ACCOUNTING AND FINANCIAL REPORTING FOR
LOANS BETWEEN CALIFORNIA CITIES AND
RELATED REDEVELOPMENT AGENCIES
Revised January 2005
PUBLISHED BY THE
CALIFORNIA COMMITTEE ON MUNICIPAL ACCOUNTING
(a joint committee comprised of representatives of the League of California Cities and the
California Society of Certified Public Accountants)
ACCOUNTING AND FINANCIAL REPORTING FOR
LOANS BETWEEN CALIFORNIA CITIES AND
RELATED REDEVELOPMENT AGENCIES
I.
INTRODUCTION
Purpose of Paper
One of the most significant transactions occurring between California cities and their
redevelopment agencies is loans (or advances) from the City to the redevelopment
agency. Millions of dollars in loans are made and repaid each year subject to a variety of
loan repayment provisions. As a result, questions have arisen regarding the accounting
and financial reporting treatment of these loans.
In April of 1987, the California Committee on Municipal Accounting published its
“white paper” on this topic, entitled Accounting and Financial Reporting for Loans
Between California Cities and Related Redevelopment Agencies. In May of 1996, this
white paper was revised and reissued. The position of these prior white papers was that
long-term loans from the City to the Redevelopment Agency should be reported as a
liability in the Agency’s General Long-term Debt Account Group. As a result of GASB
Statement No. 34 and certain recommendations made by GFOA, this accounting will no
longer be appropriate.
GASB Statement No. 34 requires that loan transactions between the primary government
and a blended component unit be accounted for in the same manner as interfund advances
within the reporting context of the financial statements of the reporting entity as a whole.
The purpose of this white paper is to provide recommendations regarding the accounting
and financial reporting for loan transactions between the city and the redevelopment
agency in that reporting context. Section V of this white paper provides recommendations
regarding the financial reporting applicable to the separate component unit financial
statements of the redevelopment agency.
Materiality
The provisions of this paper need not be applied to immaterial items.
Consistency
The accounting principles discussed in this paper should be followed consistently from
year to year. The implementation of these principles and changes in the application of
these principles from year to year, if material, could result in prior period adjustments
and a consistency qualification in the independent auditors’ report.
Authoritative References
The following authoritative references relate to the accounting and reporting issues
discussed herein and are provided for the convenience of the reader:
a. Measurement Focus of Governmental Funds (GASB Cod. Sec. 1300.102a):
“...The governmental fund measurement focus is on determination of financial
position and changes in financial position (sources, uses, and balances of financial
resources), rather than on net income determination. The statement of revenues,
expenditures, and changes in fund balance is the primary governmental fund
1
operating statement. It may be supported or supplemented by more detailed
schedules of revenues, expenditures, transfers, and other changes in fund balance.”
Accounting for Fund Balance Reserves (GASB Cod. Sec. 1800.123):
“...The use of the term ‘reserve’ should be limited to indicating that a portion of the
fund balance is not appropriable for expenditure or is legally segregated for a
specific future use.”
b. Revenue Recognition Criteria (GASB Cod. Sec. 1600.106):
Generally, revenues are not recognized unless they are both “measurable” and
“available”. Available means received during the current fiscal year, or soon enough
after year end to be used to pay liabilities of the current year. Each governmental
unit should adopt its own policies to implement the measurable and available
criteria, and apply them consistently. Revenues earned by Proprietary Funds are
recognized in essentially the same manner as in commercial accounting, i.e., on the
accrual basis.
c. Transfers Between Component Units (GASB Cod. Sec. 2600.120):
Transfers between the primary government and its component units have
historically been reported as intergovernmental revenues, operating
revenues/expenditures/expenses and/or as interfund transfers. For presentation
within the financial statements of the reporting entity, such transfers should be
reported as if they were between funds of the primary government.
d. Related Receivables and Payables (GASB Cod. Sec. 2600.120):
Related receivables and payables between what were previously separately
reported governmental units, which are included as component units of a reporting
entity, should be reclassified as amounts due to and due from other funds.
The opinions expressed in this white paper are the opinions of the members of CCMA
and do not have authoritative status. Rather, the guidance in this white paper is suggestive
to assist California cities in the application of generally accepted accounting principles.
Other positions on these matters may be defended as appropriate applications of
generally accepted accounting principles.
II. RECOMMENDED ACCOUNTING WITHIN THE CONTEXT OF THE REPORTING
ENTITY FINANCIAL STATEMENTS
The accounting and reporting set forth in this white paper addresses the accounting required for
loans between the primary government (a city) and a blended component unit (a redevelopment
agency) within the context of the financial statements of the reporting entity as a whole (e.g., the
CAFR). Recommendations regarding financial reporting in the context of the separate standalone component unit financial statements for the redevelopment agency are discussed in Section
V of this white paper.
This section has been divided to address the following accounting issues:
1. Short-term loans
2. Long-term loans
3. Revolving loans
1. SHORT-TERM LOANS
2
Short-term loans are those which are to be repaid from “available current financial resources”.
Such resources would typically include proceeds from the sale of land held for resale or interest
earnings on investments, but would not include tax increment revenue.
The required entries to record short-term loans are as follows:
CITY (GOVERNMENTAL) FUND
Due from Redevelopment Agency
Cash
1,000,000
1,000,000
RDA CAPITAL PROJECTS FUND
Cash
Due to City of ____________
1,000,000
1,000,000
When the loans are repaid, the entries above would be reversed.
Occasionally, the City may make a loan to the Agency which is to be repaid within the same
fiscal year or shortly after year end from tax increment monies to be received by the Agency
during the fiscal year. In these cases, the short-term borrowing would be treated similar to
revenue anticipation debt (i.e., as a fund liability). However, since the source of repayment is
normally received in the debt service fund, additional entries are required to record the transfer
of funds from the debt service fund to the capital projects fund as follows:
RDA DEBT SERVICE FUND
Transfers out
Cash
1,000,000
1,000,000
RDA CAPITAL PROJECTS FUND
Cash
Transfers in
1,000,000
1,000,000
2. LONG-TERM LOANS
Long-term loans are those which are to be repaid from future resources, i.e., not from “available
current financial resources”. A reserve of fund balance is made for the long-term receivable in
the City Fund (lender) as these funds are not available to finance current operations.
The RDA should not record the receipt of the loan proceeds as an other financing source, as
was done prior to the implementation of GASB Statement No. 34. After the implementation
of GASB Statement No. 34, the RDA’s receipt of the loan proceeds should be recorded as a
liability of the fund responsible for repayment, i.e. the debt service fund. The cash associated
with this borrowing should then be transferred to the capital projects fund so that it can be
expended for project purposes as required by state law. [Some agencies may prefer to record
this liability in the capital project fund of the agency. This is also an acceptable manner in
which to record the liability.]
The required entries to record long-term loans are as follows:
(if the liability is
recorded in the fund providing repayment, i.e. the debt service fund):
3
CITY (GOVERNMENTAL) FUND
Advances receivable
Cash
1,000,000
Fund balance—Unreserved
Fund balance—Reserved for long-term advances
1,000,000
1,000,000
1,000,000
RDA DEBT SERVICE FUND
Cash
Advances payable
1,000,000
Transfers out
Cash
1,000,000
1,000,000
1,000,000
RDA CAPITAL PROJECTS FUND
Cash
Transfers in
1,000,000
1,000,000
When the advance is repaid, the following entries are required:
CITY (GOVERNMENTAL) FUND
Cash
Advances receivable
1,000,000
Fund balance—Reserved for long-term advances
Fund balance—Unreserved
1,000,000
1,000,000
1,000,000
RDA DEBT SERVICE FUND
Advances payable
Cash
1,000,000
1,000,000
3. REVOLVING LOANS
Revolving loans are those loans made on an ongoing basis, where repayment is sporadic or
otherwise unscheduled. Typically, these loans are associated with administrative charges made
by the City to the Agency for salary and overhead costs allocable to the Agency. The loans
usually accumulate and are repaid from future tax increment revenues as they become available.
The required entries to record revolving loans are as follows:
CITY (GOVERNMENTAL) FUND
Advances receivable
Administrative costs recovered (revenue)
1,000,000
Fund balance—Unreserved
Fund balance—Reserved for long-term advances
1,000,000
4
1,000,000
1,000,000
As an alternative, the credit above to revenue could be made against the appropriate expenditure
accounts, particularly in the financial statements, in order to avoid the double counting of
administrative and overhead expenditures.
The liability is recorded in the Redevelopment Agency fund responsible for repayment (the debt
service fund). An interfund transfer out is then recorded into the capital projects fund in order to
provide for the recording in that fund of the administrative costs being incurred for the project:
RDA DEBT SERVICE FUND
Transfers out
Advances payable
1,000,000
1,000,000
RDA CAPITAL PROJECTS FUND
Administrative costs
Transfers in
1,000,000
1,000,000
When advances are repaid from tax increment revenue, the entries required are the
same as shown above for “long-term loans”.
Entries to record direct charges to the Redevelopment Agency:
When administrative costs are charged directly to the Redevelopment Agency Capital Projects
Fund through automated payroll journal entries, etc., additional entries must be made in the
City and Agency funds to record the loan and effects on cash at the time of the payroll journal
entry. Assume a direct monthly charge of $10,000.
CITY (GOVERNMENTAL) FUND
Advances receivable
Cash
10,000
Fund balance—Unreserved
Fund balance—Reserved for long-term advances
10,000
10,000
10,000
RDA DEBT SERVICE FUND
Cash
Advances payable
10,000
Transfers out
Cash
10,000
10,000
10,000
RDA CAPITAL PROJECTS FUND
Cash
Transfers in
10,000
III. UNPAID ACCRUED INTEREST
5
10,000
Unpaid accrued interest on loans between a City and a Redevelopment Agency can result from
the following:
1. The accrued interest is due, but will not be paid currently as sufficient funds are
unavailable to meet the interest payment (i.e., the interest payment is delinquent); or
2. The accrued interest is not due, but payable in future years.
Each of these scenarios are discussed below.
1. ACCRUED INTEREST DUE BUT UNPAID
When accrued interest is “due” but goes unpaid because of unavailable Redevelopment Agency
funds, the City will typically agree to add the unpaid interest to the outstanding balance
through a refinancing of, or an amendment to, the existing loan. Subsequent interest will be
calculated based on the adjusted balance (which includes the accumulated unpaid accrued
interest). However, the recommended treatment discussed below is not affected by the method
used to calculate subsequent accrued interest (compound vs. simple method).
Based on the above, the unpaid accrued interest would be recorded when incurred as an
addition to the recorded liability in the debt service fund, as shown in the following
entries:
RDA DEBT SERVICE FUND
Interest expenditures
Advances payable
100,000
100,000
CITY (GOVERNMENTAL) FUND
Advances receivable
Deferred revenue
100,000
100,000
Because the interest included above within the Advances Receivable is not available to finance
current operations, it is offset by a corresponding entry to deferred revenue.
Footnote disclosures of both Advances Receivable and Advances Payable balances in the City
and Agency financial statements, respectively, may disclose the accumulated accrued, but
unpaid, interest amounts included within the respective balances.
When the accumulated unpaid accrued interest is ultimately repaid, the following
entries are required:
CITY (GOVERNMENTAL) FUND
Cash
Advances receivable
100,000
Deferred revenue
Interest revenue
100,000
RDA DEBT SERVICE FUND
Advances payable
100,000
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100,000
100,000
Cash
100,000
As a less preferable alternative, the unpaid accrued interest can be disclosed in the footnotes
each year, but not added to the liability recorded in the debt service fund. The interest would
then be recorded as an expenditure in the debt service fund only in the year paid. The
government-wide financial statements, in that case, would of course report the accrued interest
in the statement of net assets.
2. ACCRUED INTEREST NOT DUE AND UNPAID
Loan agreements between a City and its Redevelopment Agency may provide that interest on
loans is payable at a specified date in the future or otherwise “when sufficient tax increment
revenues are available”. In general when accrued interest is not paid simply because it is NOT
DUE, then the Redevelopment Agency should apply the same treatment described above for
unpaid interest which is due (i.e., treating the interest as accrued and added to the liability
recorded in the fund responsible for repayment—the debt service fund).
IV. CONSIDER RECLASSIFICATION OF LOAN AS TRANSFER
Paragraph 112(a)(1) of GASB No. 34 states in part with respect to interfund loans (including
loans between the primary government and blended component units): “If repayment is not
expected within a reasonable time, the interfund balances should be reduced and the amount
that is not expected to be repaid should be reported as a transfer from the fund that made the
loan to the fund that received the loan.”
Agencies should support the likelihood of repayment by preparing cash flow projections that
demonstrate repayment of the loan plus accrued interest over the expected lifetime of the
agency. If repayment is not likely because of the insufficiency of resources to provide for
repayment (after meeting the other obligations of the Agency), the Agency should consider
reclassifying the loan balances as transfers, as described above in paragraph 112(a)(1) of GASB
No. 34.
A careful assessment of the possibility of repayment should be made. Absolute certainty is not
required in this assessment. However, if it is probable that an agency will not repay its obligation
to the City as demonstrated by reasonable cash flow projections, the advance should be
reclassified as a transfer at the time that that determination is made. On the other hand, agencies
should avoid the premature writing off of its liability to the City that might be followed by an
eventual repayment of that indebtedness.
The entries to record the transfer would be as follows:
CITY FUND RECORDING THE RECEIVABLE
Transfer out
Advances receivable
1,000,000
1,000,000
RDA FUND RECORDING THE LIABILITY
Advances payable
Transfer in
1,000,000
1,000,000
Some agencies may wish to keep track of the loan payable and receivable on the balance sheet
of the respective funds with an offsetting allowance account in the full amount of the loan
balance. In that event, the entries to record the transfer would be as follows:
CITY FUND RECORDING THE RECEIVABLE
7
Transfer out
Allowance for loans not likely to be repaid
1,000,000
1,000,000
RDA FUND RECORDING THE LIABILITY
Allowance for loans not likely to be repaid
Transfer in
1,000,000
V. FINANCIAL REPORTING IN THE CONTEXT OF
REDEVELOPMENT AGENCY FINANCIAL STATEMENTS
THE
1,000,000
SEPARATE
The above accounting sets forth the accounting to be followed in the fund financial statements of
the reporting entity as a whole. In the context of the financial statements of the reporting entity
as a whole, GASB Statement No. 34 requires that loans between the primary government and its
blended component units be accounted for as fund liabilities in the fund financial statements of
the reporting entity.
Prior to November 2004, there was no guidance with respect to how transactions between the
primary government and its blended component units should be accounted for in the context of
the separate stand-alone financial statements of the component unit. CCMA had previously
recommended that these transactions be reported as fund liabilities in both the reporting entity
financial statements and the component unit financial statements. This was done to avoid
confusion that might arise as a result of certain funds reporting different fund balance amounts in
the reporting entity financial statements and the component unit financial statements.
In November 2004, this matter was addressed by question 7.479 that was added to the 2004
GASB Comprehensive Implementation Guide. This new guidance indicates that in the context of
the component unit financial statements, debt owed to the primary government would be
considered to be external debt that is reported only in the government-wide financial statements
of the component unit. In the reporting entity financial statements (CAFR), this debt would be
reclassified as interfund debt reported as a liability on the balance sheet of the fund obligated for
repayment.
The accompanying chart sets forth the journal entries to demonstrate the required accounting for
both the component unit financial statements and the CAFR It also presents the worksheet
entries necessary to convert the component unit presentation to the CAFR presentation.
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Comparison of Entries for Reporting City Advances to Redevelopment Agency
in RDA Financial Statements and in City CAFR
(along with worksheet entries necessary to reclassify City advances as a fund liability in the City's CAFR)
Balance at beginning of year
$ 1,000,000
Current year additions
300,000
Current year principal payments
(200,000)
Interest accrued and added to
liability balance (due at maturity)
80,000
Balance at end of year
$ 1,180,000
Worksheet Entries
(to convert RDA presentation to CAFR presentation)
Entries for RDA Financial Statements
*Entries for City CAFR Presentation
To restate beginning fund balance as a result of recording
beginning of year advances as liability in debt service fund:
In debt service fund:
Fund balance
1,000,000
Advances payable
1,000,000
Recording receipt of advance proceeds in current year:
In debt service fund:
Transfers out
Advances payable
300,000
300,000
In debt service fund:
Cash
Advances payable
Transfers out
Cash
In capital projects fund:
Cash
Proceeds of advances
300,000
In capital projects fund:
Proceeds of advances
Transfers in
80,000
In debt service fund:
Proceeds of advances
Advances payable
300,000
Accrual of interest due at maturity:
In debt service fund:
Interest expenditures
80,000
Proceeds of advances
Recording principal payments made in current year:
In debt service fund:
Principal exp
200,000
Cash
200,000
In debt service fund:
Advances payable
Principal exp
300,000
300,000
80,000
80,000
200,000
200,000
In capital projects fund:
Cash
Transfers in
In debt service fund:
Interest expenditures
Advances payable
In debt service fund:
Advances payable
Cash
300,000
300,000
300,000
300,000
300,000
300,000
80,000
80,000
200,000
* The "Entries for CAFR Presentation" are presented for the sole purpose of displaying the accounting methodology reflected in the City CAFR. The worksheet entries
shown above convert the RDA accounting to this presentation.
200,000