audit of loans, its accounting system and sinking fund. session title

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Audit of Loans, its accounting system and

Sinking Fund.

Session Title

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Training Module on Audit of ULBs Session 4 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.

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•The inputs will enable the participants

– to acquire basic concepts of accounting system

of loans, and

– maintenance of Sinking Fund.

Learning Objective

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Introduction

• For any specific purpose, the municipalities /

corporations may, on sanction by the State

Government, borrow funds either by issuing

debentures or other-wise;

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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.

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• 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.

Introduction

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• Similarly, the ULB may create an escrow

account for repayment of loans, and credit to

it, the income earmarked for this.

Introduction

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• The purpose of establishment of a sinking fund

or an escrow account is to accumulate money,

including interest, adequate to repay the loan.

Introduction

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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,

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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,

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• 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

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• 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.

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• Loan shall not be applied to any other purpose

other than that for which it has been raised.

Power of the KMC to raise loans contd.

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• 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.

Power of the KMC to raise loans contd.

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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.

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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.

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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.

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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.

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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.

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Establishment and maintenance of Sinking Funds for loans

• Corporation shall establish a separate

Sinking Fund in respect of each loan;

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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,

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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

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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,

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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.

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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,

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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.

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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.

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• 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.

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• 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.

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• 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;

Annual examination of Sinking Funds contd.

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• If such excess fund is found the Corporation

shall transfer it to the Municipal Fund in the

General Account.

Annual examination of Sinking Funds contd.

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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.

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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.

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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.

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

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• 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.

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• 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.


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• 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.


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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;

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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.

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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 AccountTo Bonds & debentures

Dr.

Cr.

10,00,000 10,00,000 Cash BookLedger, Register of Debenture

All figures are illustrative

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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-

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Code of Account

Accounting EntryDr./ Cr.

Debit Amount (Rs.)

Credit Amou

nt (Rs.)


240 – (b)350-12-(a)

Interest & Finance Charges

To Interest Accrued &

due – Loans

Dr.

Cr.

1,00,000

1,00,000

Journal BookLedger, Register of Loans,Register of Debenture

Figures are illustrative

Code of Account


Debit Amount

(Rs.)

Credit Amount

(Rs.)


290- (a)311-50-(b)

Transfer to Sinking FundTo Sinking Fund

Dr.Cr.

1,00,000 1,00,000 Journal Book, Ledger, Register of Sinking Fund



NEXT

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


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• The accounting entries/procedures to be

followed for investments of such moneys are

similar to those followed in respect of other

investments.


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• Interest earned on Investments, profit/loss on

disposal of Investments, if any, shall be

updated in the Register of Sinking Fund.


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• 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.



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• The Accounts Department shall pass the following

entry:

Code of Account


Debit Amount

(Rs.)

Credit Amount (Rs.)


290-(a)311-50-(a)

Transfer to Sinking Fund To Sinking Fund

Dr.Cr.

5,0005,000

Journal BookLedger, Register of Sinking Fund



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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.

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

Code of Account


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

7,00,00010,00,000

Cash BookLedger, Register of Loans,Register of Debenture


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

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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.

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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.

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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;

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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.)


480-10-(a)

450-21-(a)

Loan Issue Expenses –DeferredTo Bank Account*

Dr.

Cr.

50,000

50,000

Cash Book, Ledger,


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• 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.



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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.)


270-50-(a)

480-10-(a)

Miscellaneous Expenditure written offTo Loan Issue Expenses Deferred

Dr.

Cr.

30,000

30,000

Journal BookLedger,



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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 period’s Income and Expenditure

Statement.

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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.

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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 Government’s 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.

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• 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.

Internal Controls

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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?

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• 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?

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• 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?

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• 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?

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• 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.

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• 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?

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• 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?

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• 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?

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• 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?

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• 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?

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• 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

audit of loans, its accounting system and sinking fund. session title

Documents

audit of ulbs session

training module

audit of loans

loan slide

session title slide

loans corporation

introduction slide

session overview