Current through Register Vol. 46, No. 39, September 25, 2024
[ 1440 ]
(a) Debt financing for plant replacement and
expansion programs may take many forms. Under the terms of most debt financing
agreements the debtor is required to perform or is prohibited from performing
certain acts. In many instances, debt financing gives rise to special
accounting treatment because of discounts and premiums on bond issues,
financing charges, formal restrictions on debt proceeds, and sinking and other
required funds.
(b)
Discounts
and premiums on bond issues.
[ 1441 ] Discounts and premiums arising from the issue
of bonds must be amortized over the life of the related issue(s). Bond
discounts must be recorded as a reduction of the related debt (Bonds Payable -
Net of Unamortized Discount). Bond premium must be recorded as Other Deferred
Credits (account 2140).
(c)
Financing charges.
[ 1442 ] Costs of obtaining debt financing other than
discounts (e.g., legal fees, underwriting fees, special
accounting costs) must be recorded as deferred costs and amortized over the
life of the related debt.
(d)
Accounting for debt
proceeds.
[ 1443 ]
(1)
Debt agreements for financing plant replacement and expansion programs may or
may not require formal segregation of debt proceeds prior to their use.
Proceeds which are not required to be formally segregated prior to their use
must be recorded as other noncurrent assets in the Unrestricted Fund.
(2) For the purposes of this Part, all funds
received under covenant agreement arrangements which require formal segregation
and/or separate accountability shall be recorded in the Plant Replacement and
Expansion Fund until such time as the project is completed. Upon completion,
the asset and related debt must be transferred to the Unrestricted Fund.
(e)
Sinking and
other required funds.
[ 1444 ]
(1)
These funds are usually established to comply with loan provisions whereby
specific deposits are to be used to insure that adequate funds are available to
meet future payments of:
(i) interest and
principal (retirement of indebtedness funds); or
(ii) property insurance, related taxes,
repairs and maintenance costs, equipment replacement (escrow funds).
(2) Funds of this nature may also
be required to be held by trustees outside the hospital. Income generated from
the investment of such funds may be immediately available to the hospital or
such income may be held by the trustee for some future designated
purpose.
(3) For the purposes of
this Part, all sinking and other required funds will be accounted for in the
following manner:
(i) All fund assets,
whether trusteed or otherwise, must be recorded in the Unrestricted Fund as a
long-term investment. The only exception is when the funds are restricted by
covenant agreement.
(ii) All income
generated from the investment of such funds must be recorded as nonoperating
revenue in the Unrestricted Fund, except as required under number 1386. Income
generated from funds under covenant agreement may be accounted for as an
addition to the appropriate restricted fund balance account.
(f)
Early debt
retirement.
[ 1445 ]
(1)
Many bond contracts provide for the calling of any portion or all of the issue
at the option of the company at a stated price, usually above par, for the
purpose of enabling the corporation to reduce its indebtedness before maturity
as occasion arises, or to take advantage of opportunities to borrow on more
favorable terms. Bonds are often retired piecemeal through sinking fund
operations.
(2) Costs incidental to
the recall of bonds before their date of maturity are considered debt
cancellation costs. Such costs include bond recall penalties, unamortized bond
discounts and expenses, legal and accounting fees, etc. These costs must be
reduced by any unamortized bond premiums and recorded in the Unrestricted Fund
in accordance with generally accepted accounting
practices.
