CHAPTER 6

Capital Project Fund

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 Introduction
• The previous unit indicates that long lived assets such as office equipment,
government vehicles and other relatively minor items may be acquired by a
governmental unit by expenditures of appropriations of the general fund or
one or more of its special Revenue funds.

• Long-lived assets used by activities accounted for by a governmental fund

types are called general fixed assets. Acquisitions of General Fixed Assets
that require major amounts of money ordinarily cannot be financed from
general fund or special revenue fund appropriations .
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 Cont. …
• Major acquisitions of general fixed assets are commonly financed by issuance of long term
debt to be repaid from tax revenues, or by special assessments against property deemed to
be particularly benefited by the long lived asset.

• Other sources financing the acquisitions of long lived assets include grants from other
governmental units, transfers from other funds, gifts from individual or organizations or by
a combination of several of these sources.

• If money received from these sources is restricted, legally or morally to the acquisition or
construction of specified capital assets, it is recommended that a capital projects fund be
created to account for these resources to be used for major construction or acquisition
projects.
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 General Outline Of Capital Projects Fund
• Capital Projects Funds (CPF) account for financial resources to be used for
the acquisition or construction of major capital facilities (other than those
financed by proprietary funds & trust funds).

• Examples of major capital facilities are Administration Buildings, Civic

Centers and libraries etc. these funds do not account for the acquisition of
smaller fixed assets, such as vehicles, machinery & office equipment which
are normally budgeted for & recorded as expenditures in the general fund

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 General Outline Of Capital Projects Fund
• It is also possible that a construction project could simply have a subsidiary
ledger within the General Fund, rather than its own distinct fund.

• The existence of the Capital projects fund, as any other fund will depend on
the legal requirements and the need for good financial management.

• Virtually all-governmental buildings are constructed by the governmental

unit & are mostly financed by bond offerings.

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 General Outline Of Capital Projects Fund
• In commercial accounting, all the activities (the construction of the
building, the subsequent capitalization & accounting for the building & the
servicing of the debt incurred to finance the construction of the building is
accounted using one general ledger.

• CPF do not account for the fixed assets acquired only for the construction
of the fixed assets. It exists only for the period of acquisition or construction
of the fixed assets. After the acquisition or construction is completed, the
Capital Projects Fund will be abolished.
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 General Outline Of Capital Projects Fund
• In governmental, four general ledgers are used, of which two are funds & two are account
groups.

• The Fixed Assets constructed are accounted for in the GFAAG( General Fixed Asset account
Group) . It does not also account for the repayment & servicing of any debt obligations issued to
raise money to finance the acquisition of capital facilities.

• Such debt & debt related servicing activities are accounted for in the General Long Term Debt
Account Group (GLTDAG) & Debt service fund (DSF).

• Since the purpose of capital projects fund is to account for the acquisition and deposition of
revenues for specific purpose, it contains balance sheet accounts for only liquid assets and for
the liabilities to be liquidated by those assets.
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 General Outline Of Capital Projects Fund
Example
• Issuance of bonds for Br 500,000
Capital Projects Fund (CPF) - receives cash from bond offerings & uses cash to
construct fixed assets.
General Long Term Debt Account Group(GLTDAG) - accounts for matured General
Long Term Debt, at the maturity date, the liability is transferred to a DSF.

CPF
Cash 500,000
O.F.S Bond proceeds 500,000
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 General Outline Of Capital Projects Fund
GFAAG – accounts for fixed assets during & after construction.

* Construct new building

C.P.F
Expenditures 500,000
Cash 500,000
GFAAG
Building 500,000
Investment in F.A –CPF 500,000

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 General Outline Of Capital Projects Fund
 D.S.F. – services GLTD, making both interest & principal payments using money obtained
from tax levies on operating transfers from General Fund.
* Bond matures
DSF
Expenditures 500,000
Bonds payable 500,000
* Operating transfer made from GF.
DSF
Bonds payable 500,000
Cash 500,000
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 ESTABLISHMENT & OPERATION
C.P .F are usually established on a project-by-project basis, because legal requirements
may vary from one project to another. So the existence of the C.P .F as any other fund
will depend on the legal requirement & the need for good financial management.

The focus of the CPF is the entire life of the project. It is by definition an expendable
fund, and all its resources are expected to be used up.

However, CPFs do not have the same year-by- year focus as the G.F because of the
multi-year focus of CPFs, some accountants prefer not to close a CPF annually, but
others do .

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 ESTABLISHMENT & OPERATION
• The decision to use or not to use budgetary accounts is influenced by factors such as .

1. The number of projects in the C.P .F

2. The amount of detail in the C.P .F budget

3. The use of an annual budget (rather than a project life budget) in the CPF

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 FINANCING A CAPITAL PROJECT
Capital projects project obviously need large amount of financing . Typically source of
financing include ;

• Long term debit issue proceeds

• Grants from other governmental units

• Transfers from other funds with in the governmental entity

• Interest income from temporary investments .

• Gifts from individuals or foundations

• Special taxes or;

• A combination of more than one of those

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 Means of Acquisition
• Accomplishment of capital acquisition or construction project may be
brought about in one or more of the following ways:
1. Outright purchase from fund cash

2. By construction, utilizing the governmental units own force

3. By construction, utilizing the services of private contractors

4. By capital lease agreement.

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 Means of Acquisition
Costs Included
All expenditures for getting the project ready are put in the CPF, including architect
fees, transport costs, damages etc…. Usually major capital facilities are constructed
by contracted labor .Construction costs incurred are charged to expenditures.
At the completion of the project the cost of the facility is recorded as a fixed asset in
the GFAAG.
Until then any costs incurred are shown as construction work in progress in the
GFAAG.

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 RETAINED PERCENTAGES
 it is a common practice to withhold a portion of the contractors remuneration until final
inspection & acceptance have come about. The withheld portion is normally a contractual
percentage of the amount due on each segment of the contract.
 This is to prevent the contractor from doing a poor quality work, specially in a rush to finish
at the end. Basically the entity will pay part of the final sum, then have its own engineers
come and inspect the contractors work.
 If the contractors work passes the inspection, the balance of the amount owed is paid. if the
engineer finds poor quality or undone work, the contractor must then correct the problem
before the final retained sum is paid this amount withheld by the governmental entity is
known as retained percentage.
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 ENCUMBRANCES
 An encumbrance account is highly recommended & is very necessary in case of
multiple subcontractors for a project. Because of this, an encumbrance
accounting procedures alone are usually deemed sufficient for control purposes.
So recording of the budget in the general ledger might not be necessary .
 In capital projects fund, Encumbrance is also recorded by the same amount in
which the construction contract agreement is made between the governmental
unit and the contractor and also in the same manner as that of the general and
special revenue fund when items are ordered through purchase orders.

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 Bond Premiums, Discount And Accrued Interest On Bonds Sold
Issuance of Bonds at a Premium
 Bond premiums arise because of adjustments to the interest rates . The bond indenture
agreements usually specify that any bond premium is to be set-aside in the related DSF .
This is desirable because it remains the incentive to spend more on a project than is
authorized merely by raising additional cash by increasing the interest rate in the CPF .
 There are two ways of accounting the bond proceeds and the associated premium.

• The proceed including the premium could be recorded in the CPF as OFS-Bond proceeds
Cash……………….. 110,000

OFS- Bond proceeds……….. 110,000

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 Bond Premiums, Discount And Accrued Interest On Bonds Sold
• Or, only the par value of the bond is considered as OFS of the CPF

Cash…………… 110,000

OFS- bond proceed …………..100,000

Due to DSF ……………………10,000

 In the first case the transfer of the premium to the DSF is reported as an Operating Transfer Out in the
CPF and an Operating Transfer In in the DSF .

CPF O .F .U- operating transfer out ………10,000

Cash ………………………………..10,000

DSF: Cash ……………………………10,000

OFS –operating transfer in…………. 10,000

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 Cont. ….
 Whereas in the second case, the bond premium is accounted as a liability of the CPF
because it must be remitted to the DSF.

Issuance of Bonds at a Discount

 Bond discount are rare because the stated the interest rate is usually set enough set
high enough so that no discounts may result.
 If a discount does result, theoretically there should be a transfer from the related DSF
to the CPF to cover the shortfall. In practice such a transfer may not be possible
because money may not be available in the related DSF or because of legal restraints.
In such case, the shortage may be covered by an operating transfer from the GF .
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 INVESTMENTS

• All the money necessary to pay for the capital project is usually raised near the
inception of the project, but contractors are paid as work progresses. Excess
cash, therefore may be temporarily invested in high quality interest bearing
securities .

• Interest rates payable by the governmental unit on general long term debt have
been lower than interest rates the governmental units can earn on temporary
investments of high quality such as Treasury bills and notes, Bank notes, Bank
Certificates of deposit and government bonds with short maturities.

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 INVESTMENTS
• Consequently, there is considerable attraction to the practice of selling bonds as
soon as possible after capital project is legally authorized, and investing the proceeds
to earn a net interest income.
 If interest income is available to the CPF, it should be recognized on the accrual
basis as a credit to revenues .
 If it will be collected by the CPF but must be transferred, the credit for the income
earned should be Due to other funds .
 If the interest will be collected by the DSF or other fund that will recognize it as
Revenue, no entry by the CPF is necessary .
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 Illustration
• The town of X wants to construct a new library on the site owned by the town. The
construction is expected to cost 50,000,000. It is expected to be completed within two
years on June 30 year 2017.

• In a special meeting held on July 2 year 2015, the members of the town council
approved a 30,000,000 issue of General Obligation Bonds maturing in 20 years. The
proceeds of this sale will be used to help finance the construction of the new library. The
remaining 20,000,000 will be financed by an Irrevocable State Grant that has been
awarded.

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 Illustration
The following transactions occurred during the fiscal year ended June 30 year 2016.

1. The General fund loaned 500,000 to the library Capital Projects Fund for defraying
Engineering and other preliminary expenses by receiving a note which is later to be
Settled from the bond issue proceeds.
2. Out of the Irrevocable grant of 20,000,000, the state contributed 5,000,000 and the
remaining is deemed to be susceptible to accrual.
3. Preliminary engineering and planning costs of 320,000 were paid to the contractor. There
had been no encumbrances for this cost.
4. The Bonds were sold at 101. the bond indenture agreement requires that any premium to
be set aside in the related Debt Service Fund
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 Illustration
5. The town of X library CPF invested its 10,000,000 bond proceeds on the Federal
Government treasury bills.

6. A construction contract for 44,270,000 is authorized and signed.

7. Orders were placed for materials estimated to cost 550,000.

8. The materials previously ordered (Transaction 7) were received at a cost of 510,000.

9. In addition to the construction contract of transaction 6; 3,900,000 was incurred for

the services of the architects and engineers; of this amount 3,100,000 was paid.
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 Illustration
10. Received cash of 1,000,000 from the General fund as an operating transfer.

11. A partial payment of 10,000,000 was received from the state irrevocable Grants and
the General Fund loan was repaid with interest amounting to 10,000.

12. When the project was approximately half finished, the contractor submitted billing for
a payment of 12,000,000.
13. The contractors initial claim was fully verified and paid

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 Required

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