CAPITAL ASSETS

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CAPITAL ASSETS

• deene.dayton_at_state.sd.us
• 773-5932

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Intro

• GFOA has released a new guide to provide
  direction in accounting for capital assets
• See GFOA.org

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Intro

• 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

• 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

• 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

• 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

• Buildings all permanent structures
• 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)
• 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

• 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

• 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

• 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

• 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

• 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

• Retroactive reporting of intangible assets
  considered to have indefinite useful lives is not
  required (permanent ROW)
• Retroactive reporting of intangible assets that
  are internally generated is not required
  (software)

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Assets Held for Resale

• 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

• For districts that have construction programs,
  assets are held for resale and should be reported
  on governmental fund f/ss 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

• Costs should be directly identifiable with a
  specific asset
• 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

• General and administrative costs should not be
  capitalizedmanagement, accounting, HR
• Costs relating directly to a purchase should be
  capitalized.salaries of FTE working on the site

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Capitalizable Costs

• Improvements are capitalized if they 1) increase
  the useful life, or 2) increase the assets
  ability to provide service (effectiveness or
  efficiency)
• Total retrofit of a building
• Adding a new wing to a building

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Capitalizable Costs

• Repairs and maintenance are costs that are not
  capitalized because they help an asset retain
  its value rather than providing additional
  value.
• Striping, snow removal
• Painting a building
• Replacing shingles

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Valuation

• The purpose of capitalization is not to show how
  much an asset is worthbut rather to defer
  recognizing as expense of the current period a
  cost incurred for the benefit of future periods.

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Valuation

• Historical costs or an estimate thereof should be
  used for valuing capital assets
• Research vouchers, minutes, bids
• Use of CPI tables

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Valuation

• Bundled assets should have their values
  splitwhen land and a building are purchased in
  one transaction

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Valuation

• 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

• 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

• Three types of capital assets that are not
  depreciated
• Land
• Intangibles (those with indefinite useful lives)
• Art, historical treasures (B.M.s computer)

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Depreciation

• 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

• Useful life matches costs over the period of
  use..consider the following
• Brick vs. wooden building
• Volume of use
• Level of maintenance
• Tone of governing board

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Depreciation

• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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

• 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/ss
• Normally this account is Cap Assets less Accum
  Depr less Cap related debt....however

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Financial Reporting

• Consider all capital assets both tangible and
  intangible
• The calculation should exclude non-capital
  assets. (Loan proceeds remaining to be spent on
  a project)

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Financial Reporting

• When deducting long-term debtmake 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

• Capitalization threshold(s)
• Estimated useful lives
• Method used to compute depreciation (straight
  line)

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Disclosures

• Disclose changes in capital assets
• 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

• Immaterial gains and losses are reported as an
  other general revenue

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Disposals

• Material gains and losses on the G-W
• 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

• In enterprise fund f/ss, both gains and losses
  are classified as nonoperating revenues and
  expenses

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Disposals

• On rare occasion significant gains and losses may
  be reported as a special item (within control) or
  an extraordinary item (not within control)