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 of funds. 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:
518.63.40 Financial Assistance and Other Distributions $100,000
Cash $100,000
Loan repaid:
Cash $102,000
337.00.00 Local Grants and Other Payments $100,000
361.40 Other Interest $2,000
Recipient Accounting for Intergovernmental Loans
Loan issued:
Cash $100,000
391.80.00 Intergovernmental Loans $100,000
Loan repaid:
591.XX.70 Debt Service Principal $100,000
592.XX.80 Debt Service Interest $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 contains a forgiveness clause that the government expects to eventually meet.
Loans with forgiveness clauses should be accounted for as debt proceeds when received. 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 along with a loan repayment.
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.
Lender Accounting for Forgivable Loans
Loan issued:
518.63.40 Financial Assistance and Other Distributions $100,000
Cash $100,000
Loan forgiven:
Functional Expense $100,000
337.00.00 Local Grants and Other Payments $100,000
When the loan is forgiven, the lending government is forgoing a revenue stream in exchange for the recipient providing the services specified in the contract. As noted in BARS 3.1.7.40 Basis of Accounting, when a government forgoes a revenue stream in exchange for a reduction in expenses, the government must still record the revenue and expense.
The revenue will always be BARS Code 337.00.00 for Local Grants and Other Payments because the government is forgoing a repayment of the debt. The expense depends on what service was provided by the recipient government.
For example, if a City loans $100,000 to a Housing Authority to set up a low-income housing program. The loan will be forgiven if the Housing Authority provides renter assistance service for 3 years. Once the loan is forgiven, the City will record an expense to BARS Code 551.00.00 Public Housing Services.
Recipient Accounting for Forgivable Loans
Loan issued:
Cash $100,000
391.XX.00 Loan Proceeds $100,000
Loan forgiven:
591.XX.70 Debt Service Principal $100,000
33X.XX.00 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 ending cash and investments.
Loans are created:
518.63.40 Financial Assistance and Other Distributions $5,000
Cash $5,000
The full amount of the grant revenue continues to be reported as restricted cash and investments.
Receive payments on loans:
Cash $1,000
337.00.00 Local Grants and Other Payments $900
361.40.00 Other Interest $100
The receipt of this interest revenue increases the restricted ending cash and investments 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 $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.