Facts: A county government and alegally separate organization—the Sports Stadium Authority—enteredinto an agreement under which the authority issued revenue bonds toconstruct a new stadium. Although the intent is for the authorityto make debt service payments on the bonds from a surcharge onticket sales, the county agreed to annually advance the SportsStadium Authority the required amounts to make up any debt serviceshortfalls and has done so for several years. Accordingly, thecounty has recorded a receivable from the authority and theauthority has recorded a liability to the county for all advancesmade under the agreement.
Ticket surcharge revenues that exceed $1,500,000 are to be paidto the county and to be applied first toward interest and thentoward principal repayment of advances. Both parties acknowledge,however, that annual ticket surcharge revenues may never exceed$1,500,000, since to reach that level would require an annual paidattendance of 3,000,000. Considering that season ticket holders andluxury suite renters are not included in the attendance count, itis quite uncertain if the required trigger level will ever bereached.
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The authority has twice proposed to raise the ticket surchargeamount, but the county in both cases vetoed the proposal. Thus, thelender in this transaction (the county) has imposed limits thatappear to make it infeasible for the borrower (the authority) torepay the advances. Consequently, the authority's legal counsel hastaken the position that the authority is essentially a pass-throughagency with respect to the advances in that the authority merelyreceives the advances and passes them on to a fiscal agent for debtservice payments. Moreover, they note that the bonds could neverhave been issued in the first place without the county'sirrevocable guarantee of repayment since all parties knew from thebeginning that the authority likely would not have the resources tomake full debt service payments.
Based on the foregoing considerations, the authority's legalcounsel has rendered an opinion that the liability for the advancescan be removed from the authority's accounts. The county tacitlyagrees that the loans (advances) are worthless since it records anallowance for doubtful loans equal to the total amount of theadvances. Still, the county board of commissioners refuses toremove the receivable from its accounts because of its ongoingrights under the original agreement for repayment.
Required
a) Assume you are the independent auditor for the authority, andprovide a written analysis of the facts of this case, indicatingwhether or not you concur with the authority's decision to nolonger report the liability to the county for debt serviceadvances.
b) Alternatively, assume you are the independent auditor for thecounty and, based on the same analysis you conducted forrequirement a, indicate whether or not you concur with thecounty continuing to report a receivable for debt service advanceson its General Fund balance sheet and government-wide statement ofnet position.
