Patrick Collins

1
Fixed Asset Management in the Education
Environment

• Patrick Collins
• Business Development Manager
• 630/705-9282
• Illinois ASBOs 56th Annual Conference
• May 17, 2007

2
Overview

• Why Manage Fixed Assets
• Review GASB 34 Reporting Requirements
• Common Audit Exceptions
• Physical Inventories/Verifications
• Insurance Appraisals

3
Why Manage Fixed Assets?

• Federal Reporting Requirements
• GASB 34 Reporting
• Depreciation
• Qualified audit
• Risk Management
• Insurance Placement
• Support of Proof of Loss

4
Why Manage Fixed Assets? Cont.

• Maximize the use of district resources
• Reutilization
• Life cycle management and planning
• Management information for decision making
• Provide required level of service
• Loss, damage, and destruction avoidance
• Good stewardship to School Board, Local Press,
  Public

5
GASB 34 Reporting Requirements

• Timetable
• Phase-in approach starting for FY ending June 30,
  2003
• By June 30, 2005 all school districts should be
  compliant
• Reporting Requirements
• Capital assets reported at historical or
  estimated original cost
• Capital assets are to be depreciated over
  estimated useful life
• Capital asset reported net of accumulated
  depreciation in Statement of Net Assets
• Depreciation expense should be reported in the
  Statement of Activities

6
GASB 34 Capital Asset Reporting

• Report Depreciation by Function
• 1100 Regular Instruction
• 1200 Sp. Ed. Instruction
• 1300-1900 Other Instruction
• 2100 Pupil Services
• 2200 Instructional Services
• 2300 General Admin. Srvs.
• 2400 School Admin. Srvs.
• 2500 Business Services
• 2550 Transportation Services
• 2600 Central Services
• 2540 OM

7
Common Audit Exceptions

• Useful life assignment inconsistent with Board
  Policy/Capital Asset Policy
• Depreciation method does not match Board
  Policy/Capital Asset Policy
• Function data not reported
• Buildings not reported by Function
• Beginning Balance does not match Ending Balance
  from previous year
• Assets fully depreciated at transition
• Federal funds not being tracked (500 level)

8
Common Audit Exceptions Cont.

• Land Account
• Often reported with no detail backup
• If cost information in lacking, can the assessor
  provide with confidence, estimates of original
  cost at the date of acquisition or donation?
• Estimating historical land values
• Buildings/Construction Costs
• Entry for Land/Improvements to land to prepare
  site (non-depreciable)
• Entry for land improvements- parking lots,
  sidewalks, lighting, landscaping, etc. (useful
  life shorter)
• Entry for building cost

9
Inventory Control vs. GASB 34 Reporting
10
GASB 34 Capitalization Threshold

• Issues to Consider
• Property Record Maintenance
• higher capitalization threshold equates to
  accounting for big items
• easier
• sophisticated, recognizable items
• less movement
• fewer items
• economies
• efficiencies
• auditability

11
Inventory Control Threshold

• GFOA recommending practice on Ensuring Control
  over Noncapitalized Items (2005)

• Items that require special attention to ensure
  legal compliance
• Items that require special attention to protect
  public safety and avoid potential liability
• Items that require special attention to
  compensate for heightened risk of theft (walk
  away items)
• Individuals responsible for controlled
  capital-type items should prepare and maintain a
  complete list of those items each year within the
  department
• Departments should certify each 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 should
  periodically verify data on controlled
  capital-type items on file in each department.

12
Physical Inventory

• Objectives
• To confirm assets in the system are physically
  exist
• Assets are appropriately recorded in the system
• Records are accurate as to location, description,
  accountability, etc.
• Identify excess, unserviceable or obsolete
  property
• Assesses Health of the System!

13
Working with outside firm to verifycapital asset
schedule

• Existing data file
• Physical verification of equipment
• Tagging
• Inspection of buildings and improvements (for
  insurance?)
• Review client data for non-tagged assets
• Reconciliation
• Report preparation
• Capital Asset Reports
• Exception Reports

14
Property Insurance Appraisals

• Used to establish Cost of Reproduction New for
  insurance placement
• Buildings
• Insurable Land Improvements
• Contents
• Every 5 years
• Support of Proof-of-Loss
• In conjunction with verification or accounting
  services

15
Property Insurance Appraisals -cont.

• Cost of Reproduction New - Estimated amount
  required to reproduce a duplicate or a replica of
  the entire property at one time in like kind and
  materials in accordance with current market
  prices for materials, labor, and manufactured
  equipment, contractors' overhead and profit, and
  fees, without provision for overtime, bonuses for
  labor, or premiums for material or equipment.
  Synonymous with the insurance industry term
  replacement cost.
• VS.
• Replacement Cost New - the estimated amount
  required to replace the entire property at one
  time with a modern new unit using the most
  current technology and construction materials
  that will duplicate the production capacity and
  utility of an existing unit at current market
  prices for materials, labor, and manufactured
  equipment, contractors overhead and profit, and
  fees, but without provision for overtime, bonuses
  for labor, or premiums for material or equipment.
  

16
Property Insurance Appraisals -cont.

• Property Insurance Update 2001-2005
• Post 9/11/01 hardening of the property insurance
  market
• Historical underwriting losses were attributable
  to significant valuation issues for the insured
  properties.
• Valuation issues were attributable to the lack of
  accuracy and completeness of data obtained from
  the insured.
• Increased scrutiny of the insurance industry by
  Federal and State regulators
• Significant losses related to the hurricanes in
  the gulf coast.
• Difficulty placing coverages in certain sectors
• Reinsurance market is beginning to dictate
  changes in the underwriting process

17
Property Insurance Appraisals -cont. changes
in insurance market

• Improved underwriting discipline dictated by the
  reinsurance markets
• Increased emphasis on a consistent disciplined
  approach to underwriting
• Exposure data analysis (COPE data)
• Loss experience analysis
• Management assessment
• Increased market specialization for carriers
• Increased focus on geography
• Discontinuance of blanket coverage
• Appraisal requirements for insured properties
• Discontinuance of contingent broker commissions
• Increased financial transparency (Sarbanes-Oxley)

18
Property Insurance Trends 2006-2007

• Natural Catastrophe (Wind, Quake Flood)
  Exposures
• Increased pricing
• Increased windstorm deductibles
• Decreased coverage capacity
• Tightening of underwriting guidelines
• Closer attention to aggregate geographic risks
• Increased emphasis on portfolio catastrophe
  modeling
• New catastrophe models have increased expected
  losses
• Non-Cat. Property
• Decreases
• Time to get appraisal

19
Inflation Whats Happening in Construction Cost
Trends?

• Moderate construction inflation over the last
  fifteen years (1 - 3).
• Significant construction inflation in 2004
  (10.5).
• Slowing but not back to normal in 2005 (5.5
  6.5)
• Slowing again 2006 (4.4)

20 Inflation in 3 years!!!!!!!!
20
Inflation Whats Happening in Equipment Cost
Trends?

• Equipment Inflationary Increases, 1990 January
  2006

Sources cited Marshal Valuation Service -
Marshall Swift Quarterly Cost Index, industrial
Equipment Average of All FM Global Industrial
Cost Trends, Industrial Equipment Composite U.S.
Department of Labor, Bureau of Labor Statistics -
Producer Price Index, Finished Goods Seasonally
Adjusted - Table WPSSOP3000
21
Inflation Whats Happening in Equipment Cost
Trends?
Equipment Inflationary Increases, 2004 January
2006
Sources cited Marshal Valuation Service -
Marshall Swift Quarterly Cost Index, industrial
Equipment Average of All FM Global Industrial
Cost Trends, Industrial Equipment Composite U.S.
Department of Labor, Bureau of Labor Statistics -
Producer Price Index, Capital Equipment - Table
WPUSOP3200
22
Benefits of Insurance Appraisal

• Determine the adequacy of insurance coverage
• completeness of property listing
• accuracy of property values
• Improved risk management
• Improved marketability to underwriters
• Serves as a basis for the allocation of premiums
• Serves as a basis for the preparation of a
  proof-of-loss

23
Now what?
Set guidelines for property management

• Capital asset/insurance reporting policies
• Capitalization Threshold
• Useful Life Schedule

• Set forth specific procedures
• Acquisition
• Retirement
• Transfers
• Tagging
• Inventory

24
Reports

• Capital Asset Reporting for GASB 34
• Summary Reports by Account
• Summary Report by Function
• Detailed Record
• Insurance Appraisals
• Summary Report (Statement of Values)
• Buildings, land improvements, contents
• Detailed Reports