Intergovernmental and Forgivable Loans

3 Accounting

3.4 Liabilities

3.4.7 Intergovernmental and Forgivable Loans 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

Recipient Accounting for Intergovernmental Loans

This should also be reported as a liability on the recipient’s Schedule of Liabilities (Schedule 09). 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 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 Intergovernmental Loans above should be followed. 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

Recipient Accounting for Forgivable Loans