Audit of Loans, its accounting system and Sinking Fund.

1
Audit of Loans, its accounting system and
Sinking Fund.
Session Title
2
Session Overview

• In this session we will discuss
• loans received/raised by municipalities and
  municipal corporations,
• its accounting system,
• application and utilisation of sinking fund.

3
Learning Objective

• The inputs will enable the participants
• to acquire basic concepts of accounting system of
  loans, and
• maintenance of Sinking Fund.

4
Introduction

• For any specific purpose, the municipalities /
  corporations may, on sanction by the State
  Government, borrow funds either by issuing
  debentures or other-wise

5
Introduction

• These are generally secured by movable and
  immovable properties vested in the ULB.
• The loans can be used only for any purpose as
  specified in the approval.

6
Introduction

• On the sanction for establishing a Sinking Fund
  to repay loan, the ULB shall establish it and
  credit to it, funds from the Municipal Fund.

7
Introduction

• Similarly, the ULB may create an escrow account
  for repayment of loans, and credit to it, the
  income earmarked for this.

8
Introduction

• The purpose of establishment of a sinking fund or
  an escrow account is to accumulate money,
  including interest, adequate to repay the loan.

9
Power of the Kolkata Municipal Corporation (KMC)
to raise loans (This may be adopted as per State
specific scenario)

• The Corporation may raise a loan
• by issue of debentures or otherwise on the
  security of any of the taxes, surcharges, cesses
  and
• fees under the relevant Act or on the guarantee
  by the State Government,

10
Purpose to raise loans

• for construction of works,
• for the acquisition of land or buildings,
• to pay off any debt due to the State Government,

11
Purpose to raise loans

• to repay a loan raised,
• for the acquisition of a public utility concern
  which renders such services,
• for the purchase of vehicles, locomotive engines,
  boilers and machinery necessary for carrying out
  function,
• for any other purposes

12
Purpose to raise loans

• Provided that
• prior sanction of the State Government is
  required, and
• the rate of interest to be paid for such loan
  etc. shall be subject to the approval of the
  State Government.

13
Power of the KMC to raise loans contd.

• Loan shall not be applied to any other purpose
  other than that for which it has been raised.

14
Power of the KMC to raise loans contd.

• Loan raised for the construction of works shall
  only be applied to the payment of salaries or
  allowances to the employees engaged in the
  construction.

15
Limit to the power of the KMC of raising loans

• The power of Corporation to raise a loan shall
  not exceed 15 of the annual value of land and
  buildings as determined under the Act.

16
Power of KMC to open a credit a/c with a bank

• The Corporation may take credit, from any
  scheduled bank on a Cash Account to be kept in
  the name of the KMC Cash Account.

17
Time for repayment of loans

• The time for repayment of any loan shall
• not exceed sixty years, and
• the time for repayment of any loan raised for the
  purpose of discharging any previous loan shall
  not extend beyond the unexpired portion of the
  period.

18
Manner of repayment of loans

• Every loan raised by the Corporation shall be
  repaid within the time approved
• such repayment shall be made either
• (a) from a Sinking Fund or
• (b) partly from such Sinking Fund and partly from
  the loan raised for the purpose.

19
Priority of payments for interest and repayment
of loans over other payments

• All payments due from the Corporation on account
  of interest on and repayment of, shall have
  priority over all other payments due from the
  Corporation.

20
Establishment and maintenance of Sinking Funds
for loans

• Corporation shall establish a separate Sinking
  Fund in respect of each loan

21
Investment of the amount at the credit of a
Sinking Fund

• All moneys credited to a Sinking Fund shall be
  invested by the Corporation in
• Government securities, or
• Securities granted by the Central or State
  Government, or
• Debentures issued by the Corporation,
• Such other public securities as may be approved
  by the State Government,

22
Discharge of the Corporation from liability under
debentures

• The Corporation shall be discharged from all
  liabilities when-
• the amount due on a debenture has been paid on

23
Discharge of the Corporation from liability under
debentures

• a debenture has been renewed or issued upon
  subdivision, amalgamation or exchange,
• a duplicate debenture has been issued in lieu of
  one alleged to have been lost, stolen or
  destroyed, either wholly or in part,

24
Application of Sinking Funds

• Until any loan is wholly repaid, the Corporation
  shall not apply the money at the credit of the
  concerned Sinking Fund for any other purpose.

25
Annual statement by Municipal Commissioner

• The Municipal commissioner shall, at the end of
  each year, prepare a statement showing-
• The amount which has been invested during the
  year,
• The date of last investment made during the year,
• The aggregate amount of the securities in the
  hands of the Corporation at the end of the year,

26
Annual statement by Municipal Commissioner

• The aggregate amount which has been applied for
  the purpose of repayment of loan.
• Every such statement shall be laid before a
  meeting of the Corporation and shall be published
  in the Official Gazette.

27
Annual examination of Sinking Funds

• All Sinking Funds shall be annually examined by
  the statutory audit
• Audit shall ascertain whether the cash and the
  value of securities belonging thereto are equal
  to the amount which should be at the credit of
  such funds.

28
Annual examination of Sinking Funds

• The amount which should be at the credit of a
  Sinking Fund shall be calculated on the basis of
  the sums credited to such fund.

29
Annual examination of Sinking Funds

• The Corporation shall pay into a sinking fund
  such amount as the auditors may certify to be
  deficit in respect of such fund, unless the State
  Government specially sanctions a gradual
  readjustment of such debit.

30
Annual examination of Sinking Funds contd.

• If the cash and the value of the securities at
  the credit of a sinking fund are in excess of the
  amount which should be at its credit, the
  auditors shall certify the amounts of such excess
  sum

31
Annual examination of Sinking Funds contd.

• If such excess fund is found the Corporation
  shall transfer it to the Municipal Fund in the
  General Account.

32
Power to borrow money from theState Government.

• The Corporation may borrow money from the State
  Government on such terms and conditions as the
  State Government may determine.

33
Power to borrow money from theState Government.

• If any such money is not repaid, or any interest
  is not paid, the State Government may attach the
  Municipal Fund.

34
Accounting Principle

• Interest expenditure on loan shall be recognised
  on accrual basis.
• Interest on borrowings directly attributable to
  acquisition or construction of qualifying fixed
  assets up to the date of commissioning of the
  assets shall be capitalised.

35
Accounting Principle

• A provision shall be made for the interest
  accrued between the date of last payment of
  interest and the date of financial statements.

36
Accounting Principle

• The expenses incurred while issuing of debentures
  or bonds shall be deferred, and
• amortised in equal installments over a period of
  5 years or the tenure of the loan whichever is
  earlier.

37
Accounting Principle

• In case, the debentures bonds are prematurely
  redeemed,
• the amount of issue expenses outstanding during
  the year shall be written-off, and
• charged to the Income and Expenditure Statement.

38
Accounting Principle

• All other expenses in respect of raising loans
  other than those considered, as issue expenses
  shall be expensed off in the year in which they
  are incurred.

39
Accounting procedure for Receipt of Loan

• The amount borrowed as per the terms of sanction
  shall be entered in the Register of Loans
• A separate folio shall be allotted for each loan
  taken

40
Accounting procedure for Receipt of Loan

• In case, sanction has been obtained for issuing
  debentures, the particulars of the debenture
  holder shall be recorded in the Register of
  Debentures.
• Amount received as loan shall be deposited in the
  Designated Loan Bank Account.

41
Raising / Borrowing of Funds

• On receipt of loan, the Accounts Department shall
  pass the entries as shown in the table given
  below

Code of Account Accounting Entry Dr./ Cr. Debit Amount (Rs.) Credit Amount (Rs.) Books to be entered into
450- (b) 331-70-(a) Designated Loan Bank Account To Bonds debentures Dr. Cr. 10,00,000 10,00,000 Cash Book Ledger, Register of Debenture
All figures are illustrative
42
Accounting of interest payable on loan / debenture

• Recording of interest accrued
• the Accounts Department shall pass the entry for
  payment of interest as approved by the
  authorities designated by the municipalities and
  municipal corporations,
• the entries shown in the table appears in next
  slide-

43
Accounting of interest payable on loan / debenture
Code of Account Accounting Entry Dr./ Cr. Debit Amount (Rs.) Credit Amount (Rs.) Books to be entered into
240 (b) 350-12-(a) Interest Finance Charges To Interest Accrued due Loans Dr. Cr. 1,00,000 1,00,000 Journal Book Ledger, Register of Loans, Register of Debenture
Code of Account Accounting Entry Dr./ Cr. Debit Amount (Rs.) Credit Amount (Rs.) Books to be entered into
290- (a) 311-50-(b) Transfer to Sinking Fund To Sinking Fund Dr. Cr. 1,00,000 1,00,000 Journal Book, Ledger, Register of Sinking Fund
NEXT
Figures are illustrative
Figures are illustrative
44
Accounting of interest payable on loan / debenture

• Investments made in respect of Sinking Fund shall
  be entered in a Sinking Fund Investment Register.

45
Accounting of interest payable on loan / debenture

• The accounting entries/procedures to be followed
  for investments of such moneys are similar to
  those followed in respect of other investments.

46
Accounting of interest payable on loan / debenture

• Interest earned on Investments, profit/loss on
  disposal of Investments, if any, shall be updated
  in the Register of Sinking Fund.

47
Accounting of interest payable on loan / debenture

• On examination, if the present value of sinking
  fund investment is less than the value of the
  Fund sanctioned, the difference shall be made
  good from the Municipal Fund.

Figures are illustrative
48
Accounting of interest payable on loan / debenture

• The Accounts Department shall pass the following
  entry

Code of Account Accounting Entry Dr./ Cr. Debit Amount (Rs.) Credit Amount (Rs.) Books to be entered into
290-(a) 311-50-(a) Transfer to Sinking Fund To Sinking Fund Dr. Cr. 5,000 5,000 Journal Book Ledger, Register of Sinking Fund
Figures are illustrative
49
Repayment of Loan / Redemption of Debentures in
case where Escrow Account is created

• In case of provision for establishment of an
  Escrow account
• an equivalent amount shall be transferred to the
  Escrow account based on collections of earmarked
  income.
• For example, if a loan has been taken for
  building Water Supply Infrastructure, then out of
  the water supply income collected, an amount
  equal to certain percentage of water tax shall be
  deposited into the Escrow account.

50
Repayment of Loan/Redemption of Debentures in
case where Escrow Account is created contd.

• For creation of Escrow Account, the Accounts
  Department shall pass the following entry

Code of Account Accounting Entry Dr./ Cr. Debit Amount (Rs.) Credit Amount (Rs.) Books to be entered into
450-41-(a) 450-21-(a) 110-02-(a) Designated Bank Account Bank Account To Tax Revenues Water Taxes Dr. Dr. Cr. 3,00,000 7,00,000 10,00,000 Cash Book Ledger, Register of Loans, Register of Debenture
Figures are illustrative
51
Investment of amount lying in Escrow Account

• Investments shall be entered in an Escrow Account
  Investment Register.
• The accounting procedures are similar to those
  followed in respect of other investments.
• Interest earned on Investments, profit / loss on
  disposal of Investments, if any, shall be updated
  in the Escrow Account Investments Register.

52
Accounting and payment of Interest on Loans /
Debentures

• Will be same as in case of Accounting procedure
  of interest payable on loan / debentures.
• The only difference being payment will be out of
  Escrow Bank Account instead of Main Bank Account.

53
Accounting for Expenditure incurred in raising
loans or issuing debentures

• The municipalities/corporations may incur
  expenses such as credit rating fees, security
  creation fees, stamp duty, etc., at the time of
  raising loan or issuing debentures
• These expenses shall be deferred and be
  classified as Loan Issue Expenses

54
Accounting for Expenditure incurred in raising
loans or issuing debentures

• After payment, the Accounts Department shall pass
  the entry as shown in the table given below

Code of Account Accounting Entry Dr./ Cr. Debit Amount (Rs.) Credit Amount (Rs.) Books to be entered into
480-10-(a) 450-21-(a) Loan Issue Expenses Deferred To Bank Account Dr. Cr. 50,000 50,000 Cash Book, Ledger,
Figures are illustrative
55
Accounting for Expenditure incurred in raising
loans or issuing debentures

• The Loan Issue Expenses shall be amortised in
  equal installments over a period of 5 years or
  the tenure of the loan whichever is lower.
• For instance, issue expenses of Rs. 50,000
  incurred for raising loan shall be amortised over
  a period of 5 years in equal installments of Rs.
  10,000/- every year.

Figures are illustrative
56
Accounting for Expenditure incurred in raising
loans or issuing debentures

• At the end of each financial year, for
  amortising the relevant portion of Loan Issue
  Expenses, the A/cs Deptt. shall pass the
  following entry

Code of Account Accounting Entry Dr./ Cr. Debit Amount (Rs.) Credit Amount (Rs.) Books to be entered into
270-50-(a) 480-10-(a) Miscellaneous Expenditure written off To Loan Issue Expenses Deferred Dr. Cr. 30,000 30,000 Journal Book Ledger,
Figures are illustrative
57
Internal Controls

• The Head of the A/cs Deptt. shall ensure
• that adequate provision is made for the interest
  accrued between the date of last payment of
  interest and the date of Financial Statements and
  
• is charged to the current periods Income and
  Expenditure Statement.

58
Internal Controls

• The Head of the A/cs Deptt. shall
• carry out physical verification of Sinking Fund
  Investment documents and
• compare with the Sinking Fund Investment Account.
• monitor the funds borrowed and ensure proper
  utilisation of funds.

59
Internal Controls

• The Head of the A/cs Deptt. shall ensure that
• the present value of the sinking fund investment
  ties up with the value of the Fund as per the
  State Governments sanction.
• the transfers to escrow account out of income
  collected are as per the conditions of
  borrowings.
• If any mismatch is observed, the adequate funds
  shall be transferred from the Main Bank Account
  to Sinking Fund Bank Account.

60
Internal Controls

• The Chief Executive Officer/Head of the
  municipalities/corporations shall specify
• such appropriate calendar of returns / reports
  for monitoring.
• All Reconciliation Statements shall be certified
  by the Head of the Accounts Department and
  verified.

61
Audit points on Loans

• In case of raising of loans
• could the auditor ensure that the same was
  within the power of the Corporation?
• Was there any case of raising of loans without
  the prior sanction of the State Government?

62
Audit points on Loans

• Were the necessary particulars, viz. the rate of
  interest to be paid for such loans and the terms
  and conditions of repayment approved by the State
  Government?

63
Audit points on Loans

• Could the auditor ensure
• the power of the Corporation to raise a loan did
  not exceed 15 of the annual value of land and
  buildings?
• In case of opening a credit account with a bank
  instead of raising loan, was the same sanctioned
  by the State Government?

64
Audit points on Loans

• Was there any case where the time for repayment
  of any loan exceeded 60 years?
• Did the Corporation establish
• a separate Sinking Fund in respect of each loan
  and
• was due credit to such fund provided every six
  months?

65
Audit points on Loans

• Were all moneys credited to a Sinking Fund
  invested in
• Government Securities, Debentures issued or other
  public securities as approved by the Government?
• Was there any case of delay in investment? If so,
  the reasons there for should be analysed.

66
Audit points on Loans

• Was there any case of application of the money at
  the credit of the concerned Sinking Fund for any
  purpose other than the purpose of repayment of
  loan before full repayment of the loan?

67
Audit points on Loans

• Did the Municipal Commissioner prepare
• an annual statement showing the necessary
  particulars of investment made during a year?
• Was such statement laid
• before a meeting of the Corporation and published
  in the Official Gazette?

68
Audit points on Loans

• Were all Sinking Funds submitted to statutory
  audit for annual verification? If not, why? If
  yes, the report thereof should be analysed.
• Could the auditor ensure
• amount at the credit of a Sinking Fund was
  calculated on the basis of the sums credited to
  such fund?

69
Audit points on Loans

• Was there any case
• where any amount was certified by the statutory
  auditor as deficit for a Sinking Fund and,
• in such case, did the Corporation pay the same
  into the respective Sinking Fund?
• Was the case of deficit or excess, if any, after
  due adjustment, referred to the State Government
  for their decision?

70
Audit points on Loans

• Was the amount borrowed as per the terms of the
  sanction entered in the Register of Loans
  maintained by the Accounts Department?
• In case of debentures, were the particulars of
  the debenture holder recorded in the Register of
  Debentures?

71
Audit points on Loans

• Was the amount received as loan
• deposited in the Designated Loan Bank Account?
• Were investments made in respect of Sinking Fund
• entered in a Sinking Fund Investment Register?

The End