A number of questions continue to surface regarding the accounting and financial reporting of Build America Bonds. The American Recovery and Reinvestment Act of 2009 (ARRA) allows state and local governments to issue taxable governmental bonds with a federal subsidy for a portion of their borrowing costs. The Build America Bonds (direct payment type) provide for a federal subsidy paid to state or local government issuers in an amount equal to 35 percent of the total coupon interest payable to investors.
To obtain a refund, the issuer must file Form 8038-CP with the IRS by the 45th day before the applicable interest payment date (but no earlier than the 90th day before the interest payment date).
We've compiled the following answers to frequently asked questions regarding accounting and financial reporting of Build America Bonds to guide government finance officials as they prepare their Annual Financial Report:
1. Can the local government "net" the federal subsidy with interest expense/expenditure?
A. Generally, revenues are not netted with expenditures/expenses unless specifically allowed by accounting standards. Per a discussion with a GASB staff member, federal subsidy of Build America Bonds should not be netted with interest expense.
2. When should revenue be recognized for the federal subsidy under modified accrual basis of accounting?
A. The federal subsidy is an example of a voluntary nonexchange transaction. Guidance is found in GASB Statement No. 33, specifically paragraphs 30 and 15. As such, revenue should be recognized when the corresponding "expenditure" is recognized.
3. When should revenue be recognized for the federal subsidy using the full accrual basis of accounting?
A. As with Question 2, GASB Statement No. 33 applies. Revenue should be recognized then the corresponding "expense" is recognized. As such, in the case where interest expense is accrued at year end, a receivable should be recorded for the federal subsidy portion.
4. How should a local government disclose payments to maturity in the footnotes?
A. GAAP requires a disclosure of debt service payments to maturity. This schedule should present the future interest payments consistent with the payment schedule reflected in the resolution issuing the bonds (i.e. do not reduce future interest payments by the amount of the federal subsidy).
5. Is the federal subsidy considered a federal award that would be subject to single audit?
A. The U.S. Office of Management and Budget (OMB) has determined that the Build America Bonds Program is excluded from the provisions of OMB Circular A-133. Therefore, the Build American Bonds should not be presented on the Schedule of Expenditures of Federal Awards.
If you would like to further discuss Build America Bonds, please contact David Mol at dmol@hlbtr.com or Peggy Moeller at mmoeller@hlbtr.com.