General Capital Assets; General Long-Term Liabilities; Permanent Funds

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General Capital AssetsGeneral Long-Term
LiabilitiesPermanent Funds

• Chapter 9

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Learning Objectives

• Understand how to maintain GCA GLTL information
  for reporting purposes
• Understand how to account for transactions
  affecting GCA GLTL
• Understand how GCA GLTL are related
• Account for and report general infrastructure
  capital assets
• Understand how to apply the modified approach to
  infrastructure capital assets
• Understand GCA GLTL financial reporting
• Understand how to use, account for, report
  Permanent Funds
• Account for transactions affecting all
  Governmental Funds, GCA, GLTL

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GCA GLTLWhat Weve Seen Thus Far

• General Capital Assets (GCA)
• Purchases recorded as expenditures rather than
  fund assets
• Sales recorded as Other Financing Sources (OFS)
• General Long-Term Liabilities
• Issuance of debt recorded as OFS
• Retirement of debt recorded as expenditures or
  Other Financing Uses (OFU)

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GCA-GLTL Accounting Equation
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Characteristics of Capital Assets

• Used in operations of the government (not for
  resale)
• Have useful lives extending beyond a single
  reporting period (may be modified by governments
  capitalization policy)
• May be tangible or intangible

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Types of Capital Assets

• Land
• Land improvements
• Easements
• Buildings
• Building Improvements

• Vehicles
• Machinery
• Equipment
• Works of art
• Historical treasures
• Infrastructure

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Capital Assets ? GCA

• All general capital assets are capital assets,
  but not all capital assets are general capital
  assets!
• GCA used by the Governmental Funds (general
  government)
• Other capital assets are fund-specific used by
  the Proprietary Funds and Trust Funds

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Initial Valuation
Cost Invoice price Cost of delivery Cost to get asset ready for intended use
Estimated cost Used when invoice price is unknown Frequent problem for governments with poor inventory records
Gifts Fair value Cost of delivery Cost to get asset ready for intended use
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Other Acquisition Methods
Foreclosure Lower of (1) amount due for taxes, etc. or (2) appraised value of property
Eminent domain Assign value as if it were a negotiated purchase
Escheat Same manner as gifts
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Normal GCA Classifications(recommended by GFOA)

• Land
• Buildings or Building Improvements
• Infrastructure
• Machinery Equipment
• Construction in Progress

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Infrastructure Capital Assets

• 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 of
  infrastructure assets include roads, bridges,
  tunnels, drainage systems, water sewer systems,
  dams, lighting systems.

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Capitalization Policy

• Minimum dollar amount
• Minimum useful life
• Whatever the government elects to do, it must be
  disclosed in the notes

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Minimum Information forProperty Records

• Property system ID number
• Serial number, etc.
• Abbreviated description
• Date of acquisition
• Name and address of vendor
• Payment voucher number
• Fund and account from which purchased

• Federal financing, if any
• Cost or estimated cost
• Estimated useful life salvage value and annual
  depreciation
• Accumulated depreciation
• Department charged with custody
• Location
• Date, method, and authorization of disposal

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Other GCA Issues

• Regular GCA inventory
• Accounting for additions, betterments, and
  renewals
• Depreciation and accumulated depreciation
• Modified approach
• Allowed only with infrastructure assets
• No depreciation recorded
• Only additions / improvements are capitalized
• Updating GCA records

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Impairment of Assets

• Defined
• Significant (material)
• Unexpected (not normal, not ordinary)
• Decline in the service utility of a capital asset

• Excludes
• Events or changes in circumstances that might be
  expected to occur during useful life
• CA accounted for using the modified approach
• Declines caused by deferred maintenance

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Indicators of Impairment

• Evidence of physical damage
• Change in legal or environmental factors
• Technological development or evidence of
  obsolescence
• A change in the manner or expected duration of
  usage of an asset
• Construction stoppage

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Measuring Impairments
Method Generally Used Method Generally Used
Ind Continued Use Stop Use
1 Restoration cost Lower of CV or FV
2 Service units Lower of CV or FV
3 Service units Lower of CV or FV
4 Deflated depreciation Lower of CV or FV
5 Lower of CV or FV
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Restoration Cost Approach

• Amount of impairment is derived from the
  estimated costs to restore the utility of the
  capital asset. The estimated restoration cost can
  be converted to historical cost either by
  restating the estimated restoration cost using an
  appropriate cost index or by applying a ratio of
  estimated restoration cost over estimated
  replacement cost to the carrying value of the
  capital asset.

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Service Units Approach

• Isolates the historical cost of the service
  utility of the capital asset that cannot be used
  due to the impairment event or change in
  circumstances. The amount of impairment is
  determined by evaluating the service provided by
  the capital asseteither maximum estimated
  service units or total estimated service units
  throughout the life of the capital assetbefore
  and after the event or change in circumstance.

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Deflated Depreciation Replacement Cost Approach

• Replicates the historical cost of the service
  produced. A current cost for a capital asset to
  replace the current level of service is
  estimated. This estimated current cost is
  depreciated to reflect the fact that the capital
  asset is not new, and then is deflated to convert
  it to historical cost dollars.

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Reporting Impairment Losses

• Temporary no impairment loss report, but cost
  to repair is reported
• Expenditure in Governmental Funds
• Loss in Proprietary Funds
• Other than temporary
• Expenditure in Governmental Funds
• Program expense, extraordinary item, or special
  item in Proprietary Funds and government-wide
  statements

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Reporting Insurance Recoveries

• Governmental Funds OFS or extraordinary item,
  as appropriate
• Government-wide financial statements
  Proprietary Funds report restoration separate
  from impairment and associated insurance recovery
• Impairment loss reported net of insurance
  recovery if both occur in same fiscal year
• Insurance recovery in subsequent year reported as
  program revenue, nonoperating revenue, or
  extraordinary item, as appropriate

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Special Circumstances

• Insurance recoveries for losses other than
  impairments
• Netted against loss if in same fiscal year
• Program revenue, nonoperating revenue, or
  extraordinary revenue if in subsequent year
• Self-Insurance
• From ISF, report as described above
• From General Fund, recovery is reported as
• Reimbursement up to amount of loss
• Transfer for any excess

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Reporting GCA

• Financial Statements governmental activities
  column of government-wide Statement of Net Assets
• Notes to the Financial Statements
• Beginning and Ending Balances of capital asset
  accounts and related accumulated depreciation
  accounts
• Acquisitions of capital assets
• Sales or other dispositions
• Allocation of current period depreciation expense
  to each function in the Statement of Activities

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General Long-Term Liabilities

• Defined
• All unmatured long-term debt of the government
  except for that accounted for in a Proprietary
  Fund or Trust Fund

• Examples
• Bonds, warrants, notes
• Capital leases and CoPs
• Underfunded pension plan contributions
• Claims judgments
• Compensated absences
• Landfill closure and post-closure care costs

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Special Circumstances

• Serial Bonds
• Special Assessment debt
• Defaulted bonds
• In-substance defeasance

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Reporting GLTL

• Financial Statements governmental activities
  column of government-wide Statement of Net Assets
• Notes to the Financial Statements
• Beginning and Ending Balances of GLTL accounts
• Issuances / increases in GLTL accounts
• Retirements / decreases in GLTL accounts
• Which governmental funds have typically been used
  in prior years to liquidate other long-term
  liabilities

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Permanent Funds

• Used to account for resources held in trust by
  the government for the benefit of the government
  or of its citizenry as a whole
• Contrast with Private Purpose Trust Fund where
  the assets are used to benefit private
  individuals, private organizations, or other
  governments

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Relationships Requiring Use of a Permanent Fund

• Gift of real or personal property where
• Principal is to remain intact
• Earnings are to be used for certain purposes
• Employee loan fund principal could be reduced
  under certain circumstances
• Other trust agreements