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ASOP:
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Revenue bonds are debt obligations of IU that are issued pursuant to Indiana Code 21-33-3. Debt service of revenue bonds is repaid from specified revenue streams associated with the facilities being financed and other legally available funds of IU. IU has three types of revenue bonds outstanding – Consolidated Revenue Bonds (“CRBs”), Facility Revenue Bonds (“FRBs”), and Student Residence System Bonds (“SRSs”). IU no longer issues FRBs or SRSs.
The figures, dates, interest rates, and terms included in the following examples are for illustration purposes only.
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Recording Revenue Bonds
Assume the following facts:
- Project: new student housing facility
- Par amount of bonds: $66,795,000.00
- Bond premium: $3,733,521.90
- Short-term principal: $500,000.00
- Good faith deposit: $717,865.59
- Underwriter’s Discount: $356,174.94
- Bond Proceeds Received: $69,454,481.37
- Bond Issuance Expense: $172,346.96
- Issue date of April 2, 2009
- Interest Rate: 4.56%
- 20-year term
- Interest is paid semi-annually on June 1 and December 1.
- Principal is paid annually on June 1
- Construction proceeds: $60,000,000.00
- Construction costs incurred prior to the date of bond issue: $2,525,000.00.
All entries below show the net effect of each transaction at the account level of the organization and may ignore some generated offset entries. These entries are listed below in chronological order.
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Good Faith Deposit: Treasury receives and records the good faith deposit prior to the closing on the sale of the bonds. Once closing on the bonds sale occurs, Treasury initiates an Internal Billing (“IB”) document that credits Bonds Payable, object code 9202 in the 90* construction account of the appropriate auxiliary organization. Automatic FIS-generated offset entries move the liability from the auxiliary 90* account to the auxiliary 95* account where the bond liability resides. After the generated offset entries are complete, the consolidated effect on the organization is as follows:
90* Dr. 8000 Cash $717,865.59
90* Cr. 9899 Fund Balance $717,865.59
95* Dr. 9899 Fund Balance $717,865.59
95* Cr. 9202 Bond Payable $717,865.59
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Bond Proceeds Received: On the date the bond sale is closed, Treasury receives cash proceeds from the bond underwriters via the trustee bank. The proceeds include the par value of the bonds plus or minus any premium or discount, less the underwriter’s discount (fees and expenses) and good faith deposit. When the cash is received, Treasury records a Cash Receipt (“CR”) document that credits Bonds Payable, object code 9202, in the 90* construction account. Automatic FIS-generated offset entries move the liability to the 95* account. After all the generated offsets, the consolidated effect on the organization is as follows:
90* Dr. 8000 Cash $69,454,481.37
90* Cr. 9899 Fund Balance $69,454,481.37
95* Dr. 9899 Fund Balance $69,454,481.37
95* Cr. 9202 Bond Payable $69,454,481.37
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Bond Proceeds Transferred to Bond Expense and Investment Accounts: The University incurs expenses such as ratings fees, bond counsel fees, and personnel costs in order to issue the bond. These costs are recorded into a bond expense account at the University level. After bond proceeds are received, Treasury uses a Transfer of Funds (“TF”) document to allocate proceeds first to the bond expense account to pay for costs of issuing the bonds. The remaining balance of the proceeds is transferred to a Treasury investment account where the cash will remain until it is needed for costs of the construction project. After all the generated offsets, the consolidated effect on the organization is as follows:
90* Dr. 5199 Transfer Out $172,346.96
90* Dr. 9900 Transfer Out $70,000,000.00
90* Cr. 8000 Cash $70,172,346.96
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Reimburse Construction Costs: In many cases, the auxiliary organization has incurred design or construction costs on the project prior to receipt of the bond proceeds. In this example, the organization has previously incurred construction costs in the amount of $2,525,000.00. Treasury records a TF document to transfer funds from the bond proceeds investment account back to the 90* construction account to reimburse for these construction costs. After all automatic FIS-generated offset entries occur, the consolidated effect on the organization is as follows:
90* Dr. 8000 Cash $2,525,000.00
90* Cr. 9915 Transfer In $2,525,000.00
Treasury and the Office of the Vice President for Capital Planning and Facilities monitor spending on construction accounts and coordinate transfers of bond proceeds on a monthly, or as needed, basis.
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Record Bond Premium or Discount: Bonds can be issued at par, at a discount, or at a premium. For bonds issued at par, IU receives the bond’s stated par value of the bonds. For bonds issued at a discount (less than par), IU receives the par value less the amount of the discount. For bonds issued at a premium (more than par), IU receives the par value plus the amount of premium.
The following example shows entries for both a premium and discount transaction. Treasury records the bond premium or discount on an IB document. The document books the bond premium using Long Term Portion of Premium/Discount object code 9210 in the 90* construction account. An automatic FIS-generated offset entry moves the bond premium/discount into the organization’s 95* account. The consolidated effect on the organization is as follows:
(i) Bonds issued at a premium:
95* Dr. 9202 Bond Payable $3,733,521.90
95* Cr. 9210 LT Port of Prem./Disc. $3,733,521.90
(ii) Bonds issued at a discount:
95* Dr. 9210 LT Port of Prem./Disc. $3,733,521.90
95* Cr. 9202 Bond Payable $3,733,521.90
In summary, for premium bonds object code 9210 will maintain a credit balance and for discount bonds object code 9210 will maintain a debit balance.
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Underwriter’s Discount: IU pays a fee to the investment banking firm who underwrites IU bonds (purchases the bonds to resell to the public). This fee is referred to as the “underwriter’s discount”. Treasury records the underwriter’s discount using an IB document which credits the liability to Bond Payable object code 9202 and debits the expense to Bond Issuance Cost object code 7329 on the 90* construction account. An automatic FIS-generated offset entry debits Bond Issuance Expense object code 8629 in the auxiliary organization’s 95* account and moves the Bonds Payable liability, from the 90* account to the 95* account. The consolidated effect on the organization is as follows:
90* Dr. 7329 Bond Issuance Cost $356,174.94
90* Cr. 9899 Fund Balance $356,174.94
95* Dr. 8629 Bond Issuance Exp. $356,174.94
95* Cr. 9202 Bond Payable $356,174.94
- Adjust for Short-Term Portion of Bond Premium/Discount: Bond premium/discount is amortized using the straight-line method. The short-term portion of premium/discount is defined as the amount that is expected to be amortized within 12 months. Accordingly, the short-term portion must be reclassified from long-term. This entry occurs in conjunction with closing on the bond sale. The short-term portion of the premium/discount will remain constant over the life of the bonds until the balance is within one year of being fully amortized. When the bonds are within one year of being paid off, the long-term portion of the premium/discount should be zero while the remaining short-term balance is amortized to zero. Treasury uses a journal voucher (“JV”) document to record following entry:
(i) Bonds issued at a premium:
95* Dr. 9210 LT Port of Premium/Discount $186,702.36
95* Cr. 9209 ST Port of Premium/Discount $186,702.36
(ii) Bonds issued at a discount:
95* Dr. 9209 ST Port of Prem./Discount $186,702.36
95* Cr. 9210 LT Port of Premium/Discount $186,702.36
- Post-Issuance Entries
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Amortization of Bond Premium/Discount: Treasury records amortization of bond premiums/discounts monthly using a JV document in the auxiliary’s 95* account. Continuing with the example from above, the amount amortized each year for 20 years is $186,702.36. The amount amortized monthly using the straight-line basis would be $15,558.53 ($186,702.36 divided by 12 months). The consolidated effect on the organization is as follows:
(i)Bonds issued at a premium:
95* Dr. 9210 LT Port of Prem./Disc. $15,558.53
95* Cr. 4429 Amort of Bond Prem./Discount $15,558.53
(ii) Bonds issued at a discount:
95* Dr. 4429 Amort of Prem./Disc. $15,558.53
95* Cr. 9210 LT Port of Prem./Disc. $15,558.53
During the final year of amortization, object code 9209 (ST Portion of Discount) will be used for the entry instead of object code 9210 (LT Portion of Discount).
The Amortization of Premium/Discount, object code 4429 is reported on the same object level (Financial/Debt Services) as 4400 Interest Expense. Amortization of a premium will decrease the total interest expense on the auxiliary’s financial statements and amortization of a discount will increase interest expense.
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Quarterly Reclassification of Investment Balances to Construction Project Accounts: Bond proceeds are held in an investment clearing account until the funds are needed to pay for construction. In order to prevent the auxiliary organization’s assets from being understated at quarter-end, Treasury allocates unspent bond proceeds from the investment clearing account to the appropriate construction project account. The entry reverses the next month. The consolidated effect on the organization is as follows:
90* Dr. 8525 Construct. Invest. $57,475,000.00
90* Cr. 1699 Transfer In $57,475,000.00
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Reclassify Short-Term Debt Liability Balances: After a principal payment has been made, Treasury reclassifies the amount of principal expected to be repaid during the next 12 months to 9200 Current Portion Bonds Payable via a JV document. The entry reverses when the next bond principal payment is made. The consolidated effect on the organization is as follows:
95* Dr. 9202 Bonds Pay–Long Term $500,000.00
95* Cr. 9200 Current Portion Bonds Pay. $500,000.00
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Monthly Interest Expense Accrual: Interest payment dates on revenue bonds typically do not coincide with the financial reporting dates of the University, so interest expense is accrued by Treasury. A JV is recorded monthly that accrues 1/6 of the next semi-annual interest payment. The JV will reverse prior to the date of the next scheduled bondholder interest payment.
The following two tables illustrate how to calculate interest expense for monthly budgeting purposes.
Calculation of Monthly Interest Accrual Amount
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Date
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Amount
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Monthly Amount
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12/01/2011
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$1,620,509.38
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$270,084.90
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06/01/2012
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$1,620,509.38
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$270,084.90
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12/01/2012
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$1,562.259.38
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$260,376.56
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Cumulative Interest Expense for Budgeting Purposes
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Month
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Next Scheduled Interest Payment
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Amount Accrued
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Cumulative Interest Expense
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July
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12/01/2011
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$270,084.90
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$ 270,084.90
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August
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12/01/2011
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$270,084.90
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$540,169.80
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September
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12/01/2011
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$270,084.90
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$ 810,254.70
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October
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12/01/2011
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$270,084.90
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$1,080,339.60
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November
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12/01/2011
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$270,084.90
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$1,350,424.50
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December
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06/01/2012
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$270,084.90
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$1,620,509.40
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January
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06/01/2012
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$270,084.90
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$1,890,594.30
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February
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06/01/2012
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$270,084.90
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$2,160,679.20
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March
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06/01/2012
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$270,084.90
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$2,430,764.10
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April
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06/01/2012
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$270,084.90
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$2,700,849.00
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May
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06/01/2012
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$270,084.90
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$2,970,933.90
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June
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12/01/2012
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$260,376.56^
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$3,231,310.46
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The accrual amounts in this example are off by a few cents for rounding.
Note: The interest amount accrued for June will be lower due to the principal payment made June 1st.
Monthly JV for Interest Expense Accrual
The consolidated effect on the auxiliary organization’s 60* account is as follows:
60* Dr. 4400 Interest Expense $270,084.90
60* Cr. 9004 Accrued Interest $270,084.90
Amortization schedules for each bond issuance are provided by Treasury.
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Monthly Funding of Annual Debt Service Payment: Treasury staff will record a TF document on a monthly basis to charge the auxiliary operation 1/12 of the annual debt service payment on the bonds and a pro-rata portion of annual trustee bank fees, to set aside cash for the next bond payment. The consolidated effect on the organization is as follows:
| 60* Dr. 5197 Transfer of Princ./Int.–Other Expense |
$$ |
| 60* Cr. 8000 Cash |
$$ |
| 91* Cr. 1697 Transfer of Princ./Int. - Other Revenue |
$$ |
| 91* Cr. 8000 Cash |
$$ |
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Payment to Trustee Bank: On the day the payment is due to the bank, a non-check disbursement (“ND”) is recorded that initiates an ACH/wire to the bank in the amount of the debt service payment, as follows:
| 91* Dr. 8004 Cash Deposits-Princ. and Int. |
$$ |
| 91* Cr. 8000 Cash |
$$ |
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Record Bondholder Payment/Relieve Liability: Treasury initiates an IB document to record the payment. The IB entry will credit Cash Deposits-Prin and Int object code 8004 for the total payment amount and debit Bonds Payable object code 9202 in the 91* account for the amount of the principal. The interest portion of the payment is accounted for differently depending on the completion status of the project. If the project is complete, the interest portion is expensed (see section i below). If the payment is made during the construction period, the interest portion is capitalized (see section ii. below). An automatic FIS-generated offset entry will move the object code 9202 Bond Liability adjustment to the appropriate 95* account. All the amounts in the IB entry have offsets to Cash object code 8000, and net to zero.
(i) Interest Expense: If the project is complete, Treasury initiates an IB document to record the interest as an expense in object code 4400 Interest Expense. The consolidated effect on the organization is as follows:
| 95* Dr. 9202 Bond Payable |
$$ Principal amount |
| 91* Dr. 4400 Interest Expense |
$$ Interest portion |
| 91* Cr. 8004 Cash Deposits-Principal & Int. |
$$ Total Payment |
(ii) Capitalized Interest (Construction Period Interest): If construction is not complete, the interest portion of the payment is recorded as capitalized interest and added to the cost basis of the building for capital asset management purposes. Treasury initiates an IB document to record the capitalized interest in object code 7300 Buildings & Attached Fixtures in the organization’s 90* account with an automatic FIS-generated offset to object code 8601 Institutional Plant-Building in the appropriate 95* account. The consolidated effect on the organization is as follows:
| 95* Dr. 9202 Bond Payable |
$$ Principal amount |
| 90* Dr. 7300 Buildings & Attached Fixt. |
$$ Interest portion |
| 91* Cr. 8004 Cash Deposits-Prin and Int |
$$ Total Payment |
| |
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| 95* Dr. 8601 Institutional Plant-Bldg |
$$ Interest portion |
| 95* Cr. 9899 Fund Balance |
$$ Interest portion |
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Sinking Fund Interest: Depending on the type of bonds issued, IU is required to transfer funds for debt service payments to a debt service sinking fund at the trustee bank from one to five days in advance of the date bondholders are paid. The trustee bank invests these funds until the bondholders are paid. Any interest earned during that time is credited to the sinking fund and applied toward the next interest payments. This interest is recorded as follows:
| 91* Dr. 8004 Cash Deposits-Prin and Int |
$$ |
| 91* Cr. 1635 Interest Income |
$$ |
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DEFINITIONS:
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Bond Expense - Expenses incurred by IU in order to prepare the bond issue for sale including legal fees, rating agency fees, trustee fees, printing and other cost required to issue the bonds.
Capitalized Interest - Bond interest payments that are made when the facility being financed with the bonds is still under construction and are capitalized as a part of the cost of the facility.
Consolidated Revenue Bond - Unsecured obligations that promise to pay bond holders the principal and interest on the bonds from “available funds”, which includes both revenues from the associated facilities and revenue systems as well as other unrestricted fund balances of the university.
Discount - The amount by which the price a buyer pays for a bond is lower than its principal amount at maturity (par value). Since bond prices are quoted as a percent of par value, if you assume that a bond has a par value of $1,000, then a price of 98.00 means that the bond is selling for 98% of its par value of $1,000.00 and the bond discount is 2%, or $200.
Facility Revenue Bonds - Guarantee repayment from specified revenue streams of the parking system.
Good Faith Deposit - An amount not less than 1% of the par amount of the bonds that an underwriter electronically transfers to IU approximately 7 to 14 days prior to the closing on the sale of the bonds. This is a component of bond proceeds received.
Premium - The amount by which the price a buyer pays for a bond is higher than its principal amount at maturity (par value). Since bond prices are quoted as a percent of par value, if you assume that a bond has a par value of $1,000, then a price of 103.00 means that the bond is selling for 103% of its par value of $1,000.00 and the bond premium is 3%, or $300.
Revenue Bonds - Revenue bonds are debt obligations of IU that are issued pursuant to Indiana Code 21-33-3. Debt service of revenue bonds is repaid from specified revenue streams associated with the facilities being financed and other legally available funds of IU. Revenue bonds can be issued without the approval of the General Assembly for specific categories of facilities listed in the statute including student housing, parking, food service and health care facilities, and for research facilities on the Bloomington and Indianapolis campuses. The General Assembly can authorize revenue bonds to be issued for other types of facilities that are not listed in the statute.
Sinking Fund - An account that is helped by a trustee bank, pursuant to a requirement in a bond indenture (legal agreement between the bond issuer and trustee bank) into which funds are transferred from the issuer, in advance of the date that debt service payments are due to bondholders.
Student Residence System Bonds - Guarantee repayment from specified revenue streams of the student residence system.
Underwriter - An investment banking firm engaged by a bond issuer to assist the issuer in bringing a bond issue to market. Underwriters generally obtain subscriptions to purchase the bonds from institutional and individual buyers during an “order period”, then purchase the bonds from the issuer and resell the bonds to the investors who subscribed for the bonds.
Underwriter’s Discount - This term refers to the fees charged by the Underwriter to assist in the structure and marketing of the bonds
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