Transcript Tangible Capital Assets Alberta Regional GFOA Workshops

Tangible Capital Assets
Alberta Regional GFOA Workshops
Series Two
January 2008
Workshop Overview
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Provincial and local updates
Capital policy
Impact on budgets and financial reports
Transition
Examples
2007 Note
Q & A/small groups
TCA Project Update – Provincial
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Infrastructure valuation manual
Bridge inventory & valuation
Balanced budget legislation
Financial reporting & budgets
Position papers
Bridge Inventory & Valuation
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Access AIT bridge information
Bridge files
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Inventory
Data
Value
Accumulated amortization
Audit trail
Guideline Amendments
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Capitalization thresholds
Valuation date for counties
Policy guideline - Amortization start and
end date
Position Papers – Priority One
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Government partnerships
Undeveloped road allowances and rights of
way
Networks/components – materiality,
valuation
Biological assets
Grouping and pooling
Contributed assets
Position Papers – Priority Two
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Multiple topics
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Gravel pits
Infrastructure with excess capacity and partial
retirements
Land leases
Provincial $1 transfers
Fully depreciated assets still in use
Municipal reserves
Position Papers – Priority Two (cont)
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Multiple topics
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Treatment of ‘sweat’ equity
Tax sale properties acquired by municipality
‘Construction in progress’
Useful life and liability relationship
Link to full cost recovery requirement by
Environment
Position Papers – Priority Three
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Implementation accounting entries
TCA Project Update - Locally
What is your project status?
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Capital Policy Framework
Scope
Principles
Presentation
Thresholds
Accounting
Policy
Aggregation
Write-downs
Disposals
Segmentation
Amortization
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Capital Policy
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Authority, purpose and scope
Definition & classification of assets
Recording and valuing assets
Amortization methods and rates
Capital Policy (cont)
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Reviews and write-downs
Maintaining records
Asset disposal
Financial system, asset recording system &
asset management system
Financial reporting and budgets
TCA Impact on Financial Statements
& Budgets
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Focus on TCA impact
Financial reporting changes
General Impact of Recording TCA
Brings a non-cash dimension to financial
reporting and budgeting
Full Accrual Accounting
This change does not require a change in
behaviour but it may cause you to change
because there will be more information
available.
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Impacts at Transition and Ongoing
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Amount of TCA will probably increase.
Total TCA will be reduced by ‘accumulated
amortization’.
Higher emphasis on Statement of Cash
Flow.
Impacts at Transition and Ongoing
Statement of Operations
 TCA purchases not included
 Capital grants included
 Non-cash annual amortization expense
 Gain/loss on disposal of TCA included
 Write-downs expensed
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What Will be the Impact to our
Municipality?
Each municipality will be different; some
factors determining impact are:
 Age of TCA
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Net value of unrecorded TCA
Accumulated amortization of recorded TCA
Write-down of recorded TCA
Assets funded by senior government and
donated assets.
Should the budget mirror the financial
statements?
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Recommend that amortization expense be
included in the budget.
If not, PSAB requires a link between the
budget and financial statements be provided.
Statement of Financial Position – Current View
As at December 31
Financial Assets
Cash and investments
$
480,000
Accounts receivable
104,000
Inventory for resale
155,000
739,000
Physical Assets
Inventory for consumption
Capital assets
5,000
14,003,000
14,008,000
Total Assets
14,747,000
Liabilities
Accounts payable
264,000
Deferred revenue
56,000
Long term debt
2,900,000
3,220,000
Municipal Equity
Operating fund
Capital fund
Equity in capital assets
372,000
42,000
11,113,000
11,527,000
Total Liabilities & Municipal Equity
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$ 14,747,000
Statement of Financial Position – New View
As at December 31
Financial Assets
Cash and investments
$
480,000
Accounts receivable
104,000
Inventory for resale
155,000
739,000
Liabilities
Accounts payable
264,000
Deferred revenue
56,000
Long term debt
2,900,000
3,220,000
Net Debt
(2,481,000)
Non-financial Assets
Inventory for consumption
Tangible capital assets
5,000
14,003,000
14,008,000
Accumulated Surplus
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$ 11,527,000
Statement of Financial Activities/Operations
As at December 31
Budget
Current
New
Revenue
Net municipal taxes
$ 1,430,000
$ 1,430,000
$ 1,430,000
Capital grants
200,000
200,000
200,000
Capital debt issued
300,000
1,014,000
1,014,000
1,014,000
2,944,000
2,644,000
2,644,000
2,151,000
2,151,000
2,151,000
Capital purchases
693,000
693,000
Capital debt repayment
100,000
Other revenue
Expenditures
Operating
Amortization of TCA
225,000
Excess (Deficiency)
2,844,000
2,376,000
0
(200,000)
268,000
Capital debt issued
300,000
Capital debt repaid
(100,000)
Change in Fund Balances
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2,944,000
$
0
$
0
$
268,000
Current Balanced Budget Legislation
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Cannot budget more expenditures than
anticipated revenues
On a 3 year cumulative basis, actual
revenue = or be > than expenditures
(Sec 244)
Revenue includes transfers from
accumulated surplus
Cash basis approach
Operating and capital funds referenced
Impact of Accounting Standard Changes
TCA Requirement (PS 3150)
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TCA to be amortized over useful life.
Annual amortization (non-cash) to be
expensed; may result in annual deficiencies.
CICA requirement does not mandate funding
amortization.
Impact of Accounting Standard Changes
Financial Reporting (PS 1000, 1100, 1200)
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One single statement of operations
Annual budget replaces operating & capital budgets
Capital purchases/proceeds & debt
proceeds/retirements are not included in ‘Statement
of Operations’
‘Accumulated surplus’ is one amount including
‘Equity in TCA’
Focus on financial position (net assets/net debt)
Proposed Amendments to Legislation
and Future Review
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Transitional Amendment
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Future Amendments
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Replace references to operating & capital
funds/budgets with ‘annual budget’
Consider redefining ‘deficiency’
Further Review
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Back out amortization expense to comply with
Section 244
Measures of municipal financial performance
including debt limits
Recording an Existing Asset
Example
An Arena built in 1940 has a 2006 appraisal cost of $10M and a land
value of $5M. Component breakdown is as follows:
Description
% of cost
Building Envelope
50%
Roof
10%
Mechanical
10%
Interior Fit – outs
20%
(includes ice sheet)
Exterior Fit – outs
10%
There is no salvage value.
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Useful Life
Remaining
Useful Life
60 years
20 years
10 years
10 years
0 years
2 years
8 years
2 years
25 years
20 years
Discount Factor and Deflated Cost
Discount Factor
Index for in-service year/index for current year
Deflated Cost
Current cost * Discount Factor
Example
1989 Discount Factor: 70.9/112.3 = 0.631
Roof deflated cost: $1M * 0.631 = $631,000
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Discount Factors
Discount Factors for Example
1940 0.071
(8.0/112.3)
1989 0.631
(70.9/112.3)
1999 0.814
(91.4/112.3)
2002 0.890
(100.0/112.3)
2005 0.963
(108.1/112.3)
2006 1.000
(112.3/112.3)
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Inventory/Valuation
Item
Number
30
Item
Description
Replacement
Reproduction
or Appraisal
Const
Year
Useful
Life in
Years
Discount
Factor
Salvage
Value
0.071
Calculated
Historical
Cost
1
Land
$5M
1940
$0.36M
2
Building
Envelope
$5M
1940
60
0.071
$0
$0.36M
3
Roof
$1M
1989
20
0.631
$0
$0.63M
4
Mechanical
$1M
2005
10
0.963
$0
$0.96M
5
Interior Fit –
outs
$2M
1999
10
0.814
$0
$1.63M
6
Exterior Fit –
outs
$1M
2002
25
0.890
$0
$0.89M
Amortization
Item
Number
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Item
Description
Historical
Cost
Age
(Yrs)
Useful
Life in
Years
Amortization
Rate
(S/L)
Amortization
1
Land
$0.36M
67
2
Building
Envelope
$0.36M
67
60
* 60/60
$0.36M
3
Roof
$0.63M
18
20
* 18/20
$0.57M
4
Mechanical
$0.96M
2
10
* 2/10
$0.19M
5
Interior Fit –
outs
$1.63M
8
10
* 8/10
$1.30M
6
Exterior Fit –
outs
$0.89M
5
25
* 5/25
$0.18M
Qualitative Considerations
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What threshold(s) to use
 Thresholds in ‘Toolkit’
 Cumulative?
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Useful life considerations
 Asset age exceeds useful life
Qualitative Considerations (cont)
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Discount Factor Used
 CPI
 Other
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Supporting Information
 Methodology
 Valuation
 Useful Life
Audit Support
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Third Party Evidence
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Industry Standards
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Invoice
Qualified Estimator
CPI
Published lists
Internally developed
Audit Support (cont)
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Documented Methodology
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Consistent with methodology used by
qualified third party
Sound industry practice
Reasonableness test
Transition Process
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Develop TCA inventory and register information
Record information in TCA register
Document audit trail
Determine accumulated amortization prior to
implementation year
Adjust General Ledger to implementation year
opening balances
Link TCA register to GL in implementation year
(when all TCA are recorded)
Record 2009 TCA transactions under new TCA
rules and report in new reporting format
Transitional Impact
Significant amendment to the financial
statements in the first year of reporting due to:
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Adding existing unrecorded TCA
Deducting the recorded amount for TCA which no
longer exist.
Deducting the recorded amount for TCA having
an historical cost below the capitalization
threshold.
Reporting the net value of the TCA total cost;
deduct accumulated amortization.
Accumulated Amortization
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Identified by asset class in notes to
financial statements.
Amount prior to first year of reporting
treated as a prior years’ adjustment.
Annual amortization on the revised TCA
expensed in year of implementation for that
specific year.
Transition Accounting Entries
Note: Journal entries are always balanced.
Adjust Opening Balances of GL
a. Reduce the existing TCA account balances to zero
CR: Tangible capital assets
DR: Capital debt
DR: Equity in TCA – Prior period adjustment
b.
Record the updated TCA values
DR:
CR:
CR:
CR:
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Tangible capital assets (historical cost)
Accumulated amortization
Capital debt
Equity in TCA – Prior period adjustment
Transition Accounting Entry Example
Assumptions & Data
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Implement in 2009
GL accounts December 31, 2008:
TCA
Capital debt
Equity in TCA
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$10,000
$2,000
$8,000
TCA data at implementation
TCA historical cost
$50,000
Accumulated amortization $30,000
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Transition Accounting Entry Example
(cont)
a.
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Reduce existing TCA account balances
to zero:
Dr
Cr
TCA
$10,000
Capital debt
$2,000
Equity in TCA
$8,000
Transition Accounting Entry Example
(cont)
b.
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Record updated TCA inventory values:
Dr
Cr
TCA
$50,000
Accumulated amortization
$30,000
Capital debt
$2,000
Equity in TCA
$18,000
Transition Accounting Entry Example
(cont)
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The change in equity will be treated as a
‘prior period restatement/adjustment’ and
referenced in the notes to the financial
statements.
If possible, record 2008 amortization in
expense accounts for comparative statement
purposes.
Retroactive application – expected but not
mandatory (CICA guide, pages 34 & 35)
‘Municipal Equity’ Terminology
Current Terms (Sampleford)
 Fund Balances
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Operating Fund
Capital Fund
Reserve Fund
Equity in Capital Assets
New Term (used in examples)
 Accumulated Surplus
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Purchase to Retirement
Equipment – Fire truck (pumper)
Information or Decisions Required
Actual cost
$300,000
Useful life
12 years
Amortization method
Straight line
Salvage value
$60,000
Annual amortization
$20,000
(assume ½ year rule for purchase and disposal years)
1st year
$10,000 (50%)
TCA asset register
Major class Machinery & Equipment
Minor class Fire Equipment
Sub class
Pumper truck
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Purchase Entries
Assume that there are links between General
Ledger/Accounts Payable/TCA.
DR TCA asset
$300,000
CR Cash/debt
$300,000
 No impact on Accumulated Surplus; there
may be internal transfers between Equity in
TCA and Reserves.
 No record in Statement of Operations
 Affects Statement of Financial Position
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Amortization Expense
Annual entry:
DR Fire department – equipment amortization expense
CR Accumulated amortization – Machinery &
Equipment
(1st year - $10,000, remaining years - $20,000,
disposal year if year 13 - $10,000)
 Annual closing entry
DR Accumulated Surplus
CR Fire department – equipment amortization expense
Note: These entries demonstrate what will normally be
done automatically by your financial system.
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Impact on Fire Department Budget
If funds are normally collected annually for future
purchases, i.e. transfer to capital:
 amortization would be funded in the Statement of
Operations; move budget from ‘transfer to capital’
to amortization
 internal financial records would need to identify
these funds
 the department bottom line would be breakeven if
the amount annually put away equalled the
amortization.
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Impact on Fire Department Budget
If debt is normally used:
 the fire department budget would incur an annual
deficit of $20,000
 cash would still need to be available in the
organization to pay the debt which would be
budgeted with no expense.
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If debt retirement allocated to the fire department, then
offset the deficit resulting from the amortization
expense.
Pumper Fire Truck Information at the
end of Year 12
Cost
$300,000
Accumulated amortization $230,000
Net book value
$ 70,000
Assume sold in year 13
Amortization entry in year 13 (50/50 rule)
DR Fire Dept – Equipment amortization
expense
$10,000
CR Accum. Amortization – M & E $10,000
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Sale & Disposal Entries in Year 13
Sold for $75,000.
DR Cash
$ 75,000
DR Accumulated amortization $240,000
CR TCA asset
$300,000
CR Profit on disposal of TCA $ 15,000
Annual Surplus and Accumulated Surplus will
increase $15,000.
(TCA ($300,000) less Accum. Amortization
($240,000) less Cash ($75,000) results in a
credit of $15,000 to Accumulated Surplus.
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Example - Replacement of a Component
Building
Situation Information
Building originally recorded at $5 M with a
useful life of 40 years.
Roof needs to be replaced in 2009:
 The roof is fully amortized.
 The life of the roof was 20 years.
 Replacement cost is $1.1 M.
 Roof is 14% of the total building cost.
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Replacement Entries
DR Accumulated amortization $ 350,000
DR Loss on disposal of roof $ 350,000
CR TCA – Building
$ 700,000
DR TCA – Building – Roof
$1,100,000
CR Cash/Debt
$1,100,000
Loss on Statement of Operations
Decrease in Accumulated Surplus
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2009 Amortization Entries using 50% rule
Old roof: $700,000/40 * 50%
$ 8,750
New roof: $1,100,000/20*50%
$27,500
Total 2009 amortization expense$36,250
2009 Accumulated amortization
$27,500
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Impact of Amortization on
Accumulated Surplus
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Decrease if amortization expense is greater
than roof related revenues
Remain unchanged if amortization is funded.
Increase if funds greater than annual
amortization are put away for future roof
replacement.
Statement of Operations will reflect the changes in
Accumulated Surplus in the annual deficit/surplus.
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Issues to Consider
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What are the audit issues if the roof is
expensed? Is this cost material so that it will
need to be capitalized?
Is it better to record the cost of the major
components at the time of initially recording the
asset?
How Are Networks Determined?
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Are the TCA in the proposed network similar?
How is age determined?
How will the value be established?
Should the networks be determined by
geographic location?
Example – Network to Segment
Engineered Structure – Road System
Situation Information
The municipality has 20 km of paved roads.
They have been recorded as networks; a
separate network each for the asphalt,
subsurface and right of way. The municipality
plans to gradually segment each network when
rehabilitation work is done.
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Paved Road Information
Historical Cost
Description
Asphalt
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Total
per km
Useful
Annual
Replace
Average
Accumulated
Life
Amort.
Cost
Age
Amortization
Years
per km
Total
per km
4M
200,000
15
13,333
250,000
10
2,666,667
133,333
Subsurface
2.5 M
125,000
40
3,125
850,000
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2,187,500
109,375
Right of way
1M
50,000
0
0
0
Replace 2 km of Asphalt
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Replacement cost is $250,000/km
Assume component is fully amortized when
replaced.
Will set up a separate asset or multiple
assets for the two km of asphalt.
Replacement Entries
Remove asphalt component from TCA records
DR Accumulated amortization $400,000
(Asphalt – 2 km * 200,000 historical cost)
CR TCA – Engineered Structures – Roads Asphalt
$400,000
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New TCA Records
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Create new TCA records in TCA register to
provide more detailed information
Segments – geographical location and
distance established by policy (for example,
by block or km)
Impact on TCA Network Records
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Since the asphalt network is the only network
affected, the other networks will not be affected.
The other networks may be segmented in the
same manner as the asphalt network.
If the asphalt, subsurface and right of way were
one network, a new asset should be created for
the subsurface portion for this specific segment
with TCA and accumulated amortization
adjustments made to the subsurface network.
Discussion Questions
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When networks are used, what methods can
be used to determine the average life of the
network and the accumulated amortization?
What criteria should be used to determine the
best method?
What is the best method?
Reporting Requirements
Prior to Implementation (PS 3150.45)
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Report according to PSG-7 during the period
of transition.
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PSG-7 TCA of Local Governments
page 55)
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(Toolkit,
Disclose information required for asset classes for
which municipality has information.
Effective January 1, 2007
2009 (PS 3150.40-42)
Disclose for each major category of TCA and in
total:
Beginning and end of period
Cost, accumulated amortization, net carrying amount
For the period
Additions, disposals, write-downs, amortization
Amortization method, period/rate
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2009 (PS 3150.40-42) (cont)
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Net book value of TCA not amortized (not in
service, under construction)
Nature & amount of contributed TCA
received during period
Nature & use of TCA recognized at nominal
value
Nature of works of art & historical treasures
Amount of interest capitalized in the period
2007 Financial Statement Note
Section 6, TCA Implementation Toolkit
 Subsection of ‘Significant Accounting Policies’ note
 Narrative provides authority, background and
progress report
 Table provides the revised TCA information by major
class Note: This table will not link to the TCA
amount in Statement of Financial Position.
TCA GL accounts are not revised until
implementation.
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2007 Financial Statement Note Example
i. Narrative
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Assets already amortized noting amortization
method.
Assets not amortized if some are amortized.
Assets classes completely updated.
Asset classes still requiring to be completed by
December 31, 2008 (2009)
Assets disclosed at nominal value
Statement regarding capitalizing interest
(municipality policy)
2007 Financial Statement Note Example
(cont)
ii. List of TCA Classes
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State that amortization expense not recorded
and project the date when it will be recorded.
List major classes and minor Engineered
Structure classes.
Provide range of useful life in years for each
class reported.
State method of amortization
2007 Financial Statement Note Example
(cont)
iii. Table of Financial Information
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Table for current year
Table for previous year only if TCA project was
started in previous year.
Beginning year amount to be zero in year
respective TCA class is completed.
Amount of amortization in financial statements in
situations where there has been amortization
already in place.
Value of assets not amortized because removed
from service
2007 Financial Statement Note
Example (cont)
Cost Beginning
Additions
of Year
Land
Write-
Cost -
Disposal
down
End of
Amortization
Accumulated
s
s
Year
in Year
Amortization
NBV
0
250,000
0
0
250,000
0
0
250,000
Vehicles
0
125,000
0
0
125,000
93,750
93,750
31,250
Sub-total and Total
0
375,000
0
0
375,000
93,750
93,750
281,250
Land Improvements
Buildings
Engineered Structures
Machinery & Equipment
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Discussion Question
How will accumulated amortization be
tracked for asset classes completed prior to
implementation?
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Note for Prior Period Adjustments
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Restated to comply with PS 3150
Adjustments to TCA and Accumulated
Surplus
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Adjust opening 2008 if retroactive
If not retroactive, adjust opening 2009
Note for Prior Period Adjustments
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Add the net amount for
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Less
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Assets capitalized but previously expensed
Contributed assets not recorded
Disposal of assets
Write-down of assets
Assets capitalized but below threshold
Increase in amortization expense
It’s Your Turn!
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