Transcript CAPITAL ASSETS

CAPITAL ASSETS
[email protected]
773-5932
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Intro
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GFOA has released a new “guide” to provide
direction in accounting for capital assets
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See GFOA.org
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Intro
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This presentation will address the
maintenance of capital asset records for
financial reporting purposes
Entities may utilize a dual purpose approach
for listing capital assets or they may have
other systems for tracking assets for the
purposes of insurance, accountability,
budgetary and grant/statutory compliance
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Defined
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Land, improvements to land, easements,
buildings, building improvements, vehicles,
machinery, equipment, works of art and
historical treasures, infrastructure and all
other tangible or intangible assets that are
used in operations and have a useful life
greater than a year
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Defined - Infrastructure
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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.
Roads, bridges, tunnels, drainage systems,
water and sewer systems, dams and lighting
systems.
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Major Asset Classes
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Land – includes the acquisition price but also
the cost of initially preparing land for its
intended use, provided these preparations
have an indefinite useful life, like the land
itself.
Basic site improvements (e.g. excavation, fill
and grading), as well as the cost of removing,
relocating, or reconstructing the property of
others (e.g., power lines)
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Major Asset Classes
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Buildings – all permanent structures
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Improvements or betterments that extend the useful
life or make the building larger are normally added
to the cost of the structure (but not maintenance
which is expensed)
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An option is to compartmentalize major components
of buildings into separate capital assets in their own
right (HVAC, bleachers, stage curtains)
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Major Asset Classes
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Improvement Other Than Buildings –
permanent (non-moveable) improvements,
other than buildings, that add value to land,
but do not have an indefinite useful life
Fences, retaining walls, parking lots and most
landscaping.
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Major Asset Classes
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Machinery and Equipment – this class is used
for moveable items that meet a preset
capitalization level such as vehicles,
generators, copy machines, and other large
equipment
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Major Asset Classes
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Construction in Progress – an asset class used
to accumulate capital asset costs until it is
ready to be placed into service.
This asset class is not depreciated.
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Major Asset Classes
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Intangible Assets – (GASB 51) –capital assets
that lack physical substance, are non-financial
in nature and have an initial useful life of
greater than a year
Software/website, water rights, easements but
not goodwill
If material, separate asset classes should be
reported for unrelated types of intangible
assets
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Intangible Assets
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Effective date is FY10
For GASB 34 Phase 1 and 2 entities,
retroactive reporting is required at least back
to fiscal years ending after June 30, 1980
Phase 3 entities may start recording
intangibles as of the effective date
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Intangible Assets
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Retroactive reporting of intangible assets
considered to have indefinite useful lives is
not required (permanent ROW)
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Retroactive reporting of intangible assets that
are internally generated is not required
(software)
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Assets Held for Resale
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An asset that is permanently retired from
service ceases to become a capital asset and
should be considered an “asset held for
resale”
These assets need to be adjusted and carried at
their “fair” value
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Assets Held for Resale
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For districts that have construction programs, assets
are held for resale and should be reported on
governmental fund f/s’s at their fair value
Fund balance should be reserved in connection with
these assets to the extent that they are not considered
available to liquidate liabilities of the current period
and are not otherwise offset by deferred revenue.
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Capitalizable Costs
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Costs should be directly identifiable with a
specific asset
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The costs of a “study” would generally not be
capitalizable
Legal costs arising in connection with acquiring a
specific asset would be
A cost should be capitalized only if incurred
“after” the purchase was considered probable
(likely to occur)
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Capitalizable Costs
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General and administrative costs should not
be capitalized…management, accounting, HR
Costs relating directly to a purchase should be
capitalized…….salaries of FTE working on
the site
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Capitalizable Costs
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Improvements are capitalized if they 1)
increase the useful life, or 2) increase the
assets ability to provide service (effectiveness
or efficiency)
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Total retrofit of a building
Adding a new wing to a building
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Capitalizable Costs
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Repairs and maintenance are costs that are not
capitalized because they help an asset “retain
its value” rather than providing additional
value.
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Striping, snow removal
Painting a building
Replacing shingles
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Valuation
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The purpose of capitalization is not to show
how much an asset is worth……but rather to
defer recognizing as expense of the current
period a cost incurred for the benefit of future
periods.
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Valuation
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Historical costs or an estimate thereof should
be used for valuing capital assets
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Research vouchers, minutes, bids
Use of CPI tables
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Valuation
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Bundled assets should have their values
split………when land and a building are
purchased in one transaction
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Valuation
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When an asset is acquired by trade-in,
generally speaking, the new asset should be
recorded at the sum of the cash paid plus the
book value of the asset surrendered
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Valuation
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Donated capital assets should be reported at
their estimated fair value at the time of
acquisition
Fair value is what the government would have
had to pay to acquire the asset on its own, not
the amount for which the donated asset might
be resold
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Depreciation
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Three types of capital assets that are not
depreciated:
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Land
Intangibles (those with indefinite useful lives)
Art, historical treasures (B.M.’s computer)
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Depreciation
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Straight line depreciation is generally used
because governments are not seeking the tax
advantages offered by alternative methods
Depreciable intangible assets are “amortized”
rather than depreciated.
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Depreciation
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Useful life matches costs over the period of
use……..consider the following:
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Brick vs. wooden building
Volume of use
Level of maintenance
Tone of governing board
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Depreciation
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Group depreciation may be used for similar
assets or composite depreciation may be used
for a broader range of assets. Both methods
are similar in that they allow costs to be
averaged over the estimated useful life.
(computers, libraries)
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Depreciation
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Many governments ignore the use of salvage
values. Judgment should be applied in the
application of salvage value to each asset.
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Depreciation
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Policies should be consistently applied to the
convention of applying depreciation to the
year of acquisition or disposal. For example a
full year of depreciation during acquisition
and none upon disposal, or vise-versa….
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Depreciation
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Efforts should be undertaken to ensure that
assets do not become fully depreciated. This
may include a periodic review and adjustment
of useful lives.
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Threshold
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The key to establishing a capitalization
threshold ought to be financial reporting. The
proper objective of capitalization is financial
reporting….not accountability.
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Threshold
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Entities acquire groups of items (computers)
that individually may fall under the cap
threshold, but clearly exceed it in the
aggregate. A govt must make their own
decision for each group. The key decision to
eliminate or cap a group is whether that group
will be “material” to the financial statements.
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Threshold
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Cap thresholds may be set for different
classes/groups of capital assets. Vehicles,
buildings, food service, improvements other
than buildings, etc…..
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Physical Inventory
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An important internal control is to
periodically take a physical inventory of your
capital assets. A physical inventory will
identify both assets that have been removed
(possible I/C weakness) and assets that have
been acquired but not capitalized (another
possible I/C weakness)
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Financial Reporting
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GAAP does not allow the reporting of
depreciable and nondepreciable capital assets
on the same line.
So land and CIP should be reported on lines
separate from buildings and equipment
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Financial Reporting
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Capital asset resources are reported in an
equity account called, “ Net assets invested in
Capital Assets, Net of Related Debt (706)” on
the Food Service Fund and G-W f/s’s
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Normally this account is Cap Assets less
Accum Depr less Cap related debt....however
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Financial Reporting
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Consider all capital assets both tangible and
intangible
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The calculation should exclude non-capital
assets. (Loan proceeds remaining to be spent
on a project)
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Financial Reporting
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When deducting long-term debt……make
sure the district is not deducting long-term
debt incurred for non-capital purposes such
as, OPEB, compensated absences and early
retirement.
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Disclosures
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Capitalization threshold(s)
Estimated useful lives
Method used to compute depreciation
(straight line)
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Disclosures
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Disclose changes in capital assets
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Listing Beg, purchased, disposed and ending
List Governmental separate from Proprietary
List depreciable separate from non-depreciable
Accumulated depr accounts listed separately
List depr expense by each statement of
activities function
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Disposals
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Immaterial gains and losses are reported as an
other general revenue
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Disposals
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Material gains and losses on the G-W
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Governmental activities – gains and losses are
separately displayed as a general revenue
BTA – gains are included as a part of general
revenues, losses are included as any other
program cost
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Disposals
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In enterprise fund f/s’s, both gains and losses
are classified as nonoperating revenues and
expenses
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Disposals
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On rare occasion significant gains and losses
may be reported as a special item (within
control) or an extraordinary item (not within
control)
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