Chapter five

Accounting for Capital

Project Fund
 LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Explain the term capital project fund.

2. Identify purposes of capital project fund.
3. Explain the characteristics of a capital project fund.
4. List the classification of general capital assets.
5. Explain the typical sources and uses of cashflows for
capital projects.
6. Identify methods to acquire general capital assets.
 LEARNING OBJECTIVES

7. Differentiate CPF from GF & SRFs.

8. Account for depreciation of general capital assets,

including the modified approach for infrastructure

assets.

9. Prepare journal entries for a capital project fund.

10. Prepare financial statements for CPF.

 5.1 Definitions and purposes
➢ Capital projects funds are governmental funds used
to account for financial resources segregated for
acquisition or construction of major general
government capital facilities (those not financed
and used by trust and proprietary 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.
 5.1 Definitions and purposes
❖ The purpose for creating a fund to account for capital
projects is the same as the reason for creating special
revenue fund.

❖ To provide a formal mechanism to enable administrators to

ensure revenues and other financing sources dedicated to a
certain purpose are used for that purpose and no other,

❖ As well as to enable administrators to report to creditors

and other grantors of capital projects fund resources that
their requirements regarding the use of the resources
were met.
 5.2 Characteristics of a capital project fund
❖ Modified accrual basis of accounting is applicable.
❖ Encumbrance accounting is used for contracts and
purchase commitments.
❖ Formal budgetary accounting is usually not
required.
❖ A CPF exists for the life of the project.
❖ Fixed assets acquired or constructed are recorded
in the GFAAG. 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 GLTDAG
DSF.
 5.2 Characteristics of a capital project fund
❖ CPF exists only for the period of acquisition or
construction of the fixed assets.

❖ Involve long-lived assets (e.g., buildings, roads and

bridges, etc.)

❖ Usually involve a construction project.

❖ Usually require long-range planning and extensive

financing.

❖ Usually requires long-term financing.

 5.2 Characteristics of a capital project fund
❖ 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.
 5.2 Characteristics of a capital project fund
❖ Encumbrances:- B/c the amounts involved in a
capital project are usually large, an encumbrance
account is highly recommend, and is very
necessary in the case of multi sub contractors for a
project.

❖ Retained Percentage:- It is common in construction

contracts for the entity to hold back a portion of
the last payment of the contract. This is to
prevent the contractor from doing poor quality
work, especially in a rush to finish at the end.
 5.2 Characteristics of a capital project fund
❖ Revenues & O.F.S of the C.P.F should equal or slightly
exceed the expenditures and O.F.U leaving a residual
equity (surplus) and if long term debt had been
incurred for the purposes of the capital projects fund.

❖ However, in some situations, in spite of careful

planning and cost control, Expenditures and OFU of a
CPF may exceed its revenues and OFS resulting in a
negative fund balance (deficit).

❖ If the deficit is small an additional transfer will

probably be requested from one or more other funds.
 5.2 Characteristics of a capital project fund
❖ Required financial statements include:
➢ Balance Sheet; since the purpose of the capital projects
fund is to account for the receipt and expenditure of
financial resources encumbered for capital projects, it
contains balance sheet accounts for only current financial
resources and for the liabilities to be liquidated by those
resources.

➢ Statement of Revenues, Expenditures, and Changes in

Fund Balance.
 5.3 Classification of general capital assets
❖ General Capital Assets: long-lived assets used by
activities reported in governmental funds.

➢ Land

➢ Buildings

➢ Improvements Other than Buildings

➢ Machinery and Equipment

➢ Construction Work in Progress

➢ Infrastructure (e.g., roads, streets, bridges)

 5.4 Sources and uses of cashflows for capital
projects
❖ A major source of funding for capital projects funds is the
issuance of long-term debt.

❖ In addition to debt proceeds, capital projects funds may

receive: grants from other governmental units, proceeds of
dedicated taxes, transfers from other funds, gifts from
individuals or organizations, or a combination of several of
these sources.
 5.5 Methods to acquire general capital assets
The successful accomplishment of a capital project
may be brought about in one or more of the following
ways:
➢ Outright purchase from fund cash.
➢ By construction, utilizing the government’s own
workforce.
➢ By construction, utilizing the services of private
contractors.
➢ By capital lease agreement.
 5.6 CPF Vs GF & SRF’s
❖ CPF differs from the General Fund and Special
Revenue Funds in that the latter categories have a
year-to-year life, whereas CPF has a project-life
focus.
❖ In some jurisdictions, governments are allowed to
account for all CPs within a single CPF.
❖ In other jurisdictions, laws are construed as
requiring each project to be accounted for by a
separate capital projects fund.
 5.6 CPF Vs GF & SRFs
❖ Appropriations account need not be used b/c the
legal authorization to engage in the project is in
itself an appropriation of the total amount that
may be obligated for the construction or
acquisition of the capital asset specified in the
project authorization.
❖ Estimated Revenues need not be recorded
because few contractors will start work on a
project until financing is ensured through the sale
of bonds or the receipt of grants or gifts.
5.7 Account for depreciation of general capital
assets
❖ Depreciation on general capital assets, including
infrastructure assets, is required at the
government-wide level under GASBS 34.
❖ Depreciation is not recorded on inexhaustible
assets, such as land and noncapitalized collections
of art.
❖ The government can elect not to depreciate
certain eligible infrastructure assets, under the
modified approach.
 Illustrative case on CPF:
The city of Hawassa wants to construct a new library on the
site owned by the city. The construction is expected to cost
Birr 50,000,000. It is expected to be completed within two
years on June 30, 2012 E.C. In a special meeting held on July
2, 2010 E.C. the members of the city council approved a Birr
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 Birr
20,000,000 will be financed by an Irrevocable State Grant
that has been awarded.
The following transactions occurred during the fiscal year
ended June 30, 2011 E.C.
1) The General fund loaned Birr 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.
Cash Birr 500,000
Bond Anticipation N/Payable Birr 500,000
2) Out of the Irrevocable State Grant of Birr 20,000,000,
the state contributed Birr 5,000,000 and the remaining is

deemed to be susceptible to accrual.

Cash Birr 5,000,000
Due from State Grant 15,000,000
Revenue Birr 20,000,000
3) Preliminary engineering and planning costs of Birr 320,000
were paid to the contractor. There had been no
encumbrances for this cost.
Construction Expenditure Birr 320,000
Cash Birr 320,000
4) The bonds were sold at Birr 101. The bond indenture agreement
requires that any premium to be set aside in the related Debt
Service Fund.
Cash Birr 30,300,000
OFS-Bond Proceeds Birr 30,000,000
Due to DSF 300,000
5) The city of Hawassa library CPF invested its Birr 10,000,000
bond proceeds on the Federal Government Treasury Bills.

Sort term inv’t-Treasury Bills Birr 10,000,000

Cash Birr 10,000,000
6) A construction contract for Birr 44,270,000 is authorized
and signed.
Encumbrances Birr 44,270,000
Reserve for Encumbrances Birr 44,270,000
7) Orders were placed for materials estimated to cost Birr
550,000.
Encumbrances Birr 550,000
Reserve for Encumbrances Birr 550,000
8) The materials previously ordered (see Transaction 7 were
received at a cost of Birr 510,000.
Reserve for Encumbrances Birr 550,000
Encumbrances Birr
550,000
Construction Expenditure Birr 510,000
Construction Payable Birr 510,000
9) In addition to the construction contract of transaction 6; Birr
3,900,000 was incurred for the services of the architects and
engineers; of this amount Birr 3,100,000 was paid.
Construction Expenditure Birr 3,900,000
Construction Payable Birr 3, 900,000
Construction Payable Birr 3,100,000
Cash Birr 3,100,000
10) Received cash of Birr 1,000,000 from the General Fund as an
operating transfer.
Cash Birr 1,000,000
OFS- Operating transfers in Birr 1,000,000
11) A partial payment of Birr 10,000,000 was received from the
State Irrevocable Grants and the General Fund loan was
repaid with interest amounting to Birr 10,000.
Cash Birr 10,000,000
Due from State Grant Birr 10,000,000
Bond Anticipation Notes Payable ………………………… Birr500,000
Interest Expenditure 10,000
Cash Birr 510,000
12) When the project was approximately half finished, the
contractor submitted billing for a payment of Birr 12,000,000.
Reserve for Encumbrance------------------Birr 12,000,000
Encumbrance Birr 12,000,000
Construction Expenditure Birr 12,000,000
Construction Payable Birr 12, 000,000
13) The contractor’s initial claim was fully verified and paid.
Construction Payable Birr 12,000,000
Cash Birr 12,000,000
 City of Hawassa Library CPF
Trial Balance
June 30, 2011

Account Title Debit Credit

Cash Birr 20,870,000
Short Term Investment-Treasury Bills 10,000,000
Due from State Grant 5,000,000
Construction Payable Birr 1,310,000
Due to DSF 300,000
Reserve for Encumbrance 32,270,000
Unreserved and Undesignated Fund Balance -
Revenues 20,000,000
Other Financing Sources- Bond Proceeds 30,000,000
Other Financing Sources- Operating Transfer In 1,000,000
Construction Expenditures 16,730,000
Interest Expenditures 10,000
Encumbrances 32,270,000
Total Birr 84,880,000 Birr 84,880,000
 City of Hawassa Library CPF
Statement of Revenues, Expenditures and Changes in Fund
Balance
For The Year Ended June 30, 2011
Revenues:
Irrevocable State Grant 20,000,000
Expenditures:
Construction Expenditures 16,730,000
Interest Expenditure 10,000 16,740,000
Excess of Revenue over Expenditures 3,260,000
Other Financing Sources (Uses):
OFS- Bond Issue Proceeds 30,000,000
OFS- Operating transfers in 1,000,000 31,000,000
Excess of Revenue and OFS over Expenditure 34,260,000
Add: Fund Balance - July 1, 2010 -
Fund Balance - June 30, 2011 34,260,000
 City of Hawassa Library CPF
Balance Sheet
June 30, 2011
Assets:
Cash Birr 20,870,000
Short Term Investment- Treasury Bills 10,000,000
Due from State Grant 5,000,000
Total Asset Birr 35,870,000
Liabilities and Fund Balance:
Construction Payable Birr 1,310,000
Due to DSF 300,000
Fund Balance:
Reserved for Encumbrance 32,270,000
Unreserved and Undesignated 1,990,000
Total Liabilities and Fund Balance Birr 35,870,000
 Closing Entries:

Revenues Birr 20,000,000

OFS- Bond Proceeds 30,000,000
OFS- Operating Transfer In 1,000,000
Construction Expenditures Birr 16,730,000
Interest Expenditure 10,000
Unreserved and undesignated-
Fund Balance 34,260,000

Unreserved and Undesignated-

Fund Balance Birr 32,270,000
Encumbrances Birr 32,270,000
The following transactions are extension transactions of
the City of Hawassa Library Capital Projects Fund occurred
during the fiscal year beginning July 1, 2011 and ending
June 30, 2012.

Received Birr 10,500,000 at maturity date of the Federal

Government Treasury Bills

Cash---------------------Birr 10,500,000

STI-Treasury Bills----------Birr 10,000,000

Revenues-------------------Birr 500,000
15)The Library CPF transferred the premium on the Bond

to the DSF.

Due to DSF Birr 300,000

Cash Birr 300,000

16)A progress billing of Birr 32,270,000 was received from

the contractor for the final work done on the project.

As per the term of the contract, the city withholds

10% of the billing.

If Encumbrances are Re-established at the beginning
of the fiscal period (i.e. @ July 1, 2011):

Entry on July 1, 2011 would be;

Encumbrances Birr 32,270,000

Fund Balance Birr 32,270,000

Then, the entries for the current transaction

would be:

Reserve for Encumbrance Birr 32,270,000

Encumbrances Birr 32,270,000

Construction Expenditure------Birr 32, 270,000

Construction Payable---------- Birr 29, 043,000

C/Payable- Retained Percentage------3, 227,000

If there is no Re-establishment of encumbrance
(this is not very common in CPF) on July 1, 2011,
the entry for the current transaction would be:

Reserve for Encumbrance Birr 32,270,000

Construction Payable----------Birr 29,043,000

C/Payable- Retained Percentage----3,227,000

17) All outstanding liabilities of the city of Hawassa
Library CPF are paid except remaining balance.

Construction Payable Birr 30,353,000

Cash Birr 30,353,000

18) Received the remaining balance from the

Irrevocable State Grant.

Cash ----------------------------------Birr 5,000,000

Due from State Grant---------Birr 5,000,000

 City of Hawassa Library CPF
Statement of Revenues, Expenditures and Change in Fund
Balance
For the Year Ended June 30, 2012.

Revenues Birr 500,000

Add: Unreserved and Undesignated Fund Balance July 1, 2011 1,990,000
Fund Balance June 30, 2012 Birr 2,490,000
 City of Hawassa Library CPF
Balance Sheet
June 30, 2012

Assets:
Cash Birr 5,717,000
Total Assets Birr 5,717,000

Liabilities and Fund Balance:

Construction Payable- Retained Percentage Birr 3,227,000
Unreserved and Undesignated Fund Balance 2,490,000
Total Liabilities and Fund Balance Birr 5,717,000
 Closing Entry:
Revenue Birr 500,000
Unreserved& Undesignated- Fund Balance------ Birr 500,000
The following transactions and events take place after the
construction has finished.
19)The retained percentage balance has been paid to the
contractor because the work has been performed as per
the term of the contract.
Construction Payable- Retained Percentage Birr 3,227,000
Cash Birr 3,227,000
20) The town council decides to transfer the residual fund
balance of the Library CPF to the DSF.
Residual Equity Transfer Out Birr 2,490,000
Cash Birr 2,490,000
 Closing Fund Balance:

Unreserved and Undesignated- Fund Balance…… Birr 2,490,000

Residual Equity Transfer Out ……….……………….Birr 2,490,000

The End of Chapter 5

Thank You!!!