3 Accounting
3.4 Liabilities
3.4.7 Intergovernmental and Forgivable Loans
3.4.7.1 Intergovernmental loans
In general, any loans to other governments will be scrutinized for permanent diversion. However, loans to other governments may occur in lieu of a transfer or contribution when activity is related to a public or proprietary purpose of the government. For example, since provision of affordable housing is a public purpose of a city, a city could lend money to a housing authority in support of an affordable housing project within the city’s boundaries. Alternatively, the city could lend money to the authority on favorable terms, or with a partial or full forgiveness clause.
RCW 39.59.040 allows for investment in publicly issued bonds or in certain registered warrants with monies available for investment. However, a direct loan or investment with the intent to donate will be scrutinized for a permanent diversion of funds.
Lender Accounting for Intergovernmental Loans
Loan issued:
|
Intergovernmental Loans Receivable |
$100,000 |
|
|
Cash |
|
$100,000 |
Loan repaid:
|
Cash |
$102,000 |
|
|
Intergovernmental Loans Receivable |
|
$100,000 |
|
Interest Revenue |
|
$2,000 |
Recipient Accounting for Intergovernmental Loans
Loan issued:
|
Cash |
$100,000 |
|
|
Intergovernmental Loan Payable |
|
$100,000 |
Loan repaid:
|
Intergovernmental Loans Payable |
$100,000 |
|
|
Interest Expense |
$2,000 |
|
|
Cash |
|
$102,000 |
This should also be reported as a liability on the recipient’s Schedule of Liabilities (Schedule 09).
3.4.7.2 Intergovernmental loans as a fiscal agent
Lending of funds between a primary government and the fiduciary funds is considered an intergovernmental loan.
If a government acts as a fiscal agent for another government or organization, then allowing a negative fund balance is effectively lending to that other organization. Additionally, registered interest-bearing warrants issued described in 3.8.6.30 Use of Payroll and Claims Funds are considered intergovernmental loans.
The governing body of the primary government may authorize a policy for handling negative fund balances administratively that provides for appropriate terms and interest in its role as fiscal agent.
However, if negative fund balances are significant or persist beyond 60 days in substance, then procedures described in 3.4.7.1 Intergovernmental Loans above should be followed.
3.4.7.3 Forgivable loans
A loan with a forgiveness clause is a contract that contains provisions for the loan to be forgiven if certain criteria is met. For example, a lender may provide a loan to a government to construct a building and allow for forgiveness of the loan if the building is used for low-income housing for 40 years. Most loans with forgiveness clauses do not require any payments for a specified time, but some can require regular payments or interest-only payments. Transactions should be reported as loans if a note payable or loan contract is outstanding, even if the lender does not require payments and the loan includes a forgiveness clause that the government expects to eventually meet. Assets reported from loans with forgiveness clauses must be reported with a corresponding liability (loan payable) while the note payable or a loan contract is outstanding. Terms of these transactions need to be presented in the notes to the financial statements. The disclosures should include the assets acquired with the resources, conditions to be met for the transaction to become a grant, what circumstances require repayment, and the amount to be repaid (e.g., interest, appreciated value, etc.). When a government has satisfied the criteria for the loan to be forgiven, grant revenue can be recognized and the liability removed.
A recoverable grant is a contract where the grantor can require repayment if the government fails to fulfill the requirements. Some recoverable grant contracts also require return of the appreciation in value of the asset as well as the original funding amount. Recoverable grants are non-exchange transactions and should be reported as revenue when the eligibility requirements are met. If the government has received a recoverable grant, the conditions for recoverability must be disclosed in the notes to the financial statements. The items requiring disclosure include: the asset the grantor has an interest in, the amount the grantor can require to be returned, and the conditions that trigger return of the grantor interest. There are occasions where a recoverable grant may have a promissory note included. In this case, the recoverable grant should be treated as a loan with a forgiveness clause.
Lender Accounting for Forgivable Loans
Loan issued:
|
Loans Receivable |
$100,000 |
|
|
Cash |
|
$100,000 |
Loan forgiven:
|
Expense |
$100,000 |
|
|
Loans Receivable |
|
$100,000 |
Recipient Accounting for Forgivable Loans
Loan issued:
|
Cash |
$100,000 |
|
|
Loans Payable |
|
$100,000 |
Loan forgiven:
|
Loans Payable |
$100,000 |
|
|
Grant Proceeds |
|
$100,000 |
3.4.7.4 Revolving Loans
Some federal agencies award local governments funding to be used for a revolving loan program (such as HUD). In a revolving loan program, the local government receives funding from the awarding agency. They use the award funding to give loans to individuals, organizations, or business for a specific purpose. Those individuals, organizations, and businesses repay the loans and the local government uses those receipts to create new loans.
Grants received from awarding agency:
|
Cash |
$100,000 |
|
|
33X.XX.00 Grant Revenue |
|
$100,000 |
The exact grant code will depend on which agency awarded the funding and whether it was a direct or indirect award. This entry also results in restricted fund balance/net position because the grant revenue is restricted.
Loans are created:
|
Loans Receivable |
$5,000 |
|
|
Cash |
|
$5,000 |
The full amount of the grant revenue continues to be reported as restricted fund balance/net position.
Receive payments on loans:
|
Cash |
$1,000 |
|
|
Loans Receivable |
|
$900 |
|
361.40.00 Interest Revenue |
|
$100 |
The receipt of this interest revenue increases the restricted fund balance/net position because in most cases, the federal awarding agency requires you to use the interest income for a specific purpose (such as continuing to support the revolving loan program).
Other expenditures:
|
5XX.XX.X0 Expenditure/Expense |
$2,000 |
|
|
Cash/Accounts Payable |
|
$2,000 |
If the award agency approves for the funds to be used on a project or spent for something besides making loans, the local government would record an expenditure. There is no specific BARS code for the expense as it depends on the specific function of government that the activity is related to.
3.4.7.5 Working Advances from the Department of Social and Health Services (DSHS)
This guidance applies only to counties and Area Agencies on Aging (AAA).
The DSHS provides working advances to local governments in conjunction with aging, mental health, developmental disabilities and alcohol and drug rehabilitation programs. Working advances are provided in order to alleviate the cash flow problems associated with the time lag between the governments’ expenditures and reimbursements from the DSHS.
Working advances should be treated as debt rather than revenue. These should be recorded as a long-term liability per Governmental Accounting Standard Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards (Cod.) Section (Sec.) 2200 “Annual Comprehensive Financial Report” portion on Basic Financial Statements—Fund Financial Statements.
In full accrual accounting, the receipt of a working advance should be recorded as follows:
|
Cash |
$50,000 |
|
|
Long-Term Payable – Working Advance |
|
$50,000 |
In modified accrual accounting, the receipt of a working advance should be recorded as follows:
|
Cash |
$50,000 |
|
|
Other Financing Source – Intergovernmental Loan |
|
$50,000 |