1. (a) Debt financing for plant replacement and expansion programs may take many forms. Under the terms of most debt financing agreements the debtor is required to perform or is prohibited from performing certain acts. In many instances, debt financing gives rise to special accounting treatment because of discounts and premiums on bond issues, financing charges, formal restrictions on debt proceeds, and sinking and other required funds.

   1. (1) Debt agreements for financing plant replacement and expansion programs may or may not require formal segregation of debt proceeds prior to their use. Proceeds which are not required to be formally segregated prior to their use must be recorded as other noncurrent assets in the Unrestricted Fund.

   2. (2) For the purposes of this Part, all funds received under covenant agreement arrangements which require formal segregation and/or separate accountability shall be recorded in the Plant Replacement and Expansion Fund until such time as the project is completed. Upon completion, the asset and related debt must be transferred to the Unrestricted Fund.

      (e) Sinking and other required funds.

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   3. (1) These funds are usually established to comply with loan provisions whereby specific deposits are to be used to insure that adequate funds are available to meet future payments of:

      1. (i) interest and principal (retirement of indebtedness funds); or
      2. (ii) property insurance, related taxes, repairs and maintenance costs, equipment replacement (escrow funds).
   4. (2) Funds of this nature may also be required to be held by trustees outside the hospital. Income generated from the investment of such funds may be immediately available to the hospital or such income may be held by the trustee for some future designated purpose.

   5. (3) For the purposes of this Part, all sinking and other required funds will be accounted for in the following manner:

      1. (i) All fund assets, whether trusteed or otherwise, must be recorded in the Unrestricted Fund as a long-term investment. The only exception is when the funds are restricted by covenant agreement.

      2. (ii) All income generated from the investment of such funds must be recorded as nonoperating revenue in the Unrestricted Fund, except as required under number 1386. Income generated from funds under covenant agreement may be accounted for as an addition to the appropriate restricted fund balance account.

         (f) Early debt retirement.

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   6. (1) Many bond contracts provide for the calling of any portion or all of the issue at the option of the company at a stated price, usually above par, for the purpose of enabling the corporation to reduce its indebtedness before maturity as occasion arises, or to take advantage of opportunities to borrow on more favorable terms. Bonds are often retired piecemeal through sinking fund operations.
   7. (2) Costs incidental to the recall of bonds before their date of maturity are considered debt cancellation costs. Such costs include bond recall penalties, unamortized bond discounts and expenses, legal and accounting fees, etc. These costs must be reduced by any unamortized bond premiums and recorded in the Unrestricted Fund in accordance with generally accepted accounting practices.

   (b) Discounts and premiums on bond issues.

   [ 1441 ] Discounts and premiums arising from the issue of bonds must be amortized over the life of the related issue(s). Bond discounts must be recorded as a reduction of the related debt (Bonds Payable - Net of Unamortized Discount). Bond premium must be recorded as Other Deferred Credits (account 2140).

   (c) Financing charges.

   [ 1442 ] Costs of obtaining debt financing other than discounts (e.g., legal fees, underwriting fees, special accounting costs) must be recorded as deferred costs and amortized over the life of the related debt.

   (d) Accounting for debt proceeds.

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