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Advantages of Using a Capital Projects Fund

written by: •edited by: Marjory Pilley•updated: 7/1/2011

When engaging in significant capital projects, such as new building construction, additions or investments to improve energy efficiency, it's important to utilize a robust accounting method. A capital projects fund will facilitate special reporting obligations and help keep the project on track.

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    What is a Capital Projects Fund?

    Capital project funds may be used by government, local government and certain nonprofit organizations when they are undertaking certain types of capital projects. The fund is used to account for the resources employed in capital projects including the construction of new buildings, additions to buildings and certain purchases of equipment. The capital projects fund will be used during the life of a capital project and will be closed at the end of the project. There are rules and restrictions as to the use of funds raised, depending on the source of those funds. The use of the fund helps the organization show that it is complying with the law and increases accountability.

    A capital projects fund may often be used in connection with the construction or expansion of school buildings in the US and some schools and higher education institutions have a capital projects fund division that handles the accounting for these projects. US local government bodies also establish capital project funds for important projects. In deciding when to use a capital projects fund, organizations need to keep in mind the advantages of the fund but also the need for accountability and transparency.

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    Financing of Capital Projects

    School building Financing of capital projects may be achieved by bond issues. The objectives for which the funds are being raised would be made clear when the bonds are issued and those purchasing the bonds would, therefore, be clear as to the ends to which the organization is putting the funds. Other funds could be sourced from special levies or from state matching revenues. Other income going into the special projects fund would include income from investments of the fund.

    Expenditures from the capital projects fund may be restricted depending on the source of funds for that expenditure. For example, when a school has raised funds from a bond issue or from a special levy, the destination of the funds is limited to purposes such as construction of or additions to buildings, the improvement of energy efficiency, certain defined purchases of initial equipment, improvement of playfields or certain costs relating to purchases of hardware and licensing of software.

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    Accounting Issues for a Capital Projects Fund

    The individuals and public bodies that provide the financing for capital projects through bond issues, special levies or state matching revenues will want to know that the funds provided are being used for the purpose for which they are intended and are being used efficiently. The accountability for funds provided is increased by the use of encumbrance accounting for contracts. This allows early identification and earmarking of the use of certain income within the fund and therefore allows greater transparency and control of the funds.

    School Grounds For example, a liability is created for accounting purposes when an order is issued for the purchase of goods, rather than at a later stage when an invoice is issued as would normally be the case under accrual accounting. The use of encumbrance accounting means that the funds are earmarked for a particular purpose at an earlier stage and this may lead to earlier identification of overspending based on the original project budget. This method of accounting and the improved budgetary control that accompanies it can improve transparency and accountability by giving a clearer picture of the way the funds are being used.

    The capital projects fund also uses modified accrual accounting which records items as revenues or other income sources at the time they are earned, measurable and available. Therefore, the funds have to be available before they are recorded as earnings in the capital project fund. The fund will compile an annual statement of revenues, expenditures and changes in the fund balance, compiled in accordance with generally accepted accounting principles. A balance sheet for the fund will also be prepared. A capital projects fund continues to issue annual financial statements while the project is ongoing but is then closed down when the project is completed.

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    Advantages of Using a Capital Projects Fund

    Raising the financing for a capital project by means of a bond issue or special levy is facilitated if accounting for the use of the funds is transparent and responsible. The types of organizations using a capital projects fund, such as local government bodies or nonprofit organizations increases the levels of trust with interested parties by ensuring that accounting procedures and the use of the funds is done in a well-organized way in accordance with the regulations.

    The capital projects fund with its use of modified accruals accounting and encumbrance accounting, and the issue of financial statements that comply with generally accepted accounting principles contribute to the accountability and transparency for the project. The need for careful accounting must be considered by organizations deciding when to use a capital projects fund. Public bodies, such as universities, may increase transparency by showing data on their ongoing current and future special projects funds on a website to ensure that full information is available to the public.

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    References

    "Capital projects funds" on http://www.cord.edu/faculty/bfoss/ADVC20.htm

    "Capital projects funds" on http://web.multco.us/sites/default/files/finance/documents/capproj_04.pdf

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