess of anticipated cash needs throughout the duration of the loan and legally available for investment. Interfund loans can only be done within the primary government (i.e., the governmental and proprietary funds). Loans between governmental or proprietary funds and the fiduciary funds are intergovernmental loans (not interfund loans) and procedures in BARS 3.4.7, Intergovernmental and Forgivable Loans should be followed.
In addition, the governing body may make a management decision (without a formal lending agreement, however documented in governing body meeting minutes) to loan from the General Fund an amount to other governmental or proprietary funds in lieu of a permanent transfer or contribution (for example, loans of unrestricted General Fund monies). Lending of General Fund monies would require the same repayment schedule as described below.
3.9.1.20 The minimum acceptable procedures for making and accounting for interfund loans are as follows:
1. The legislative body of a local government must, by ordinance or resolution, approve all interfund loans, indicating the lending and borrowing funds, and provide in the authorization a planned schedule of repayment of the loan principal as well as setting a reasonable rate of interest (based on the external rate available to the local government) to be paid to the lending fund. The planned schedule of repayment should specify the due date(s) of payment(s) needed to repay the principal and interest on the loan.
2. Interest should be charged in all cases, unless:
a. The borrowing fund has no other source of revenue other than the lending fund; or
b. The borrowing fund is normally funded by the lending fund; or
c. The borrowing fund is a governmental fund and the lending fund in is the General Fund.
3. The borrowing fund must anticipate sufficient revenues to be able over the period of the loan to make the specified principal and interest payments as required in the authorizing ordinance or resolution.
4. The loan status should be reviewed annually by the legislative body at any open public meeting.
5. The term of the loan may continue over a period of more than one year, but must be “temporary” in the sense that no permanent diversion of the lending fund results from the failure to repay by the borrowing fund. A loan that continues longer than three years will be scrutinized for a permanent diversion of moneys. (Note: these restrictions and limitations do not apply to those funds which are legally permitted to support one another through appropriations, transfers, advances, etc.)
6. Appropriate accounting records should be maintained to reflect the balances of loans in every fund affected by such transactions.
3.9.1.30 No debt instrument issued by one fund and held by another fund can be considered an investment. Such activity should be accounted for and reported as an interfund loan. Although the accounting treatment for such situations is not specified within a source of authoritative pronouncements, GAAP standards require transactions to be with an external party in order to classify them as other than interfund.
3.9.1.31 When a fund has a negative fund balance, it has effectively borrowed money from other funds. The governing body may authorize a policy for handling negative fund balances administratively that provides for appropriate terms and interest, including negative fund balances of fiduciary funds. However, if negative fund balances are significant or persist beyond 60 days in substance, then procedures described in 3.9.1.10 should be followed. For negative fund balances of fiduciary funds that are significant or persist beyond 60 days in substance, then procedures described in BARS 3.4.7 Intergovernmental and Forgivable Loans should be followed.
3.9.1.32 When a fund is subject to taxes, fees or other charges from other funds, the resulting receivable is not considered a loan unless and until the fund is given extra time to pay. For example, when a fund has an overdue balance and is subjected to the same collection practices as other customers, or the fund is allowed to pay significantly later than other funds or customers, or unpaid balances are otherwise allowed to accrue. Granting extra time for specific funds to pay or reimburse other funds will be scrutinized to determine whether it represents an extension of credit from one fund to another, which should conform to requirements for interfund loans as described above.
3.9.1.40 For reporting interfund loan transactions, see BARS Manual 3.9.8, Interfund Activities Overview, paragraph 3.9.8.30.