Question

Can you help me answer this question, regards to the approriate mathod for interest accruals by debt service funds?

Answer 1

ANSWER:

Interest revenue on investment, under the full accrual basis, is recognized when earned. The GASB requires this method as the investments are financial resources. On contrary, interest expenditure is recognized, under the modified accrual basis, when it is due and payable. It is due to the reason that majority jurisdictions will not appropriate the resources to pay the interest, or transfer them to the debt service fund, until such point.

Accrue the debt service fund expenditure and liability in one period however record the transfer of financial resources in a later period will make it difficult for the understanding of users and may also cause overstatement of debt service fund expenditures and liabilities and understatement of the fund balance. But when the sources have been transferred in to the debt service fund, then interest may be accrued. Although appear inconsistent, however such recognition requirements focus on financial resources, which is required for measuring governmental funds