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340 Long Term Liabilities of 36

Montana Operations Manual

Policy

Category Accounting

Effective Date 07/01/2005

Last Revised Not Approved Yet

Issuing Authority

Department of Administration State Financial Services Division

340 Long Term Liabilities

I. Purpose Following is a description of long-term liabilities and how to account for these liabilities.

II. Scope This policy applies to all state agencies and component units.

III. Policy Outline IV. Policy – 340 Long Term Liabilities V. Bonds

VI. Long-term Loans and Notes Payable VII. Demand Bonds

VIII. Debt Refunding IX. Bond Anticipation Notes (BANs) and Revenue Anticipation Notes (RANs)

X. Origination Fees and Initial Direct Costs of Loans and Leases XI. Arbitrage XII. Pensions – Early Retirement Benefits

XIII. Contingencies XIV. Leases

XV. Compensated Absences XVI. Conduit (No-Commitment) Debt Disclosures

XVII. Nonexchange Financial Guarantees XVIII. Authorities


IV. Policy – 340 Long Term Liabilities Section 17-2-102, MCA provides for the following fund types:

A. (1)(d): the debt service fund type, which accounts for the accumulation of resources for and the payment of general long-term debt principal and interest [for governmental funds]

• These funds (04xxx) are classified as governmental and exclude principal and interest to be paid from proprietary, fiduciary or higher education funds.

B. (1)(c): the capital projects fund type, which accounts for financial resources to be used for the acquisition or construction of major capital facilities, other than those financed by proprietary funds or trust funds

• These funds (05xxx) are classified as governmental and exclude resources to be paid from proprietary, fiduciary or Montana University System (MUS) funds.

C. (4)(e): the plant fund, which accounts for those financial resources allocated to or received by the MUS for capital outlay purposes, or to retire long-term debts associated with construction or acquisition of fixed assets and the net accumulative results of these activities.

Long-term liabilities result from bonds, notes, mortgages, capital leases, installment purchase contracts, compensated absences, claims and judgments, contingencies and net pension liabilities. Long-term liabilities have been defined as liabilities whose average maturities are greater than one year. All long-term liabilities are to be recorded by the agency incurring the obligation. Under the GASB Statement No. 34 – Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments (GASB 34) reporting model, “general long-term debt” is referred to as “general long-term liabilities.” All long-term liabilities that are not properly presented in either proprietary funds or fiduciary funds are general long-term liabilities. Governmental funds are required to use the modified-accrual basis of accounting in regard to reporting general long-term liabilities. General long-term liabilities must be reflected in the Entitywide Ledger in the governmental fund that is responsible for repayment of the debt. Governmental fund liabilities recorded in the Actuals Ledger will include short-term debt, which is to be reported as a liability in the governmental fund that is responsible for repayment of the debt, as amounts become due. In addition, any interfund loan to a governmental fund must be reported as a liability in the Actuals Ledger of the fund that received the proceeds, regardless of when the loan is expected to be repaid. Debt service funds are used when required by statute and/or if resources are being accumulated for general long-term debt principal and interest payments maturing in future years. Debt service funds may also be used for any other general long-term obligations. If general long-term obligations are to be financed directly from


unrestricted General Fund revenues, debt service expenditures may be made directly from the General Fund, rather than a debt service funds. Allowances for estimated uncollectible amounts should be established in the debt service fund as appropriate. Proprietary and fiduciary funds are required to use the full-accrual basis of accounting in regard to reporting debt. Any long-term or short-term debt associated with full-accrual funds must be reported in the Actuals Ledger in the fund that is responsible for repayment of the debt. MUS funds are considered to be a special-purpose government engaged only in business-type activities, and therefore must also use the full-accrual basis of accounting. Agencies with statutory appropriation authority to pay bond issue costs, etc., should contact OBPP to establish that appropriation authority in SABHRS. Per GASB 34, all liabilities whose average maturities are greater than one year are required to be reported in two components: the amount due within one year and the amount due in more than one year. This adjustment will need to be recorded by each agency prior to each fiscal year-end. Bond issue costs, except any portion related to prepaid insurance costs, should be expensed in the period incurred. Prepaid insurance costs, premiums and discounts, and gains or losses on debt refundings should be amortized over the period the bonds will be outstanding. The amortization period is usually the sale date to the maturity date; however, for gains and losses on refundings, the amortization period is the lesser of the remaining life on the debt being refunded or the life of the new debt. The adjustment to amortize these deferred balances will need to be recorded by each agency prior to fiscal year-end. Journal entries are only illustrated for bonds, but the same general principles apply to loans and notes as well. The non-current portion of loans/notes is recorded in account 2607 – LT Notes Payable—Non Current and the current portion in account 2627 – LT Notes Payable—Current. Proceeds are recorded in account 583700 – Loan Proceeds, principal payments in account 69201 – Loan Principal and interest expense in account 69202 – Loan Interest.

V. Bonds A. Terminology

Bond – a written promise to pay a specified sum of money, called the face value (par value) or principal amount, at a specified date in the future, called the maturity date, together with periodic interest at a specified rate. The difference between bonds and notes is that the former runs for a longer period of time and requires greater legal formality. GO Bonds – bonds secured by the full faith and credit of a government. Revenue Bonds – generally, bonds for which the principal and interest are payable exclusively from earnings of revenue-producing facilities of Enterprise or MUS funds. In addition to a pledge of revenues, such bonds may contain a


mortgage on the facilities’ property. Nearly all non-GO municipal bonds are revenue bonds. Combination Bonds – a bond which is payable from the revenues of a governmental entity and backed by the full faith and credit of the issuing government. Industrial Revenue Bonds – bonds issued by governmental entities where the proceeds are usually used to construct facilities for a private business enterprise. The bonds are serviced by lease payments made from the business to the government. These bonds can be GO bonds, revenue bonds or combination bonds. Notes – generally an unconditional written promise signed by the maker to pay a certain sum of money, on demand or at a fixed or determinable time, either to the bearer of the note or a designated third party. Bond Anticipation Notes – short-term, interest bearing notes issued in anticipation of bonds to be issued at a later date. The notes are retired from the proceeds of the bond issue to which they relate. Revenue Anticipation Notes – short-term, interest bearing notes issued in anticipation of revenue to be received at a later dated. The notes are retired from the revenue proceeds to which they relate. Bond Issuance Costs – administrative fees, legal fees, fiscal agent fees, commissions, printing costs, insurance and other costs related to the issuing of bonds. Bond Discount – the excess of the face value over price for which a bond is issued. Bond Premium – the excess of the price over face value for which a bond is issued. Demand Bonds – contain a put provision that require the issuer to repurchase the bonds at a price equal to the principal plus accrued interest (upon notice from the bond-holder).

B. Entries Required for New Bond Issues – Full Accrual Funds (All entries are made in the Actuals Ledger.) 1. To record the sale of the bonds:

Debit 1104 Cash In Bank

Debit 69106 Bond Issuance Costs

Debit 2616 Discount on Bonds Payable (if applicable)

Credit 2602 Premium on Bonds Payable (if applicable)

Credit 2601 LT Bonds Payable – Non Current


2. To record principal and interest payments as debt matures:

Debit 2601 LT Bonds Payable—Non Current (principal payment)

Debit 69102 Bond Interest

Credit 1104 Cash In Bank

3. Adjustment needed at fiscal year-end to record the amount that will be paid during next fiscal year-end:

Debit 2601 LT Bonds Payable—Non Current

Credit 2621 LT Bonds Payable—Current

This entry should then be reversed after fiscal year-end.

4. Adjustments needed at fiscal year-end to record the amount of annual amortization:

Bond Premium (if applicable)

Debit 2602 Premium on Bonds Payable

Credit 69103 Amort. Bond Premiums – Nonbudg

Bond Discount (if applicable)

Debit 69111 Bond Discount Amortization

Credit 2616 Discount on Bonds Payable

5. Adjustment needed to accrue interest payable at fiscal year-end:

Debit 69102 Bond Interest

Credit 2116 Accrued Interest Payable



C. Entries Required for New Bond Issues – Modified Accrual Funds (Entries are made in the Actuals or Entitywide Ledgers as indicated below.) 1. To record the sale of the bonds:

(Recorded in the Actuals Ledger in the fund receiving the proceeds.)

Debit 1104 Cash In Bank Debit 69112 Bond Discount NB (if applicable) Credit 583195 Bond Premium (if applicable) Credit 583100 Bond Proceeds1

1The amount posted to the bond proceeds accounts must equal the face value of the bonds issued. If the bonds being issued are refunding bonds, the face value of the refunding bonds must be recorded in account 583600 – Proceeds of Refunding Bonds.

2. To record the payment of the bond issue costs:

(To be recorded in the Actuals Ledger.)

Debit 69104 Bond Trustee Fees Debit 69105 Bond Agent Fees Debit 6XXXX Other bond issue cost expense accounts as appropriate Credit 1104 Cash In Bank

3. To record the long-term payable, the bond issuance costs and the bond

discount or bond premium:

(Recorded in the Entitywide Ledger in the fund responsible for servicing the debt.) Debit 69106 Bond Issuance Costs Debit 2616 Discount on Bonds Payable (if applicable) Debit 583100 Bond Proceeds Debit 583195 Bond Premium (if applicable) Credit 2601 LT Bonds Payable—Non Current1 Credit 2602 Premium on Bonds Payable (if applicable) Credit 69112 Bond Discount NB

1The amount posted to this account must equal the face value of the bonds issued.


4. To record principal and interest payments as debt matures:

(Recorded in the Actuals Ledger in the fund responsible for servicing the debt.) Debit 69101 Bond Principal Debit 69102 Bond Interest Credit 1104 Cash In Bank (Recorded in the Entitywide Ledger in the fund responsible for servicing the debt.) Debit 2601 LT Bonds Payable—Non Current (principal payment) Credit 69101 Bond Principal

5. Adjustment needed at fiscal year-end to record the amount that will be paid

during next fiscal year:

(Recorded in the Entitywide Ledger in the fund responsible for servicing the debt.) Debit 2601 LT Bonds Payable—Non Current Credit 2621 LT Bonds Payable—Current


6. Adjustments needed at fiscal year-end to record the amount of annual

amortization (if applicable):

(Recorded in the Entitywide Ledger in the fund responsible for servicing the debt.)

Bond Premium (if applicable): Debit 2602 Premium on Bonds Payable Credit 69103 Amort. Bond Premiums – Nonbudg

Bond Discount (if applicable): Debit 69111 Bond Discount Amortization Credit 2616 Discount on Bonds Payable



(To be recorded in the Entitywide Ledger in the fund responsible for servicing the debt.) Debit 69102 Bond Interest Credit 2116 Accrued Interest Payable


VI. Long-term Loans and Notes Payable A. General Discussion The entries required for loans and notes payable closely resemble those used for bonds, therefore, separate entries will not be detailed here. The non-current portion is recorded in 2607 – LT Notes Payable—Non Current and the current portion is recorded in 2627 – LT Notes Payable—Current. Proceeds are recorded in 583700 – Loan Proceeds, principal payments in account 69201 – Loan Principal and interest expense in 69202 – Loan Interest.

VII. Demand Bonds A. General Discussion

GASB Interpretation No. 1 – Demand Bonds Issued by State and Local Governmental Entities (Interpretation 1), as revised by GASB Statements Nos. 34 – Basic Financial Statements—Management’s Discussion and Analysis—for State and Local Governments (GASB 34), 62 – Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements (GASB 62) and 63 – Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, provides guidance for demand bonds. Demand bonds are long-term debt issuances with demand ("put") provisions that require the issuer to repurchase the bonds upon notice from the bondholder at a price equal to the principal plus accrued interest. Demand bonds often have variable interest rates that reflect the short-term market. To assure its ability to redeem the bonds, issuers of demand bonds frequently enter into short-term standby liquidity agreements and long-term "take out" agreements. Short-term agreements engage a third party, usually a bank, to purchase the “put” bonds and then remarket them. These bonds are repurchased with standby liquidity facilities, usually letters of credit. If the third party is unable to remarket the bonds within a specified period, a take-out agreement would normally go into effect. That agreement allows for the conversion of the demand bond to another long-term instrument, usually an installment loan. Interpretation 1 provides that demand bonds should be reported by state and local governmental entities as general long-term debt, or excluded from current liabilities of proprietary funds, provided the issuer has entered into a valid financing agreement to convert bonds that have been "put" but cannot be resold


into some other form of long-term obligation. In the absence of such an agreement, demand bonds should be classified as fund liabilities, or as current liabilities of proprietary funds. Note disclosure of the details of demand bond arrangements is also required. Demand bonds have demand provisions exercisable at the balance sheet or statement of net position date or within one year from the date of that statement. Such bonds should be reported as general long-term liabilities (and reported only in the government-wide statement of net position) or excluded from current liabilities of proprietary funds if all of the following conditions are met:

• Before the financial statements are issued, the issuer has entered into an arm's-length financing (take out) agreement to convert bonds "put" but not resold into some other form of long-term obligation.

• The take out agreement does not expire within one year from the date of the issuer's balance sheet or statement of net position.

• The take out agreement is not cancelable by the lender or the prospective lender during that year, and obligations incurred under the take out agreement are not callable by the lender during that year.1

• The lender or the prospective lender or investor is expected to be financially capable of honoring the take out agreement.

• Unless these conditions are met, demand bonds should be reported as liabilities in governmental funds or, in the case of proprietary funds, as current liabilities.

B. Disclosure Requirements The following information must be sent to the Department of Administration (DOA) State Accounting Bureau (SAB) upon issuance of bonds:

• A general description of the demand bond program

• Terms of any letters of credit or other standby liquidity agreements outstanding, commitment fees to obtain the letters of credit, and any amounts drawn on them outstanding as of the balance sheet date

1 If the take out agreement is cancelable or callable because of violations that can be objectively determined by both parties and no violations have occurred prior to issuance of the financial statements, the demand bonds should be classified as general long-term liabilities (and reported only in the government-wide statement of net position) or as long-term debt of proprietary funds. If violations have occurred and a waiver has been obtained before issuance of the financial statements, the bonds should be reported in the same manner. Otherwise, the demand bonds should be reported as liabilities in governmental funds or, in the case of proprietary funds, as current liabilities. If the take out agreement is cancelable or callable because of violations that cannot be objectively determined by both parties, then the agreement does not provide sufficient assurance of long-term financing capabilities and the bonds should be reported as liabilities in governmental funds, or in the case of proprietary funds, as current liabilities.


• A description of the take out agreement including its expiration date, commitment fees to obtain that agreement, and the terms of any new obligation under the take out agreement

• The debt service requirements that would result if the take out agreement were to be exercised

If a takeout agreement has been exercised converting the bonds to an installment loan, the installment loan should be reported as a general long-term liability and the payment schedule under the installment loan should be included as part of the schedule of debt service requirements to maturity.

C. Entries The entries required for demand bonds are the same as those for standard bonds, as detailed previously.

VIII. Debt Refunding A. Terminology

Current Refunding – proceeds from the issuance of new debt are used to repay debt previously issued (old debt) and the issuance and repayment occur in the same period. Also, proceeds from refunding debt that was issued less than 90 days in advance of the maturity or call date of the refunded debt (and placed with an escrow agent for payment of the old debt) are considered a current refunding. Advance Refunding – proceeds from the issuance of new debt are placed with an escrow agent for investment and then used to repay debt issued previously (old debt) at a future time. Proceeds from refunding debt that was issued more than 90 days in advance of the maturity or call date of the refunded debt is considered an advanced refunding. Advanced refunding may result in an in-substance defeasance if certain criteria are met. Legal Defeasance – occurs when debt is legally satisfied, based on certain provisions in the debt instrument, even though the debt is not actually paid. In-substance Defeasance - debt is considered defeased in substance, even though a legal defeasance has not occurred, if the debtor irrevocably places cash or other monetary assets acquired with only existing resources – that is, resources other than the proceeds of refunding debt, with an escrow agent in a trust to be used solely for satisfying scheduled payments of both interest and principal of the defeased debt. Reacquisition Price – the amount required to repay old previously issued debt. In a current refunding, this amount includes principal of the old debt and any call premium. In an advance refunding, this amount includes the amount placed in escrow (including interest) necessary to pay principal and interest on the old debt and any call premium. Premiums or discounts related to the new debt are not part of the reacquisition price; these costs are related to and amortized over the life of the new debt. In an in-substance defeasance it is the amount placed in


escrow that, together with interest earnings, is necessary to pay interest and principal on the debt and any call premium. Net Carrying Amount – the amount due at maturity, adjusted for any unamortized discount or premiums related to the old debt as well as any deferred outflows or deferred inflows of resources associated with a derivative instrument that is an effective hedge of debt. Deferred Inflows or deferred outflows of resources – the difference between the reacquisition prices and the net carrying amount of the old debt. Proprietary Activities – proprietary funds and any other governmental entities that use proprietary fund accounting, including public utilities, hospitals, healthcare providers and governmental colleges and universities who report transactions in proprietary funds using the “Governmental Model.” This does not apply to MUS funds, which follow the “AICPA Model.” Prepaid Insurance- agencies that extinguish debt, whether through a legal extinguishment or through an in-substance defeasance, should include the amount of any remaining prepaid insurance related to the extinguished debt in the net carrying amount of that debt for the purpose of calculating the difference between the reacquisition price and the net carrying amount of the extinguished debt.

B. Governmental Funds

GASB Statement No. 7 – Advance Refundings Resulting in Defeasance of Debt, (GASB 7), as amended by GASB Statement No. 86, Certain Debt Extinguishment Issues (GASB 86), provides guidance on accounting in governmental fund types for advance refundings that result in defeasance of debt. Payments to an escrow agent made from resources other than refunding debt proceeds should be reported as debt service expenditures, even for transactions in which only existing resources are used to defease debt.

C. Proprietary Funds GASB Statement No. 23 – Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities as amended by GASB Statement No. 65 – Items Previously Reported as Assets and Liabilities (GASB 65) and GASB 86 requires recording a deferred outflow of resources or a deferred inflow of resources for any difference between the reacquisition price and the net carrying amount of the old debt (the gain or loss) related to the current or advance refunding of proprietary activity debt. GASB 65 requires, for current and advanced refunding resulting in defeasance of debt, that the difference between the reacquisition price and the net carrying value of the old debt be reported as a deferred outflow of resources or a deferred inflow of resources and recognized as a component of interest expense in a systematic and rational manner over the remaining life of the old debt or the life of the new debt, whichever is shorter. As amended by GASB 86, when debt is


defeased in-substance using only existing resources, immediate recognition of the difference must be recognized as a gain or loss in the current period. The new issuance, including any related premium or discount and issuance costs (as well as subsequent payments and amortization), can be recorded by referencing the bond issuance entries outlined previously. The deferred outflows of resources are reported in the balance sheet or statement of net position following assets; the deferred inflows of resources are reported following liabilities.

D. Entries Required for Refunding Bond Issues – Full Accrual Funds (All entries are made in the Actuals Ledger.) 1. To retire the old issue:

Debit 2601 LT Bonds Payable—Non Current Debit 2602 Premium on Bonds Payable (if applicable) Credit 1104 Cash In Bank (for amount going to escrow) Credit 2616 Discount on Bonds Payable (if applicable) Debit/ Credit

1908/ 2617

Refunding Deferred Outflows or Refunding Deferred Inflows1

1This amount is the difference between the reacquisition price (credit to 1104) and the net carrying amount (net of the debits to 2601 and 2602 and the credits to 2616). For defeased debt that is defeased in-substance acquired with only existing resources, a gain or loss is recognized in accordance with GASB 86, paragraph 5.

2. To record amortization of the Deferred Interest Expense – Refunding in subsequent years:

Debit/ Credit

69102 Bond Interest

Credit/ Debit

1908/ 2617

Refunding Deferred Outflows or Refunding Deferred Inflows

The new issue is recorded as outlined previously in the bond issuances entries.


E. Entries Required for Refunding Bond Issues – Modified Accrual Funds 1. To pay for the retirement of an old issue:

(Recorded in the Actuals ledger.) Debit 67902A Pay Refunded Bond Esc Agt NB Credit 1104 Cash In Bank (for amount going to escrow)

2.

2. To remove the debt associated with the old issue:

(Recorded in the Entitywide Ledger in the fund responsible for servicing the debt.) Debit 2601 LT Bonds Payable—Non Current Debit 2602 Premium on Bonds Payable (if applicable) Credit 2616 Discount on Bonds Payable (if applicable) Credit 67902A Pay Refunded Bond Esc Agt NB Debit/ Credit

1908/ 2617

Refunding Deferred Outflows or Refunding Deferred Inflows1

1This amount is the difference between the reacquisition price (credit to 67902A) and the net carrying amount (net of the debits to 2601 and 2602, and the credit to 2616).

3. To record amortization of the refunding deferred inflows/outflows in subsequent years:

(Recorded in the Entitywide Ledger in the fund responsible for servicing the debt.) Debit/ Credit

69102 Bond Interest

Credit/ Debit

1908/ 2617

Refunding Deferred Outflows/Refunding Deferred Inflows

The new issuance is recorded as outlined previously with the bond issuance entries. Ensure the specific bond proceeds account for refunding bonds (583600 – Proceeds of Refunding Bonds) is used.

IX. Bond Anticipation Notes (BANs) and Revenue Anticipation Notes (RANs) A. General Discussion

If all legal steps have been taken to refinance BANs and the intent is supported by an ability to consummate refinancing the short-term notes on a long-term


basis in accordance with the criteria set forth in GASB 62, they should be recorded as long-term notes payable. GASB 62, par. 39, as amended by GASB 63, par. 8, states: The government’s intent to refinance the short-term obligation on a long-term basis is supported by an ability to consummate the refinancing demonstrated in either of the following ways:

1. Issuance of a long-term obligation after date of financial statements. After the date of a government’s financial statements but before those financial statements are issued, a long-term obligation has been issued for the purpose of refinancing the short-term obligation on a long-term basis; or

2. Financing agreement. Before the financial statements are issued, the government has entered into a financing agreement that clearly permits the government to refinance the short-term obligation on a long-term basis on terms that are readily determinable, and all of the following conditions are met:

a. The agreement does not expire within one year from the date of the government’s financial statements and during that period the agreement is not cancelable by the lender or the prospective lender (and obligations incurred under the agreement are not callable during that period) except for violation of a provision with which compliance is objectively determinable or measurable.3

b. No violation of any provision in the financing agreement exists at the date of the financial statements and no available information indicates that a violation has occurred thereafter but prior to the issuance of the financial statements, or, if one exists at the date of the financial statements or has occurred thereafter, a waiver has been obtained.

c. The lender or the prospective lender with which the government’s has entered into the financing agreement is expected to be financially capable of honoring the agreement.

GASB 62, par. 44 states: If a short-term obligation is excluded from current liabilities pursuant to the provisions [of GASB 62], the notes to the financial statements should include a general description of the financing agreement and the terms of any new obligation incurred or expected to be incurred a result of a refinancing.

3 Financing agreements cancelable for violation of a provision that can be evaluated differently by the parties to the agreement do not comply with this condition. Examples of provisions include “a material adverse change” or “failure to maintain satisfactory operations.”


B. BAN or RAN Entries – Full Accrual Funds (All entries made in regard to full accrual funds need to be made in the Actuals Ledger.) 1. To record the issuance:

Debit 1104 Cash In Bank Debit 2616 Discount on Bonds Payable (if applicable) Credit 2602 Premium on Bonds Payable (if applicable) Credit 2120 Short-Term Debt

2. To record interest payments:

Debit 69102 Bond Interest Credit 1104 Cash In Bank

3. To record amortization at fiscal year-end:

Bond Premium (if applicable) Credit 2602 Premium on Bonds Payable Debit 530030 Amortization Bond Premiums

Bond Discount (if applicable) Debit 530029 Accretion Bond Discounts Credit 2616 Discount on Bonds Payable


Debit 69102 Bond Interest Credit 2116 Accrued Interest Payable



C. BAN or RAN Entries – Modified Accrual Funds 1. To record the issuance:

(Recorded in the Actuals ledger.) Debit 1104 Cash In Bank Debit 69112 Bond Discount NB (if applicable) Credit 583100 Bond Proceeds Credit 583195 Bond Premium (if applicable)

2. To record payment of bond issue costs:

(Recorded in the Actuals ledger.) Debit 69104 Bond Trustee Fees Debit 69105 Bond Agent Fees Credit 1104 Cash In Bank

3. To record payable, bond issue costs and deferral of discount/premium (if

applicable):

(Recorded in the Entitywide ledger.) Debit 69106 Bond Issuance Cost Debit 2616 Discount on Bonds Payable (if applicable) Debit 583100 Bond Proceeds Debit 583195 Bond Premium (if applicable) Credit 2120 Short-term Debt Credit 2602 Premium on Bonds Payable (if applicable) Credit 69104 Bond Trustee Fees Credit 69105 Bond Agent Fees Credit 69112 Bond Discount NB

4. To record interest payments:

(Recorded in the Actuals ledger.) Debit 69102 Bond Interest Credit 1104 Cash In Bank


5. To record amortization at fiscal year-end:

(Recorded in the Entitywide ledger.)

Bond Premium (if applicable) Credit 2602 Premium on Bonds Payable Debit 530030 Amortization Bond Premiums

Bond Discount (if applicable Debit 530029 Accretion Bond Discounts Credit 2616 Discount on Bonds Payable


(Recorded in the Entitywide ledger.) Debit 69102 Bond Interest Credit 2116 Accrued Interest Payable


X. Origination Fees and Initial Direct Costs of Loans and Leases A. Terminology (per GASB 62, par. 451)

Commitment Fees – fees charged for entering into an agreement that obligates the government to make or acquire a loan [or group of loans], or to satisfy an obligation of the other party under a specified condition. This includes fees for letters of credit and obligations to purchase a loan or group of loans [and pass-through certificates]. Origination Fees – fees charges to the borrower in connection with the process of originating, refinancing, or restructuring a loan. This term includes, but is not limited to, points, management, arrangement, placement, application, underwriting, and other fees pursuant to a lending or leasing transaction. Syndication and participation fees are included to the extent they are associated with the portion of the loan retained by the lender.

B. General Discussion The below material is from GASB 62, par. 431-467, as amended by GASB 65 (par. 24-26) and GASB Statement No. 66 – Technical Corrections—2012 (GASB 66) (par. 5), as presented in the Codification – IV. Specific Balance Sheet and Operating Statement Items (L30 – Lending Activities, par. 113 and 131). GASB 62 establishes financial recording and reporting requirements for nonrefundable fees and costs associated with lending activities and loan


purchases. Lending activities include lending, committing to lend, refinancing or restructuring loans and leasing activities. The accounting for discounts, premiums and commitment fees associated with the purchase of loans and other debt securities, such as Treasury notes and bonds, corporate bonds, groups of loans and loan-backed securities (including pass-through certificates, collateralized mortgages and other securitized loans) is addressed. Also addressed is the recognition and the statement of net position classification of nonrefundable fees and costs associated with lending activities. The statement applies to individual loan contracts; however, aggregation of similar types of loans for purposes of recognizing net fees or costs and purchase premiums or discounts is permitted as longs as the resulting recognition does not differ materially from the amount that would have been recognized on a loan-by-loan basis. If a loan is held for investment, loan origination fees, except any portion related to points, and direct loan origination costs should be recognized as revenue or expense, respectively, in the period the loan is originated. Points received by a lender in relation to a loan held for investment should be reported as a deferred inflow of resources and recognized as revenue in a systematic and rational manner over the duration of the related loan. For loans that are held for sale, origination fees, including any portion related to points, and direct loan origination costs should be recorded as a deferred inflow of resources and a deferred outflow of resources, respectively, until the related loan is sold. Once the related loan is sold, the amount reported as a deferred inflow of resources related to the loan origination fees, including any portion related to points, and the amount reported as a deferred inflow of resources related to the direct loan origination costs should be recognized as revenue and expense, respectively, in the period of sale. The initial investment in a purchased loan or group of loans shall include the amount paid to the seller plus any fees paid or less any fees received. Any fees paid or any fees received related to this purchase should be recognized as an expense or revenue, respectively, in the period that the loan(s) was purchased. GASB 62 is not applicable to refundable loan origination or commitment fees that are refundable unless such fees subsequently become nonrefundable. The statement does not apply to costs that are incurred by the lender in transactions with independent third parties if the lender bills those costs directly to the borrower. It also does not apply to nonrefundable fees and costs associated with originating or acquiring loans that are carries at fair value. Provisions of the statement that apply to leasing activities are only applicable to lessors in determining the net amount of initial direct costs of a lease.


XI. Arbitrage A. Terminology

Arbitrage – (in governmental accounting) the investment of low-yielding, tax-exempt bond proceeds in higher-yielding, taxable securities, which result in interest earnings exceeding interest costs. Arbitrage Rebate – the arbitrage amount for a bond issue which is calculated and paid to the US government every five years and at bond maturity, extinguishment or refunding. Arbitrage Liability – the cumulative amount of the arbitrage determined to be due to the US government each fiscal year prior to the year in which the rebate is paid.

B. General Discussion The US Treasury Department regulations that govern arbitrage, as codified in 26 U.S. Code §148 – Arbitrage, only require a governmental entity to calculate and pay the rebate amount once every five years and at bond maturity, extinguishment or refunding. However, the five-year rebate amount must be calculated each year for an entity to comply with GAAP. The most applicable accounting guidance available is GASB 62 (par. 100-110), which provides the following criteria for recording a liability:

1. If it is probable and reasonably estimable that the governmental entity will have a rebate liability at the end of the five-year term, the liability should be accrued in year one and then the liability should be recorded as indicated in the following discussion.

2. If it is only reasonably possible that the governmental entity will incur a rebate liability at the end of the five-year term, then only footnote disclosure as discussed in par. 7 is required.

3. If it is a remote possibility that the government entity will incur a rebate liability at the end of the five-year term, then no accrual or disclosure is required.

State policy requires reporting the liability as a tax for incurring excess interest earnings using accounts 2603 – Est. Arbitrage Rbte. Tx—Non Curr and 2623 – Est. Arbitrage Rbte. Tx—Current. The rebate amount is considered an expenditure and recorded in account 62819 – Arbitrage Rebate Tax. Full accrual (proprietary, pension and MUS) funds report an expenditure each fiscal year for the current year portion of the liability. The liability is a cumulative amount until the year of payment. Modified accrual (governmental) funds report an expenditure for the total amount of the payment during the fiscal year in which the rebate payment becomes due.


C. Arbitrage entries required – Full Accrual Funds (All entries are made in the Actuals Ledger.) 1. 1. Entry to record the liability in each year the liability accrues:

Debit 62819 Arbitrage Rebate Tax Credit 2603 Est. Arbitrage Rebate Tax Payable—Non Current

2. Adjustment needed at fiscal year-end, in the year prior to the year the

payment will be made, to record the amount that will be paid during the next fiscal year:

Debit 2603 Est. Arbitrage Rebate Tax Payable—Non Current Credit 2623 Est. Arbitrage Rebate Tax Payable—Current



3. Entries made at the earlier of five years or the bond’s maturity/ extinguishment/retirement.

To record the payment to the US Treasury: Debit 62819 Arbitrage Rebate Tax Credit 1104 Cash In Bank To remove the liability once the payment has been made: Debit 2603 Est. Arbitrage Rebate Tax Payable—Non Current Credit 62819 Arbitrage Rebate Tax

D. D. D. Arbitrage entries required – Modified Accrual Funds

1. 1. Entry to record the liability in each year the liability accrues:

(Recorded in the Entitywide Ledger.) Debit 62819 Arbitrage Rebate Tax Credit 2603 Est. Arbitrage Rebate Tax Payable—Non Current

2. Adjustment needed at fiscal year-end, in the year prior to the year the

payment will be made, to record the amount that will be paid during the next fiscal year:

(Recorded made in the Entitywide Ledger.) Debit 2603 Est. Arbitrage Rebate Tax Payable—Non Current Credit 2623 Est. Arbitrage Rebate Tax Payable—Current


3. Entries made at the earlier of five years or the bond’s maturity/ extinguishment/retirement.

To record the payment to the US Treasury (recorded in the Actuals Ledger). Debit 62819 Arbitrage Rebate Tax Credit 1104 Cash In Bank To remove the liability once the payment has been made (recorded in the Entitywide Ledger): Debit 2603 Est. Arbitrage Rebate Tax Payable-Non Current Credit 62819 Arbitrage Rebate Tax


XII. Pensions – Early Retirement Benefits A. General Discussion

If an agency offers early retirement to its employees (and the offer is accepted), then the agency has created a pension liability.

B. Pension payable entries required – Full Accrual Funds (All entries are made in the Actuals Ledger.)

1. Entry to record the full amount owed:

Debit 61402 Retirement – Other Credit 2604 Pension Payable – Non Current

2. Entry to record the payment:

Debit 2604 Pension Payable – Non Current Credit 1104 Cash In Bank

3. Adjustment needed at fiscal year-end to record the amount that will be paid during the next fiscal year (if any):

Debit 2604 Pension Payable – Non Current Credit 2624 Pension Payable – Current


C. Pension payable entries required – Modified Accrual Funds 1. Entry to record the full amount owed:

(Recorded in the Entitywide Ledger.) Debit 61402 Retirement – Other Credit 2604 Pension Payable – Non Current

2. Entry to record the payment:

(To be recorded in the Actuals Ledger.) Debit 61402 Retirement – Other Credit 1104 Cash (Recorded in the Entitywide Ledger.) Debit 2604 Pension Payable – Non Current Credit 61402 Retirement - Other


3. Adjustment needed at fiscal year-end to record the amount that will be paid during the next fiscal year (if any):

(To be made in the Entitywide Ledger.) Debit 2604 Pension Payable – Non Current Credit 2624 Pension Payable - Current


XIII. Contingencies A. General Discussion

GASB 62 (par. 96-113), as amended by GASB 63 and GASB Statement No. 70 – Accounting and Financial Reporting for Nonexchange Financial Guarantees (GASB 70) and presented in the Codification – IV. Specific Balance Sheet and Operating Statement Items (C50 – Claims and Judgments) provides guidance on contingencies. A contingency is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (referred to as a gain contingency) or loss (referred to as a loss contingency) to a government that will ultimately be resolved when one or more future events occur or fail to occur. Resolution of the uncertainty may confirm the acquisition of an asset, the reduction of a liability, the loss or impairment of an asset, or the incurrence of a liability. State government is subject to many types of claims that can result in contingencies. They may arise from:

1. Employment, such as worker compensation and unemployment claims 2. Contractual actions, such as claims for delays or inadequate

specifications on contracts 3. Actions of government personnel, such as claims for medical

malpractice, damage to privately owned vehicles by government-owned vehicles and improper police arrest

4. Governmental properties, such as claims relating to personal injuries and property damage

B. Loss Contingencies When a loss contingency exists, the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability can range from probably to remote, as follows:

1. Probable. The future event or events are likely to occur. 2. Reasonably possible. The chance of the future event or events

occurring is more than remote but less than likely. 3. Remote. The chance of the future event or events occurring is slight.


An estimated loss from a loss contingency should be accrued if both of the following conditions are met:

1. Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it should be probable that one or more future events will occur confirming the fact of the loss.

2. The amount of loss can be reasonably estimated. The purpose of these two conditions is to require accrual of losses when they are reasonably estimable and relate to the current or a prior period. The condition that the amount of the loss can be reasonably estimated does not delay accrual of a loss until only a single amount can be reasonably estimated. To the contrary, when the first condition is met and information available indicates that the estimated amount of loss is within a range of amounts, it follows that some amount of loss has occurred and can be reasonably estimated. When the first condition is met with respect to a particular loss contingency and the reasonable estimate of the loss is a range, the second condition is met and an amount should be accrued for the loss. When some amount within the range appears at the time to be a better estimate than any other amount within the range, that amount should be accrued. When no amount within the range is a better estimate than any other amount, however, the minimum amount in the range should be accrued. In addition, disclosure may be required for the nature and, in some circumstances, the amount accrued. This statement also requires disclosure of the nature of the contingency and the additional exposure to loss if there is at least a reasonable possibility of loss in excess of the amount accrued. Claims against the State are characterized by conditions that could make estimation of the ultimate liability extremely difficult. For example:

1. Certain types of claims may be filed in amounts far greater than those that can reasonably be expected to be agreed on by the State and the claimant or awarded by a court.

2. The time permitted between the occurrence of an event causing a claim and the actual filing of the claim may be lengthy.

3. The time that may elapse between filing and ultimate settlement and payment of a claim may be extremely lengthy. Similarly, the adjudicated loss may be paid over a period of years after settlement.

The stages of the claim cycle are: 1. When a loss contingency occurs 2. When a loss is estimable 3. When adjudicated or settled 4. When a voucher is made for a payment 5. When paid


If a claim is asserted and the probable loss is reasonably estimable, GAAP requires that the liability be recognized in the financial statements. Because of the time involved from an incident creating a claim and the claim’s ultimate settlement, claims frequently take on the nature of long-term liabilities. Liabilities may be estimated through a case-by-case review of all claims, the application of historical experience to the outstanding claims, or a combination of these methods. If historical experience is used, the outstanding claims should be sufficiently separated by amount and type of claim to assure the reasonableness of the estimation. 1. Disclosure

Disclosure of the nature of an accrual, and in some circumstances the amount accrued, may be necessary for the financial statements not to be misleading. If no accrual is made for a loss contingency because one or both of the conditions are not met, or if an exposure to loss exists in excess of the amount accrued, then disclosure of the contingency should be made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. The disclosure should:

• Indicate the nature of the contingency.

• Give an estimate of the possible loss or range of loss or state that such an estimate cannot be made.

Disclosure is not required of a loss contingency involving an unasserted claim or assessment when there has been no manifestation by a potential claimant of an awareness of a possible claim or assessment unless it is considered probable that a claim will be asserted and there is a reasonable possibility that the outcome will be unfavorable. Certain loss contingencies should be disclosed in financial statements even though the possibility of loss may be remote. The common characteristic of those contingencies is a guarantee in an exchange or exchange or exchange-like transaction, normally with a right to proceed against an outside party in the event that the guarantor is called upon to satisfy the guarantee. Examples include guarantees of indebtedness of others in an exchange transaction and guarantees to repurchase receivables (or, in some cases, to repurchase the related property) that have been sold or otherwise assigned. Those loss contingencies, and others that in substance have the same characteristic, should be disclosed. The disclosure should include the nature and amount of the guarantee. Consideration should be given to disclosing, if estimable, the value of any recovery that could be expected to result, such as from the guarantor’s right to proceed against an outside party. The term “guarantees of indebtedness of others in an exchange or exchange-like transaction” includes indirect guarantees of indebtedness of others. An indirect guarantee of the indebtedness of another arises under an agreement


that obligates a government to transfer resources to another entity upon the occurrence of specified events, under conditions whereby both: The resources are legally available to creditors of the second entity.

Those creditors may enforce the second entity’s claims against the government under the agreement. Examples of indirect guarantees include agreements to advance resources if a second entity’s revenues, coverage of debt service, or net position/fund balance fall below a specified minimum.

2. Subsequent Events After fiscal year-end but before the financial statements are issued, information may become available indicating that an asset was impaired or a liability was incurred after fiscal year-end or that there is at least a reasonable possibility that an asset was impaired or a liability was incurred after that date. The information may relate to a loss contingency that existed at the date of the financial statements. On the other hand, the information may relate to a loss contingency that did not exist at fiscal year-end. Disclosure of those kinds of losses or loss contingencies may be necessary to keep the financial statements from being misleading. If disclosure is deemed necessary, the financial statements should indicate the nature of the loss or loss contingency and give an estimate of the amount or range of loss, or possible loss, or state that such an estimate cannot be made.

3. Loss Contingency entries required – Full Accrual Funds (All entries are made in the Actuals Ledger.)

Entry to record the entire amount of the loss contingency: Debit 67XXX Estimated Claims Credit 2610 Est. Claims Payable – Non Current Entry to Record Payment: Debit 2610 Est. Claims Payable – Non Current Credit 1104 Cash In Bank Adjustment needed at fiscal year-end to record the amount that will be paid during the next fiscal year: Debit 2610 Est. Claims Payable – Non Current Credit 2630 Est. Claims Payable – Current This entry should be reversed after fiscal year-end.


4. Loss Contingency entries required – Modified Accrual Funds

Entry to record the amount of claims/judgments where the event giving rise to the claim has occurred on or before June 30th, and where the liability is normally paid in full, in a timely manner, from current financial resources (entry recorded in the Actuals Ledger): Debit 67XXX Estimated Claims Credit 2630 Est. Claims Payable – Current Entry to record the remaining portion of the liability (entry recorded in the Entitywide Ledger): Debit 67XXX Estimated Claims Credit 2610 Est. Claims Payable – Non Current

Entry to record the payment (recorded in the Actuals Ledger): Debit 67XXX Estimated Claims Credit 1104 Cash

Entry to reverse the liability once payment is made (entry recorded in the Actuals Ledger): Debit 2630 Est. Claims Payable – Current Credit 67XXX Estimated Claims

(To be recorded in the ENTITWIDE Ledger) Debit 2610 Est Claims Payable – Non Current Credit 67XXX Estimated Claims Adjustment needed at fiscal year-end to record the amount that will be paid during the next fiscal year-end (entry recorded in the Entitywide Ledger): Debit 2610 Est. Claims Payable – Non Current Credit 2630 Est. Claims Payable - Current This entry should then be reversed after fiscal year-end.

C. Gain Contingencies A gain contingency should be disclosed in the footnotes to the financial statements, but should not be recorded in SABHRS because to do so might recognize revenue prior to its realization. Pertinent information relating to any gain contingencies should be sent to the DOA SAB at each fiscal year-end.

XIV. Leases This topic is covered in MOM Policy 335 – Capital Assets.


XV. Compensated Absences

A. General Discussion Compensated absences are liabilities owed by the State to its employees for unused vacation and sick leave and banked holidays. GASB Statement No. 16 – Accounting for Compensated Absences (GASB 16), as amended by GASB 34, GASB 45 – Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions (GASB 45) and GASB 63, established the basic concept that a liability for compensated absences should be recorded when future payments for such absences have been earned by employees. The liability should be recorded if both of the following conditions are satisfied:

1. The employees’ rights to receive compensation are attributable to services already performed by the employees.

2. It is probable that the employees will be compensated for the benefits through paid time off, cash payments at termination or retirement, or some other means.

Compensated absences should not be recorded for absences dependent on the performance of future services by employees, or when payments are contingent on specific future events that are outside the control of the employer and employees. During the fiscal year-end period, DOA SAB can provide State agencies, a compensated absences summary report. This report includes the outstanding liability balance for the current and prior fiscal year. The liability reported on this report is calculated at 100% of the employees’ vacation leave, non-exempt comp time, and banked holidays, along with 25% of the employees’ sick leave, which is multiplied by the current pay rates. The liability on this report does not include any amount for exempt comp time. This report also details the amount of annual, sick and comp time used during the fiscal year. DOA SAB creates the entries for all non-MUS funds. MUS funds determine and record (as of June 30th each fiscal year) their compensated absence liability in their Current Unrestricted Funds using the following entries outlined for MUS funds. The amount due within one year is recorded in account 2625 – Comp Abs—Current and the amount due in more than one year in account 2605 – Comp Abs—Non Current. DOA SAB will determine the total compensated absences liability for non-MUS funds. The amount estimated as due within one year, is the amount of compensated absences taken during the current fiscal year. The amount recorded as due in more than one year is the total liability, less the amount recorded as due within one year. For ease of recording, the entries made for the prior year are reversed before the current year’s entries are made. If the amount used during the current year is greater than the total liability balance, then the entry to record the amount due in more than one year will require a debit to account 2605. A debit balance in account 2605 at fiscal year-


end is an allowable unusual balance. In that situation, SAB will record the necessary CAFR-only adjustment debiting account 2625 and crediting account 2605 for an amount equal to the debit balance in 2605, which will properly report the accounts in the CAFR. If an agency prepares separately issued financial statements, then the CAFR-only adjustment must also be made by the agency for its financial statements. To illustrate that scenario, assume that an agency’s total liability balance is $10,000. Further assume that the agency used $11,000 in compensated absences in the current fiscal year.

1. Fiscal year-end entry (booked by SAB):

Debit 61905 Compensated Absences – Nonbudget 11,000 Credit 2625 Comp Abs – Current 11,000 Debit 2605 Comp Abs – Non Current 1,000 Credit 61905 Compensated Absences – Nonbudget 1,000

2. CAFR-only adjustment (booked by SAB):

Debit 2625 Comp Abs – Current 1,000 Credit 2605 Comp Abs – Non Current 1,000

B. Compensated Absence Entries – Full Accrual Funds All entries are made in the Actuals Ledger. SAB reverses prior year entries before current year entries are booked. 1. Entry made by SAB to record the amount of compensated absences due in

one year.

Debit 61905 Compensated Absences – Nonbudget Credit 2625 Comp Abs - Current

2. Entry made by SAB to record the amount of compensated absences due in

more than one year.

Debit/ Credit 61905 Compensated Absences – Nonbudget Credit/ Debit 2605 Comp Abs – Non Current


C. Compensated Absence Entries – Modified Accrual Funds All entries are to be made in the Entitywide Ledger. SAB reverses prior year entries before current year entries are booked. 1. Entry made by SAB to record the amount of compensated absences due in

one year.

Debit 61905 Compensated Absences – Nonbudget Credit 2625 Comp Abs – Current

2. Entry made by SAB to record the amount of compensated absences due in

more than one year.

Debit/Credit 61905 Compensated Absences – Nonbudget Credit/Debit 2605 Comp Abs – Non Current

D. Compensated Absence Entries – MUS (Full Accrual) Funds All entries are to be made in the Actuals ledger. 1. Entry to record the amount of compensated absences due in one year.

Increase to 2625 (positive difference from the prior year) Debit 61905 Compensated Absences – Nonbudget Credit 2625 Comp Abs – Current Decrease to 2625 (negative from the prior year) Debit 2625 Comp Abs – Current Credit 61905 Compensated Absences – Nonbudget

2. Entry to record the amount of compensated absences due in more than one

year.

Increase to 2605 (positive difference from the prior year) Debit 61905 Compensated Absences – Nonbudget Credit 2605 Comp Abs – Non Current Decrease to 2605 (negative difference from the prior year) Debit 2605 Comp Abs – Non Current Credit 61905 Compensated Absences – Nonbudget


XVI. Conduit (No-Commitment) Debt Disclosures Conduit debt is discussed in GASB Interpretation No. 2 – Disclosure of Conduit Debt Obligations. Conduit debt obligations are certain limited-obligation revenue bonds, certificates of participation, or similar debt instruments issued by a state or local governmental entity for the express purpose of providing capital financing for a specific third party that is not a part of the issuer's financial reporting entity. Accordingly, debt issued on behalf of a discretely presented component unit cannot be conduit debt, even if repayment is secured solely by revenues of the component unit. Although conduit debt obligations bear the name of the governmental issuer, the issuer has no obligation for such debt beyond the resources provided by a lease or loan with the third party on whose behalf they are issued. The required disclosures include:

A. A general description of the conduit debt transactions; B. The aggregate amount of all conduit debt obligations outstanding at fiscal

year-end; and C. A clear indication that the issuer has no obligation for the debt beyond the

resources provided by related leases or loans. This information must be provided to DOA SAB at each fiscal year-end as discussed in MOM Policy 375 – Fiscal Year-End. An example of conduit debt includes Facility Finance Authority (FFA) bonds issued on behalf of a third-party, non-governmental hospital. Assets and revenues of the borrower (the hospital) are pledged to repay the bonds, but the issuer (FFA) is not obligated for the debt. FFA is not required to present this information on the face of its financial statements, but it is required to make the disclosures detailed above.

If debt is issued by one party on behalf of another, and both parties are within the same reporting entity (State of Montana), then these additional disclosures are not necessary. Instead, the on-behalf agency must record the debt on SABHRS, as detailed previously in the Bonds section of this policy, and provide debt disclosures to DOA SAB at each fiscal year-end as required by MOM Policy 375.

XVII. Nonexchange Financial Guarantees A. Terminology

Financial Guarantee – A guarantee of obligations of legally separate entities or individuals, including component units, which require the guarantor to indemnify a third-party obligation holder under specified conditions. A financial guarantee has three separate legal entities:

1. Holder of the obligation being guaranteed (creditor) 2. Issuer of the obligation being guaranteed (issuer) 3. Entity extending guarantee (guarantor)

Nonexchange Financial Guarantee – A financial guarantee in which the guarantor does not receive equal or approximately equal value in return.


Obligation – A social, legal, or moral requirement, such as a duty, contract, or promise that compels one to follow or avoid a particular course of action. Consideration – Value exchanged which can be measured objectively. Guarantor – Government that extends a financial guarantee for the obligation of a legally separate entity or individual. Issuer – Holder of an obligation guaranteed by a government. Qualitative Factors – Predictive events, including negative economic events, such as a loss of major revenue source, violation of agreements related to the obligation, or initiation of the process of financial reorganization, including bankruptcy. More Likely Than Not – Greater than 50% probability that the guarantor will be required to make a payment, based on assessment of qualitative factors, as a result of a guarantee.

B. General Discussion

GASB 70 establishes accounting and financial reporting standards for nonexchange financial guarantees extended or received by a state or local government. This policy includes nonexchange financial guarantees for discretely presented component units. Additional guidance regarding blended component units can be found in par. 13. This Statement does not apply to guarantees related to special assessment debt within the scope of GASB Statement No. 6 – Accounting and Financial Reporting for Special Assessments (GASB 6).

1. Governments Extending Nonexchange Financial Guarantees:

a. Recognition and measurement in full accrual (proprietary, fiduciary and

MUS) funds: When qualitative factors and historical data, if any, indicate that it is more likely than not that a government will be required to make a payment related to the nonexchange financial guarantee it extended for liabilities of other entities or individuals, the government should recognize a liability and an expense in financial statements prepared using the economic resources measurement focus. The amount recognized should be the discounted present value of the best estimate of the future outflows expected to be incurred as a result of the guarantee. If there is no best estimate of the future outflows expected to be incurred but a range of estimated future outflows can be established in which no amount within that range appears to be a better estimate than any other amount, the discounted present value of the minimum amount in that range should be recognized. Classification of expenses related to nonexchange financial guarantees should be determined in the same manner as grants or financial assistance payments to other entities or individuals.


b. Recognition and measurement in modified accrual (governmental) funds: When qualitative factors and historical data, if any, indicate that it is more likely than not that a government will be required to make a payment related to the nonexchange financial guarantees it extended for liabilities of other entities or individuals, the government should recognize a fund liability and an expenditure in financial statements prepared using the current financial resources measurement focus, to the extent the liability is normally expected to be liquidated with expendable available financial resources. Liabilities for nonexchange financial guarantees extended are normally expected to be liquidated with expendable available financial resources when payments are due and payable on the guaranteed obligation. Classification of expenditures related to nonexchange financial guarantees should be determined in the same manner as grants or financial assistance payments to other entities or individuals.

2. Governments Issuing Guaranteed Obligations:

For both full accrual and modified accrual funds, if a government is required to repay a guarantor for nonexchange financial guarantee payments made on the government’s obligations, the government should reclassify that portion of its previously recognized liability for the guaranteed obligation as a liability to the guarantor. The government that issued the guaranteed obligation should continue to recognize its liability until that portion of the liability is legally released. When a government that has issued an obligation that has received a nonexchange financial guarantee is legally released as an obligor from the obligation and from any liability to the guarantor, the government should recognize revenue to the extent of the reduction of its guaranteed liabilities.

C. Disclosure Requirements

1. Governments Extending Nonexchange Financial Guarantees: A government that extends nonexchange financial guarantees should disclose the following information, by type of guarantee, for all nonexchange financial guarantees, regardless of the likelihood of a payment being required:

• A description of the nonexchange financial guarantee, identifying: o The legal authority and limits for extending the guarantees and

types of obligations guaranteed o The relationship of the government to the issuer(s) of the

obligations that are guaranteed o The length of time of the guarantees o Arrangements for recovering payments from the issuer(s) of the

obligations that are guaranteed


• The total amount of all guarantees extended that are outstanding at the reporting date

A government that recognizes a nonexchange financial guarantee liability or has made payments during the reporting period on nonexchange financial guarantees extended should disclose the following information:

• A brief description of the timing of recognition and measurement of the liabilities and information about the changes in recognized guarantee liabilities, including the following:

o Beginning-of-period balances o Increases, including initial recognition and adjustments

increasing estimates o Guarantee payments made and adjustments decreasing

estimates o End-of-period balances

• Cumulative amounts of indemnification payments that have been made on guarantees extended that are outstanding at the reporting date

• Amounts expected to be recovered from indemnification payments that have been made through the reporting date

2. Governments Issuing Guaranteed Obligations:

A government that has one or more outstanding obligations at the reporting date that have been guaranteed by another entity as part of a nonexchange transaction should disclose the following information about the guarantee(s), by type of guarantee:

a. The name of the entity providing the guarantee b. The amount of the guarantee c. The length of time of the guarantee d. The amount paid, if any, by the entity extending the guarantee on

obligations of the government during the current reporting period e. The cumulative amount paid by the entity extending the guarantee on

outstanding obligations of the government f. A description of requirements to repay the entity extending the

guarantee g. The outstanding amounts, if any, required to be repaid to the entity

providing the guarantee

If a government has issued a guaranteed obligation for which payments have been made during the reporting period by the entity that extended the guarantee and that guaranteed obligation is no longer outstanding at the end of the reporting period, regardless of whether the government has any other outstanding guaranteed obligations at the end of the reporting period, it should disclose:

a. The amount paid by the entity that extended the guarantee on obligations of the government during the current reporting period


b. The cumulative amount paid by the entity that extended the guarantee on outstanding obligations of the government

c. A description of requirements to repay the entity that extended the guarantee

d. The outstanding amounts, if any, required to be repaid to the entity that provided the guarantee

3. Other Disclosure Requirements The nature and amount of the following, along with debt service schedules to maturity (principal and interest), must be sent to the DOA SAB as required in MOM Policy 375 – Fiscal Year-End:

a. Guarantees related to the debt issue of another entity. An example is a local government obligation which is guaranteed by the State.

b. Moral Obligations. An entity may issue bonds for which another entity has a moral responsibility that is not an enforceable promise to pay. An example is debt issued by an entity for which the State is obligated (in the event of default) to consider assuming responsibility for total repayment, or to consider the necessity to provide the required annual payments to the debt service fund. Such an obligation is usually unenforceable unless adopted by the State Legislature.

Such disclosures are required because a default of that debt may adversely affect the State’s own ability to borrow.

XVIII. Authorities Authorities are established by the State’s Legislature to provide special purpose services in contract with most State agencies that provide a broad range of services. These authorities are attached to specific State agencies. The following authorities are included in the State’s reporting entity:

• Attached to the Department of Commerce: o Board of Housing (BOH) o Facility Finance Authority (FFA) o Economic Development Board (EDB)

• Attached to the Department of Agriculture: o Agricultural Loan Authority (ALA)

BOH provides low interest loans for citizens of Montana by issuing bonds/notes. The bonds/notes are usually secured by federally insured or guaranteed loans. BOH’s activities are reported in enterprise funds and federal special revenue funds. Many governmental units establish financing authorities to provide resources for specific capital projects or loans to special interest groups, such as ALA. Some financing authorities are established for the benefit of other governmental units or not-for-profit organizations, such as FFA, the activity of which is reported in enterprise funds. In some cases, a for-profit business organization is the beneficiary of a financing authority, such as EDB, the activity of which is reported in enterprise funds. EDB issues industrial revenue bonds and the proceeds are used to provide for plant expansion and thereby increase a community’s employment and


tax base. In other cases, a financing authority may be created by a governmental unit solely to finance internal capital projects. A financing authority typically issues bonds to obtain funds for the construction of a facility that is then leased to another government or private sector organization. Lease payments received are used to service the bond principal and interest, and the ownership of the facility transfers to the lessee when the bonds mature and are retired. In some cases, financing authorities develop a permanent capital base used to make loans, and occasionally grants. Authorities that make loans to citizens or citizen groups typically service bond principal and interest from loan repayments. Interest revenue in excess of interest expense typically finances administrative costs. Some authorities, such as economic or industrial development agencies, are created solely to lower the costs of borrowing for private sector entities constructing facilities within the jurisdiction served. The authority does not become involved in the construction activities or in repayment of the debt. Debt service is usually administered by a financial institution. In such cases, the debt and related capital lease receivable should normally not be recorded in the financial statements of the States unless the authority or other component unit of the State has responsibility for repayment in the event of default. Fees charged to the entities benefiting from the debt issuance and administrative expenses of the authority should be reported in the operating statement of the authority and the State. The financing debt and related capital leases outstanding in which the authority has participated should be disclosed in footnotes to the financial statements of the State, along with a clear indication that the State has no responsibility for repayment. Governmental units that create authorities to finance their capital projects usually execute lease contracts between the governmental units and the financing authorities. In the general purpose financial statements of the governmental units, the financing authority lease contract receivable should be offset against the lease liability of the governmental unit. Other transactions and balances of the authority should be combined with the activity of the governmental fund making the lease payments.

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