Transcript Accounting for Capital Assets FGFOA Annual Conference June

Sarah C. Koser, CPA, CGFO, CPFO
Deputy Director of Finance
The Villages Community Development Districts
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Capital Assets – Defined
Basic Accounting
Major Asset Classes
◦ Including Intangible Assets
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Capitalizable Costs
Valuation of Capital Assets for Financial Reporting Purposes
Financial Statement Presentation and Disclosure
Policies
Inventorying
GFOA Recommended Practices
Compliance with Florida Statutes
◦ Disposals
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Includes all of the following with initial useful lives
extending beyond a single reporting period:
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Land
Improvements to land
Easements
Buildings
Building improvements
Vehicles
Machinery
Equipment
Works of art and historical treasures
Infrastructure
Other tangible or intangible assets
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Purpose of maintaining asset information by
Management:
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Control – Good Stewardship
Maintenance – Ensure assets are properly maintained
Replacement – Plan for retirement and replacement as needed
Insurance – Reliable information to properly insure
Cost recovery and rate setting – Proprietary funds
Financial reporting – Follow GAAP
Reasons for failure of adequate capital asset
management:
◦ Inadequate scope – focus on some required elements but not all
◦ Overburdening – Collecting unnecessary information
◦ Inadequate system maintenance – Lack of resources necessary to
maintain system.
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Measurement Focus Matters!!!
◦ Governmental Funds – current resources
 Modified Accrual Basis of Accounting
◦ Proprietary Funds – economic resources
 Full Accrual Basis of Accounting
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Example:
◦ Government purchases a piece of
equipment with a cost of $500,000 and an
estimated useful life of 10 years.
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Proprietary Fund Entries – Economic Resources
Measurement Focus:
Acquisition:
Debit
Equipment
$500,000
Cash
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Credit
$500,000
Allocation to expense (depreciation) per period (year):
Debit
Depreciation Expense
Accumulated Depreciation
Credit
$50,000
$50,000
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Governmental Fund Entries – Current Financial
Resources Measurement Focus:
Acquisition:
Debit
Expenditure – Capital Outlay – Equipment
Cash
Credit
$500,000
$500,000
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Governmental Fund Entries – Current Financial
Resources Measurement Focus:
For Government-Wide Financial Statements –
Economic Resources Measurement Focus:
Debit
Depreciation Expense
Accumulated Depreciation
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WORKSHEET ENTRY – ONLY!!!!
Credit
$50,000
$50,000
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Capital Asset Reporting Requirements:
Reported in Fund
Financial Statements?
Reported in
Government-Wide
Financial Statements?
Governmental funds
No
Yes
Proprietary funds
Yes
Yes
Fiduciary funds*
Yes
No
Funds in which
Activity Reported
*Only pension trust funds typically will have any capital assets to report
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Optional capitalization:
◦ Older Infrastructure
 Acquired prior to July 1, 1980
 Smaller Governments – acquired prior to June 30, 2004
◦ Collections
 Works of Art
 Historical Treasures
 Similar Items
 ENCOURAGED TO REPORT – but not required
 Criteria – have to meet all three:
 Purpose is display or research
 Being adequately maintained
 Proceeds from sale of collection items must be applied to acquiring new
items
◦ Immaterial Items
 Below governments capitalization threshold
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Assets capitalized but not depreciated or amortized:
◦ Assets with indefinite useful lives
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Land
Some intangibles – cannot “wear out”
Works of art, historical treasures, and similar items
Infrastructure (if government uses modified approach)
◦ Capital assets not yet providing service
 Construction in progress (tangible assets)
 Development in progress (intangible assets)
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Which government should report assets when one
government acquires for use by another?
◦ Ownership – critical criterion
 Who holds title?
 Exception: Leased to another under Capital Lease.
◦ Example:
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County constructs a building
Will be used by school district
County will continue to own (holds title)
COUNTY – will report on their financial statements
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Which government should report assets when one
government acquires for use by another? (Continued)
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Assets acquired with Grant funds (sometimes)
◦ Reversionary Interest – reverts to grantor should grantee wish
to dispose
◦ Does not limit grantee’s right to “use and enjoy”
◦ Grantee reports on Financial Statements
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Which government should report assets when one
government acquires for use by another?
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When ownership cannot be established (absence of
title):
◦ Responsible for maintaining
 Owner for Financial Statement purposes
 ONLY if ownership cannot be established
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Seven or more major classes:
◦ Land – always separate from an associated asset:
 Land under a building or road – report as land
 Include in cost of land initial preparation for intended use:
 ONLY if preparations have indefinite useful life. Examples:
 Excavation
 Fill
 Grading
 Moving Power Lines
◦ Buildings
 Includes any improvements (betterments)
 Includes restoration from an impairment
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Seven or more major classes (continued):
◦ Improvements other than buildings (land improvements)
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Fences
Retaining Walls
Parking Lots
Landscaping
◦ Furnishings and equipment (machinery and equipment)
 Vehicles
 Furnishings
 Library book collections
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Seven or more major classes (continued):
◦ Infrastructure
 Definition – “Long-lived capital assets that normally are
stationary in nature and normally can be preserved for a
significantly greater number of years than most capital assets.”
 Examples:
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Roads
Bridges
Drainage retention areas
Water and sewer systems
Landfill
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Seven or more major classes (continued):
◦ Infrastructure (continued)
 Items of note:
 Cost of land associated – report as land
 Cost of buildings associated – report as buildings
 Exception: Purely ancillary buildings
 Examples:
 Rest area on turnpike
 Water pumping station in water system
 Garages associated with a highway system
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Seven or more major classes (continued):
◦ Construction (or development) in progress
 Not yet ready for service
◦ Other capital assets
 Items not properly included in another class
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GAAP - Include any “ancillary charges necessary to
place the asset into its intended location and
condition for use”.
Challenges:
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Acquisition Costs
Interest incurred during acquisition
Training
Improvements (betterments)
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Acquisition Costs:
◦ Examples of POTENTIAL costs:
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Legal and title fees
Closing costs
Appraisal and Negotiation fees
Surveying fees
Land preparation costs
Demolition costs
Audit and accounting fees
Transportation Charges
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Acquisition Costs:
◦ Preconditions for capitalization:
 Only if directly identifiable with a specific asset
 Example: Determine BEST location for a school – NOT
CAPITALIZABLE
 Example: Legal cost acquiring a specific property –
CAPITALIZABLE
 Only if incurred after acquisition of the related asset has
come to be considered probable (likely to occur)
 Example: Feasibility study – NOT CAPITALIZABLE
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Acquisition Costs:
◦ Internal Costs – Three Guidelines:
 General and administrative costs NEVER capitalized (overhead)
 Costs directly related to the acquisition of a specific asset –
CAPITALIZE
 Example: Salary & wages of employee worked on specific
construction project (building, etc.)
 Costs clearly related to the acquisition of capital assets, but not to
specific projects - CAPITALIZE
 Example: Cost accounting, design, and other departments providing
services that are clearly related to projects.
 Allocate to individual projects
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Acquisition Costs:
◦ Internal Costs – Intangible asset costs:
 GAAP: “no outlays incurred prior to meeting all of the following
may be capitalized:
 The specific objective of the project has been determined;
 The nature of the service capacity to be provided has been
determined;
 The feasibility of successfully completing the project has been
demonstrated; and
 The government has demonstrated that it 1) intends, 2) is able, and 3)
is making an effort to develop/complete the project.”
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Acquisition Costs:
◦ Internal Costs – Intangible asset costs:
 Additional guidance for internally generated computer software:
 Prohibits capitalization of costs of preliminary project stage.
 Examples:
 Conceptual formulation
 Evaluation of alternatives
 Determination of existence of needed technology
 Final selection of alternatives for development
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Acquisition Costs:
◦ Internal Costs – Intangible asset costs:
 Additional guidance for internally generated computer software
(continued):
 Costs during application development stage – Capitalize ***
 Examples:
 Design of the chosen path
 Coding
 Installation to hardware
 Testing
 Data conversion
 ***Only if incurred subsequent to completion of preliminary project
stage***
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Acquisition Costs:
◦ Internal Costs – Intangible asset costs:
 Additional guidance for internally generated computer software
(continued):
 Costs incurred post-implementation/operations stage – NEVER
CAPTIALIZE
 Examples:
 Training
 Software Maintenance
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Interest incurred during acquisition
Fund in Which Related
Activity is Reported
Fund Financial
Statements
Government-Wide
Financial Statements
Governmental Funds
Not applicable *
Not capitalized
Proprietary funds
Capitalized
Capitalized
Fiduciary funds
Capitalized
Not applicable ^
*Governmental funds do not report capital assets.
^ Fiduciary funds are not included in government-wide financial statements
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Interest incurred during acquisition (continued)
◦ Financed by tax-exempt – externally restricted debt
◦ Must be “externally restricted” (e.g., bond covenant) to the
acquisition of the qualified asset to qualify for “netting”
 Net interest expense against interest earnings on borrowing
 Begins at date of borrowing/ends when asset placed in service
 Example:
 Borrows $1 million two months prior to start of construction
 Interest rate of 5%
 Reinvest unexpended at 2% for those two months
Interest expense
$8,333
(i.e., $1 million x 5 percent x 2/12
Less:
Interest revenue
$3,333
(i.e., $1 million x 2 percent x 2/12
Net:
Capitalizable interest
$5,000
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Interest incurred during acquisition (continued)
◦ Financed by tax-exempt – externally restricted debt
(continued)
 Entry
Debit
Construction in progress
$5,000
Accrued interest receivable
$3,333
Accrued interest payable
Credit
$8,333
(To record interest accrued on capital borrowings, interest accrued on the reinvested
proceeds, and the net amount capitalized)
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Interest incurred during acquisition (continued)
◦ Financed by tax-exempt (and non tax-exempt) debt – not
externally restricted
 Not offset by earnings
 Calculation:
 Interest rate of borrowing
 Applied to the average accumulated expenditures during period
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Interest incurred during acquisition (continued)
◦ Financed by tax-exempt (and non tax-exempt) debt – not
externally restricted (continued)
 Example:
 $1 million unrestricted capital improvement bonds (5 percent)
 Expenditures first year $500,000
 Capitalized interest first year $25,000 ($500,000 X 5%)
Debit
Construction in Progress
$25,000
Interest expense
$25,000
Accrued interest payable
Credit
$50,000
(To record interest accrued on outstanding debt and the portion capitalized as part of
construction in progress
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Interest incurred during acquisition (continued)
◦ Financed by existing resources
 If debt outstanding in fund, “recycled” debt
 No netting
 Weighted average rate of interest on outstanding debt to average
cumulated expenditures during period
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Interest incurred during acquisition (continued)
◦ Financed by existing resources (continued)
 Example:
 Fund with two bond issues outstanding ($1 million at 5% and $1
million at 4%)
 First year accumulated expenditures $500,000
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Interest incurred during acquisition (continued)
◦ Financed by existing resources (continued)
Outstanding Bond Issues
Amount
Rate
Interest
Bond A
$1,000,000
5.00%
$50,000
Bond B
$1,000,000
4.00%
$40,000
Total
$2,000,000
(a) Total interest expense
$90,000
(b) Total bonds outstanding
$2,000,000
(c) Weighted average interest rate (a)/(b)
4.5%
(d) Average accumulated expenditures
$500,000
(e) Capitalizable interest (c) x (d)
$22,500
$90,000
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Interest incurred during acquisition (continued)
◦ Financed by existing resources (continued)
 Entry
Debit
Construction in Progress
$22,500
Interest Expense
$67,500
Accrued interest payable
(To recognize interest accrued on outstanding debt and portion capitalized
Credit
$90,000
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Interest incurred during acquisition (continued)
◦ Financed by capital grants restricted for acquisition of
qualified asset
 No interest is incurred by grantee
 Other interest in fund cannot be “recycled”
 No interest capitalized on any portion financed by grant
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Interest incurred during acquisition (continued)
◦ Mixed financings
 Multiple sources (i.e., tax-exempt bonds, capital grants, and
existing resources)
 Treat each source separately
 Follow each of prior examples
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Training
◦ Not capitalized – 2 reasons
 Does not affect the location nor use
 Asset ready to be used – not if government is ready to use it
 Cost should provide benefit throughout useful life
 Employee turnover
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Improvements (betterments)
◦ Two types of costs
 Improvements (betterments) - Capitalize
 Provides additional value – either by:
 Lengthening estimated useful life (reconstruct road with material that
has longer useful life – concrete rather than asphalt) or:
 Increasing assets ability to provide service (more effective or efficient)
(widening a highway from two lanes to four)
 Repairs and Maintenance – NOT capitalized
 Retains value – new roof on building
CITRUS COUNTY FLORIDA
COMPREHENSIVE ANNUAL
FINANCIAL REPORT
FISCAL YEAR ENDED
SEPTEMBER 30, 2012
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Initial Valuation
◦ Assets purchased or constructed
 Historical Cost
 Estimated historical cost
 Standard costing – going price when acquired
 Normal costing (back trending) – current cost restated in acquisitionyear dollars.
 Assigning bundled costs to individual assets (building & land)
 Work from known to unknown (if know price of land – subtract from
total purchase price for cost of building)
 Estimate fair value of each – express as ratio – apply to purchase price
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Initial Valuation (continued)
◦ Assets obtained through trade-ins
 Total cost for new asset
 Example:
 Vehicle traded – book value of $1,000
 Paid cash of $24,000 for new vehicle (after trade)
 New vehicle value - $25,000 ($24,000 + $1,000)
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Initial Valuation (continued)
◦ Donated assets
 GAAP – “estimated fair value at the time of acquisition plus
ancillary charges, if any.”
 “Buy” price – not “Sell” price
 Price at which the government could have “bought”
 NOT – price that it could be “Sold” for
 If no regular market for donated asset:
 Cost paid by donor (if within reasonable period of time)
 Example: Developer donates road
 Use developer’s costs if recent construction
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Subsequent changes
◦ Changes in market value – irrelevant
◦ Reassigned to fund that does (not) capitalize interest
 General rule – value of asset cannot change solely as result of
being moved within the same financial reporting entity.
◦ Improvements (betterments) – direct adjustment
◦ Retirement from service
 Held for resale – write down to fair value
 Disposal – remove asset
◦ Impairments
 Deduct impairment loss and
 Add cost of restoration
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Presentation
◦ Statement of Net Assets/Balance Sheet (Government-wide)
 Separate depreciable from non-depreciable
 Land – Construction-in-progress – non-depreciable
 Buildings – Infrastructure – Machinery & Equipment – depreciable
 Separate line for each major class
◦ Statement of Activities/Statement of revenues, expenses and
changes in net assets (equity)
 Depreciation expense – report by function (i.e., public safety,
transportation, etc.)
 Multi function – either in “General government” or separate line
(i.e., “unallocated depreciation expense”)
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Presentation
◦ Governmental Fund Statements
 Classified by “character” (i.e., capital outlay)
◦ Reporting impairments (three ways)
 Component of program cost
 Cost of doing business
 Report in function that uses asset
 Extraordinary Item (unusual in nature AND Infrequent in
occurrence)
 (Outside management control)
 Special Item (Unusual in nature OR infrequent in occurrence)
 (Within the control of management)
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Presentation
◦ Reporting disposals
 Immaterial gains and losses
 Can be direct adjustment to depreciation expense for period
 Material gains and losses – Government-wide reporting
 Governmental activities
 Gains – general revenues
 Losses – general government function line
 Business-type activities
 Gains – general revenues
 Losses – program cost
 Material gains and Losses – Enterprise fund statements
 Non-operating revenues and expenses
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Presentation
◦ Movement within entity
 Intra-entity sales
 Value cannot change as long as remains in same entity
 Fund Statements – Governmental to Enterprise
 Governmental – no entry
 Enterprise – Credit capital contribution
 Fund Statements – Enterprise to Governmental
 Governmental – no entry
 Enterprise – show as transfer out (note disclosure in transfers – why
one-sided)
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Note Disclosure
◦ Summary of Significant Accounting Policies (SSAP)
 Disclose all policies including:
 Capitalization threshold
 Methodology for estimating historical cost
 Extent of infrastructure reporting for items exempt from mandatory
reporting
 Methodology used for calculating depreciation or amortization
expense (i.e., straight-line method)
 Estimated useful lives used for depreciating or amortizing capital
assets
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Note Disclosure
◦ Detailed Note Disclosure
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Recorded value by major class
Changes in recorded value by major class
Accumulated depreciation by major class
Changes in accumulated depreciation by major class
 Separate depreciable from non-depreciable
 Gross – not net
 Value of asset separate from depreciation (not net out)
 Changes separate (additions and deletions – not net out)
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Note Disclosure
◦ Detailed Note Disclosure (continued)
 Depreciation expense by function
◦ Required supplementary information
 Management’s discussion and analysis
 Description of capital asset activity
 Information on modified approach
 Infrastructure condition data (modified approach)
 Results of condition assessment
 Amounts needed and amounts spent to maintain and preserve
infrastructure
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Statistical Section
◦ Ratio of debt service to total noncapital expenditures
 Need Capital Outlay to get total “non-capital” expenditures
 Reconciliation to government-wide from fund statement of
revenues, expenditures and changes in fund balance
◦ Operating information concerning capital assets
 Information concerning the volume, usage, or nature of capital
assets.
 Examples:
 Number of parks
 Number of patrol vehicles
 Number of library books
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Setting policies – decisions:
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Which items should be capitalized?
How should discrete components of larger assets be treated?
How should fair value be determined for donated capital assets?
What major asset classes should be used?
Which items should be depreciated or amortized and how?
How should control be maintained over items that were not
capitalized?
◦ Which capital assets should be tagged?
◦ How should disposals be handled?
◦ How often should a physical inventory of capital assets be
performed?
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Setting policies – decisions:
◦ Which items should be capitalized?
 Infrastructure and collections
 Infrastructure prior to required date?
 Collections: Works of art, historical treasures, similar items?
 Capitalization thresholds
 Single capitalization threshold or different for different major classes?
 What will the threshold(s) be?
 Applied to individual items in a group of similar items or to a group of
items in the aggregate?
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Setting policies – decisions:
◦ How should discrete components of larger assets be treated?
 Will discrete components of capital assets with significantly
shorter lives be treated as separate capital assets in their own
right? If so, which ones?
 If not, will the eventual replacement of a discrete component that
is included as part of the cost of the larger asset be treated as a
repair or as a disposal?
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Setting policies – decisions:
◦ How should fair value be determined for donated capital
assets?
 What methodology will be used to estimate fair value for donated
assets?
 Who will be making and documenting estimates of fair value?
◦ What major asset classes should be used?
 What will the major classes be for capital assets?
 Which specific items will be reported in each?
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Setting policies – decisions:
◦ Which items should be depreciated or amortized and how?
 Will the government use the modified approach?
 For depreciated/amortized:
 Will the useful lives of capital assets be estimated for individual assets
or for major classes of assets?
 What will be the basis for those estimates?
 How will the reasonableness of those estimates be evaluated on an
ongoing basis?
 What will be government’s policy be on estimated salvage value?
 What method will be used to calculate depreciation/amortization?
 Will depreciation be applied to individual items or groups of items?
 How will depreciation be applied to partial years?
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Setting policies – decisions:
◦ How should control be maintained over items that were not
capitalized?
 What criteria will be used to determine that a noncapitalized property
item poses a special risk to the government?
 How will departments ensure that there is proper control over such
items?
 How will the central accounting function ensure that departments are
meeting their responsibility in this regard?
◦ Which capital assets should be tagged?
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Which property items will be tagged?
For which items will a unique identification number be necessary?
Where will tags be placed on each type of property item?
Who will be responsible for tagging?
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Setting policies – decisions:
◦ How should disposals be handled?
 Who may authorize a disposal and in what circumstances?
 What procedures are to be followed to ensure that the
government receives maximum benefit from the disposal?
◦ How often should a physical inventory of capital assets be
performed?
 How often will physical inventories of capital assets be
performed?
 Who will be responsible for performing the inventories?
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Initial inventory
◦ Responsibility and staffing
 In-house staffing
 Outside staffing
 Combination of in-house and outside
◦ Design elements (Policies – last section)
◦ Input forms
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Initial inventory
◦ Work plan
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“As of” date
Staffing and workspace
Timing
Data collection
Training
Sequencing
Use of existing data sources
Source materials to be brought to the site by the inventory team
◦ Notification – notify departments in advance
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Periodic inventories – Three essential elements
1. The data in the accounting records are compared with
actual capital assets.
2. An exception report is generated.
3. The exception report is used to make any necessary
adjustments to the accounting records.
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Capitalization Thresholds
Periodic Inventories
Estimated Useful Lives
Use of the Modified Approach
Control over Noncapitalized Items
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Capitalization Thresholds
Approved February 24, 2006
Recommendation:
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Capitalize only if useful life of at least two years
Capitalization thresholds best applied to individual items
Never capitalization threshold of less than $5,000
Be aware of federal requirements on assets acquired with
federal grants.
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Periodic Inventories
Approved February 24, 2006
Recommendation:
◦ Periodic inventory so all assets accounted for
◦ No less than once every five years
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Estimated Useful Lives
Approved March 2, 2007
Recommendation:
◦ Best source own past experience
◦ Consider potential effects of these factors when looking at
experience of others:
 Quality (are the items of the same quality, i.e., asphalt/concrete)
 Application (i.e., residential street vs major thoroughfare)
 Environment (different climate)
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Use of the Modified Approach
Approved October 25, 2002
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Control over Noncapitalized Items
Approved October 11, 2005
Recommendation:
◦ Control normally should occur at the departmental level.
◦ Control responsibility should be assigned within each department.
◦ Individuals responsible for controller capital-type items should
prepare and maintain a complete list of those items each year
within the department.
◦ Departments should certify each year to the central accounting
function (or other designated finance function) that updated lists of
controlled capital-type items are on file and available for inspection.
◦ The central accounting function (or other designated finance
function) should periodically verify the data on controlled capitaltype items on file in each department.
Florida property rules:
 Florida Statutes
◦ Chapter 274
 Florida
◦ 69I-73
Administrative Code

How does Florida Statute differ from GASB
requirements?
◦ Florida Statute requirement:
 Assets with value of $1000 or more to be booked.
◦ GASB:
 Government to set their own Capitalization Threshold
 GFOA recommends that it is never less than $5,000.
 Higher thresholds for Infrastructure and Buildings – often
$50,000.
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Authorizing and Recording the Disposal of
Property 274.07
◦ Authority for the disposal of property shall
be recorded in the minutes of the
governmental unit.
Florida Administrative Code - 69I-73.005
Disposition of Property
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Methods of Disposition –
◦ Rules for disposition are provided in Sections 274.05, 274.06 and
274.07, F.S.
◦ Property which is not accounted for during an inventory is subject to
the rules regarding unaccounted for property in 69I-73.006, F.A.C.
Required Information – Shall be recorded on the individual property
record for each item lawfully disposed of:
◦ Date of disposition.
◦ Authority for disposition (resolution of the governing body properly
recorded in the minutes as required by Section 274.07, F.S.).
◦ Manner of disposition (sold, donated, transferred, cannibalized,
scrapped, destroyed, traded).
Florida Administrative Code - 69I-73.005 (continued)
Required Information (continued)


◦ Identity of the employee(s) witnessing the disposition, if
cannibalized, scrapped or destroyed.
◦ For items disposed of, a notation identifying any related transactions
(such as receipt for sale of the item, insurance recovery, trade-in).
◦ For property certified as surplus, reference to documentation
evidencing that such property was disposed of in the proper manner.
Transfer of Property Records – The individual property record for each
item lawfully disposed of shall be transferred to a disposed property
file. Destruction of such records shall be governed by the provisions of
Chapter 119, F.S.
Control Account – The cost or value of items shall be removed from the
control account at the time of disposition.
 “Accounting
for Capital Assets, A Guide
for State and Local Governments” –
Stephen J. Gauthier – GFOA Publication
 Florida
Statutes - Chapter 274
 Florida
Administrative Code - 69I-73
Sarah C. Koser, CPA, CGFO, CPFO
Deputy Director of Finance
The Villages Community Development Districts
3201 Wedgewood Lane
The Villages, Florida 32162
352-753-0421