Capital Project Fund

General Outline of Capital Projects Fund

i. 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 Centres and libraries etc..
ii. 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 general fund.
iii. It is also possible that a construction project could simply have a
subsidiary ledger within the General Fund, rather than its own
distinct fund.
iv. The existence of the Capital projects fund, as any other fund will
depend on the legal requirements and the need for good financial
management.
v. 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.
vi. After the acquisition or construction is completed, the Capital
Projects Fund will be abolished.
vii. It does not account for the repayment & servicing of any debt
obligations issued to raise money to finance the acquisition of capital
facilities.
ix. Debt & debt related servicing activities are accounted for in the
General Long Term Debt Account Group (GLTDAG) & Debt service
fund (DSF).
x. Virtually all-governmental buildings are constructed by the
governmental unit are mostly financed by bond offerings.
xi. 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 are accounted using one general ledger. In governmental,
four general ledgers are used, of which two are funds & two are
account groups.

Establishment & Operation

i. Capital Project Funds 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.
ii. 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 General Fund because of the multi-year focus of CPFs, some
accountants prefer not to close a CPF annually, but others do.
iii. Whether or not to close the CPF annually will depend on the
unique factors of each case & will be strongly influenced by the
requirement of the financing source.

 iv. The decision to use budgetary accounts will also depend on the
features & financing source of the particular CPF. It will be based on
the particular project & be strongly influenced by the requirement of
the financing source.
The decision to use or not to use budgetary accounts is influenced by
factors such as:
i. The number of projects in the Capital Project Fund
ii. The amount of detail in the Capital Project Fund budget.
iii. The use of an annual budget (rather than a project life budget) in
the Capital Project Fund.
Financing a Capital Project

Typically sources of financing include:

i. Long term debt issue proceeds

ii. Grants from other governmental units
iii. Transfers from other funds within the governmental entity
iv. Interest income from temporary investments.
v. Gifts from individuals or foundations
vi. Special taxes or; a combination of more than one of those.
vii. Inter-governmental grants.
viii. Different bond issues & different inter governmental transfers.

Other Considerations

A Means of Acquisition:
Accomplishment of capital acquisition or construction project may be
brought about in one or more of the following ways:
1. Entire purchase from fund cash.
2. Utilizing the governmental units own force.
3. Utilizing the services of private contractors.
4. By capital lease agreement.
B. Costs included in CPF in relation to fixed asset:
All expenditures for getting the project ready are put in the CPF,
including architect fees, transport costs, damages etc. At the
completion of the project the cost of the facility is recorded as a fixed
asset. Until then any costs incurred are shown as construction work
in progress. Generally the year-end closing entry in the CPF triggers
the recording of an amount equal to the credit to the expenditures
account.
C. Retained Percentages:
It is common in construction contracts for the entity to hold back the
portion of the last payment of the contract and to require contractors
on large Scale contracts to give performance bonds, providing
guarantee to the Govt Unit for any failure on the contractors party to
comply with terms and specifications of the agreement to provide
more prompt adjustment on shortcomings. 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,

especially 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.

D. Encumbrances (Obstacle):
Since the amounts involved in a capital project are usually large, an
encumbrance account is highly recommended and 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 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.

Alternative Treatment of Outstanding Equity / Deficits

Necessary expenditures planned & controlled carefully so that actual
does not exceed. Revenues of the Capital Project Fund should equal
or slightly exceed the expenditures & other financing uses.
There are three possible options:
 1. The balance could be transferred to the debt service fund, as
residual (remaining) / outstanding equity transfer for retiring the
debt, which has been incurred for the purpose of the project.
2. If the residual Equity is deemed to have come from grants or
shared revenues restricted for capital acquisitions or constructions,
legal advice may indicate that any residual (balanced) equity may
return to its source in proportionate amount or;
3. The balance might be retained for future maintenance purpose.

Bond Premiums, Discount & Accrued Interest on Bonds Sold

A) Issuance of Bonds at a Premium:

Bond premiums arise because of adjustments to the interest rates.
The bond agreements usually specify bond premium 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.

B) Issuance of Bonds at a Discount:

Bond discount are rare because the stated interest rate is usually set
high enough so that no discounts may result.

C) Accrued Interest on Bonds Sold:

When bonds are sold between the interest payment dates the amount
of accrued interest is included in the total selling price. Conceptually,
accrued interest sold is an make up of the interest expenditures on
the first interest payment date following the sale of the bonds.
Generally in practice, accrued interest sold is recorded as revenue of
the Debt Service Fund.

Bond Anticipation- Notes Payable

The “bond anticipation” is the description of the debt signifies an
obligation to retire the notes from the proceeds of the proposed bond
issue. The account is increased and decreased for the same reason
and in the same manner employed for Tax anticipation Notes Payable
in General Fund.
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.

Accounting for Capital Projects Fund

Financial activities such as revenues earned, expenditures incurred
for the construction or acquisition are recorded in almost the same
manner as that of the General and Special Revenue Fund.
At the end of each fiscal year prior to a completion of a capital
project, the Revenues, Other Financing sources, Expenditures, Other
Financing Uses and encumbrance ledger accounts of the capital
projects fund are closed to the unreserved and undesignated fund
balance account. Upon completion of the project, the entire capital
project fund is closed by a transfer of any unused cash to the Debt
Service Fund or to the General fund, as appropriate.