Part V

Accounting for Expenditures and Allocations

Proceeds are no longer subject to the arbitrage requirements when they are properly allocated to an appropriate expenditure. To make these allocations, issuers must follow special rules and maintain adequate records. If an issuer improperly treats bond proceeds as allocated to an expenditure, it may miscalculate the rebate amount, fail to adequately restrict investment yield, or fail to satisfy the requirements for a spending exception or temporary period. By properly recording, monitoring and tracking allocations of bond proceeds, issuers can stay in compliance with the arbitrage requirements.

Generally, proceeds are no longer proceeds of an issue when they are allocated to an expenditure for a governmental purpose or are deallocated from the bond issue because of the transferred proceeds or universal cap rules. ⁶¹ Proceeds may be allocated to an expenditure using any reasonable, consistently applied accounting method for an issue’s gross proceeds, investments and expenditures.

There are special rules and time limits for making allocations, but in general, to allocate gross proceeds to an expenditure, an issuer must reasonably expect an outlay of cash not later than five banking days after it allocates gross proceeds to that expenditure. ⁶² Payment of gross proceeds of an issue to a related party of the payor is not an expenditure of those gross proceeds. An issuer must make its allocations no later than 18 months after the later of the date when the expenditure is paid or the project is placed in service, and in any event no later than the date the first rebate payment would be due (that is, the earlier of (i) 60 days after the fifth anniversary of the date the bonds were issued or (ii) 60 days after the date the issue is retired). ⁶³

If the project is funded with tax-exempt bond proceeds and another source of funds, there may be questions about which sources of funds were used for which expenditures. Here again, the issuer may use any reasonable, consistently applied accounting method for gross proceeds and other funds. Examples of reasonable accounting methods ⁶⁴ an issuer may use include:

1. Specific tracing - bond proceeds are allocated to the specific expenditures actually paid with the proceeds.

2. Gross proceeds spent first - bond proceeds are allocated to the earliest expenditures.

3. First-in, first-out - the source allocated to the expenditure is based on the order in which each source becomes available.

4. Ratable allocation - funds from each source are allocated to each of the expenditures ratably.

If an issuer doesn’t have sufficient books and records to establish an accounting method for a bond issue and allocation of proceeds of that issue, specific tracing applies for the yield restriction and rebate rules. ⁶⁵

Specific rules apply for accounting for purpose investments, certain working capital (“proceeds spent last” method), grants, reimbursements and commingled funds.

61 Treas. Reg. Section 1.148-6(b)(1). For more information on the universal cap rules, see Treas. Reg. Section 1.148-6(b)(2).

62 Treas. Reg. Section 1.148-6(d)(1)(ii).

63 Treas. Reg. Section 1.148-6(d)(1)(iii).

64 Treas. Reg. Section 1.148-6(d)(1)(i).

65 Treas. Reg. Section 1.148-6(a)(3).

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