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

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Presentation on theme: "Audit of Loans, its accounting system and Sinking Fund. Session Title."— Presentation transcript:

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

2 Training Module on Audit of ULBs Session 42 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 Training Module on Audit of ULBs Session 43 The inputs will enable the participants –to acquire basic concepts of accounting system of loans, and –maintenance of Sinking Fund. Learning Objective

4 Training Module on Audit of ULBs Session 44 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 Training Module on Audit of ULBs Session 45 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 Training Module on Audit of ULBs Session 46 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

7 Training Module on Audit of ULBs Session 47 Similarly, the ULB may create an escrow account for repayment of loans, and credit to it, the income earmarked for this. Introduction

8 Training Module on Audit of ULBs Session 48 The purpose of establishment of a sinking fund or an escrow account is to accumulate money, including interest, adequate to repay the loan. Introduction

9 Training Module on Audit of ULBs Session 49 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 Training Module on Audit of ULBs Session 410 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 Training Module on Audit of ULBs Session 411 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 Training Module on Audit of ULBs Session 412 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 Training Module on Audit of ULBs Session 413 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.

14 Training Module on Audit of ULBs Session 414 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.

15 Training Module on Audit of ULBs Session 415 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 Training Module on Audit of ULBs Session 416 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 Training Module on Audit of ULBs Session 417 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 Training Module on Audit of ULBs Session 418 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 Training Module on Audit of ULBs Session 419 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 Training Module on Audit of ULBs Session 420 Establishment and maintenance of Sinking Funds for loans Corporation shall establish a separate Sinking Fund in respect of each loan;

21 Training Module on Audit of ULBs Session 421 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 Training Module on Audit of ULBs Session 422 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 Training Module on Audit of ULBs Session 423 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 Training Module on Audit of ULBs Session 424 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 Training Module on Audit of ULBs Session 425 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 Training Module on Audit of ULBs Session 426 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 Training Module on Audit of ULBs Session 427 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 Training Module on Audit of ULBs Session 428 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 Training Module on Audit of ULBs Session 429 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 Training Module on Audit of ULBs Session 430 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.

31 Training Module on Audit of ULBs Session 431 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.

32 Training Module on Audit of ULBs Session 432 Power to borrow money from the State Government. The Corporation may borrow money from the State Government on such terms and conditions as the State Government may determine.

33 Training Module on Audit of ULBs Session 433 Power to borrow money from the State Government. If any such money is not repaid, or any interest is not paid, the State Government may attach the Municipal Fund.

34 Training Module on Audit of ULBs Session 434 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 Training Module on Audit of ULBs Session 435 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 Training Module on Audit of ULBs Session 436 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 Training Module on Audit of ULBs Session 437 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. Accounting Principle

38 Training Module on Audit of ULBs Session 438 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. Accounting Principle

39 Training Module on Audit of ULBs Session 439 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 Training Module on Audit of ULBs Session 440 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 Training Module on Audit of ULBs Session 441 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) (a) Designated Loan Bank Account To Bonds & debentures Dr. Cr. 10,00,000 Cash Book Ledger, Register of Debenture All figures are illustrative

42 Training Module on Audit of ULBs Session 442 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 Training Module on Audit of ULBs Session 443 Code of Account Accounting Entry Dr./ Cr. Debit Amoun t (Rs.) Credit Amou nt (Rs.) Books to be entered into 240 – (b) (a) Interest & Finance Charges To Interest Accrued & due – Loans Dr. Cr. 1,00,00 0 Journal Book Ledger, Register of Loans, Register of Debenture Figures are illustrative Code of Account Accounting Entry Dr./ Cr. Debit Amount (Rs.) Credit Amount (Rs.) Books to be entered into 290- (a) (b) Transfer to Sinking Fund To Sinking Fund Dr. Cr. 1,00,000 Journal Book, Ledger, Register of Sinking Fund Figures are illustrative Accounting of interest payable on loan / debenture NEXT

44 Training Module on Audit of ULBs Session 444 Investments made in respect of Sinking Fund shall be entered in a Sinking Fund Investment Register. Accounting of interest payable on loan / debenture

45 Training Module on Audit of ULBs Session 445 The accounting entries/procedures to be followed for investments of such moneys are similar to those followed in respect of other investments. Accounting of interest payable on loan / debenture

46 Training Module on Audit of ULBs Session 446 Interest earned on Investments, profit/loss on disposal of Investments, if any, shall be updated in the Register of Sinking Fund. Accounting of interest payable on loan / debenture

47 Training Module on Audit of ULBs Session 447 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 Accounting of interest payable on loan / debenture

48 Training Module on Audit of ULBs Session 448 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) (a) Transfer to Sinking Fund To Sinking Fund Dr. Cr. 5,000 Journal Book Ledger, Register of Sinking Fund Figures are illustrative Accounting of interest payable on loan / debenture

49 Training Module on Audit of ULBs Session 449 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 Training Module on Audit of ULBs Session 450 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 (a) (a) (a) Designated Bank Account Bank Account To Tax Revenues – Water Taxes Dr. Cr. 3,00,000 7,00,000 10,00,000 Cash Book Ledger, Register of Loans, Register of Debenture Figures are illustrative Repayment of Loan/Redemption of Debentures in case where Escrow Account is created contd.

51 Training Module on Audit of ULBs Session 451 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 Training Module on Audit of ULBs Session 452 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 Training Module on Audit of ULBs Session 453 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 Training Module on Audit of ULBs Session 454 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 EntryDr./ Cr. Debit Amount (Rs.) Credit Amount (Rs.) Books to be entered into (a) (a) Loan Issue Expenses – Deferred To Bank Account* Dr. Cr. 50,000 Cash Book, Ledger, Figures are illustrative

55 Training Module on Audit of ULBs Session 455 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 Accounting for Expenditure incurred in raising loans or issuing debentures

56 Training Module on Audit of ULBs Session 456 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 EntryDr./ Cr. Debit Amount (Rs.) Credit Amount (Rs.) Books to be entered into (a) (a) Miscellaneous Expenditure written off To Loan Issue Expenses Deferred Dr. Cr. 30,000 Journal Book Ledger, Figures are illustrative Accounting for Expenditure incurred in raising loans or issuing debentures

57 Training Module on Audit of ULBs Session 457 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 Training Module on Audit of ULBs Session 458 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 Training Module on Audit of ULBs Session 459 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 Training Module on Audit of ULBs Session 460 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

61 Training Module on Audit of ULBs Session 461 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 Training Module on Audit of ULBs Session 462 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 Training Module on Audit of ULBs Session 463 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 Training Module on Audit of ULBs Session 464 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 Training Module on Audit of ULBs Session 465 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 Training Module on Audit of ULBs Session 466 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 Training Module on Audit of ULBs Session 467 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 Training Module on Audit of ULBs Session 468 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 Training Module on Audit of ULBs Session 469 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 Training Module on Audit of ULBs Session 470 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 Training Module on Audit of ULBs Session 471 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


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