Accounting for Capital Assets - PowerPoint Presentation

1. Accounting for Capital AssetsNature Coast FGFOAJuly 20, 2016Sarah C. Koser, CPA, CGFO, CPFOInterim Finance DirectorThe Villages Community Development Districts

2. Capital Assets – DefinedBasic AccountingMajor Asset ClassesCapitalizable CostsValuation of Capital AssetsCreating a Capital Asset PolicyInventoryingGFOA Recommended PracticesCompliance with Florida StatutesSession Objectives

3. Capital Assets Defined

4. What are some types of Capital Assets?Includes all of the following with initial useful lives extending beyond a single reporting period:LandImprovements to landEasementsBuildingsBuilding improvementsVehiclesMachineryEquipmentWorks of art and historical treasuresInfrastructureOther tangible or intangible assetsCapital Assets - Defined

5. Purpose of maintaining asset information by Management:Control – Good StewardshipMaintenance – Ensure assets are properly maintainedReplacement – Plan for retirement and replacement as neededInsurance – Reliable information to properly insureCost recovery and rate setting – Proprietary funds Financial reporting – Follow GAAPReasons for failure of adequate capital asset management:Inadequate scope – focus on some required elements but not allOverburdening – Collecting unnecessary informationInadequate system maintenance – Lack of resources necessary to maintain system.Capital Assets - Defined

6. Basic Accounting

7. Measurement Focus Matters!!!Governmental Funds – current resourcesModified Accrual Basis of AccountingProprietary Funds – economic resourcesFull Accrual Basis of AccountingBasic Accounting

8. Example:Government purchases a piece of equipment with a cost of $500,000 and an estimated useful life of 10 years.Basic Accounting

9. Proprietary Fund Entries – Economic Resources Measurement Focus:Acquisition:Allocation to expense (depreciation) per period (year):Basic AccountingDebitCreditEquipment$500,000 Cash$500,000DebitCreditDepreciation Expense$50,000 Accumulated Depreciation$50,000

10. Governmental Fund Entries – Current Financial Resources Measurement Focus:Acquisition:Basic AccountingDebitCreditExpenditure – Capital Outlay – Equipment$500,000 Cash$500,000

11. For Government-Wide Financial Statements – Economic Resources Measurement Focus:WORKSHEET ENTRIES – ONLY!!!!Basic AccountingDebitCreditEquipment$500,000 Expenditure – Capital Outlay - Equipment$50,000

12. Capital Asset Reporting Requirements:Basic AccountingFunds in which Activity ReportedReported in Fund Financial Statements?Reported in Government-Wide Financial Statements?Governmental fundsNoYesProprietary fundsYesYesFiduciary funds*YesNo*Only pension trust funds typically will have any capital assets to report

13. Optional capitalization:Older InfrastructureAcquired prior to July 1, 1980Smaller Governments – acquired prior to June 30, 2004CollectionsWorks of ArtHistorical TreasuresSimilar ItemsENCOURAGED TO REPORT – but not requiredCriteria – have to meet all three:Purpose is display or researchBeing adequately maintainedProceeds from sale of collection items must be applied to acquiring new itemsImmaterial ItemsBelow governments capitalization thresholdBasic Accounting

14. Assets capitalized but not depreciated or amortized:Assets with indefinite useful livesLandSome intangibles – cannot “wear out” (patent, trademark, etc.)Works of art, historical treasures, and similar itemsInfrastructure (if government uses modified approach)Capital assets not yet providing serviceConstruction in progress (tangible assets)Development in progress (intangible assets)Basic Accounting

15. Which government should report assets when one government acquires for use by another?Ownership – critical criterionWho holds title?Exception: Leased to another under Capital Lease.Example:County constructs a buildingWill be used by school districtCounty will continue to own (holds title)COUNTY – will report on their financial statementsBasic Accounting

16. Which government should report assets when one government acquires for use by another? (Continued)Assets acquired with Grant funds (sometimes)Reversionary Interest – reverts to grantor should grantee wish to disposeDoes not limit grantee’s right to “use and enjoy”Grantee reports on Financial StatementsBasic Accounting

17. Which government should report assets when one government acquires for use by another?When ownership cannot be established (absence of title):Responsible for maintaining Owner for Financial Statement purposesONLY if ownership cannot be establishedBasic Accounting

18. Major Asset Classes

19. Seven or more major classes:Land – always separate from an associated asset:Land under a building or road – report as landInclude in cost of land initial preparation for intended use:ONLY if preparations have indefinite useful life. Examples:ExcavationFillGradingMoving Power LinesBuildingsIncludes any improvements (betterments)Includes restoration from an impairmentMajor Asset Classes

20. Seven or more major classes (continued):Improvements other than buildings (land improvements)FencesRetaining WallsParking LotsLandscapingFurnishings and equipment (machinery and equipment)VehiclesFurnishingsLibrary book collectionsMajor Asset Classes

21. Seven or more major classes (continued):InfrastructureDefinition – “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:RoadsBridgesDrainage retention areasWater and sewer systemsLandfillMajor Asset Classes

22. Seven or more major classes (continued):Infrastructure (continued)Items of note:Cost of land associated – report as landCost of buildings associated – report as buildingsException: Purely ancillary buildingsExamples:Rest area on turnpikeWater pumping station in water systemGarages associated with a highway systemMajor Asset Classes

23. Seven or more major classes (continued):Construction (or development) in progressNot yet ready for serviceOther capital assetsItems not properly included in another classMajor Asset Classes

24. Capitalizable Costs

25. GAAP - Include any “ancillary charges necessary to place the asset into its intended location and condition for use”.Challenges:Acquisition CostsInterest incurred during acquisitionTrainingImprovements (betterments)Capitalizable Costs

26. Acquisition Costs:Examples of POTENTIAL costs:Legal and title feesClosing costsAppraisal and Negotiation feesSurveying feesLand preparation costsDemolition costsAudit and accounting feesTransportation ChargesCapitalizable Costs

27. Acquisition Costs:Preconditions for capitalization:Only if directly identifiable with a specific assetExample: Determine BEST location for a school – NOT CAPITALIZABLEExample: Legal cost acquiring a specific property – CAPITALIZABLEOnly if incurred after acquisition of the related asset has come to be considered probable (likely to occur)Example: Feasibility study – NOT CAPITALIZABLECapitalizable Costs

28. Acquisition Costs:Internal Costs – Three Guidelines:General and administrative costs NEVER capitalized (overhead)Costs directly related to the acquisition of a specific asset – CAPITALIZE Example: Salary & wages of employee worked on specific construction project (building, etc.)Costs clearly related to the acquisition of capital assets, but not to specific projects - CAPITALIZEExample: Cost accounting, design, and other departments providing services that are clearly related to projects.Allocate to individual projectsCapitalizable Costs

29. TrainingNot capitalized – 2 reasonsDoes not affect the location nor useAsset ready to be used – not if government is ready to use itCost should provide benefit throughout useful lifeEmployee turnoverCapitalizable Costs

30. Improvements (betterments)Two types of costsImprovements (betterments) - CapitalizeProvides additional value – either by:Lengthening estimated useful life (reconstruct road with material that has longer useful life – concrete rather than asphalt) or:Increasing assets ability to provide service (more effective or efficient) (widening a highway from two lanes to four)Repairs and Maintenance – NOT capitalizedRetains value – new roof on buildingCapitalizable Costs

31. Valuation of Capital Assetsfor FinancialReporting Purposes

32. Initial ValuationAssets purchased or constructedHistorical CostEstimated historical costStandard costing – going price when acquiredNormal costing (back trending) – current cost restated in acquisition-year dollars.Assigning bundled costs to individual assets (building & land)Work from known to unknown (if know price of land – subtract from total purchase price for cost of building)Estimate fair value of each – express as ratio – apply to purchase priceValuation of Capital Assets

33. Initial Valuation (continued)Assets obtained through trade-insTotal cost for new assetExample:Vehicle traded – book value of $1,000Paid cash of $24,000 for new vehicle (after trade)New vehicle value - $25,000 ($24,000 + $1,000)Valuation of Capital Assets

34. Initial Valuation (continued)Donated assetsGAAP – “estimated fair value at the time of acquisition plus ancillary charges, if any.”“Buy” price – not “Sell” pricePrice at which the government could have “bought” NOT – price that it could be “Sold” forIf no regular market for donated asset:Cost paid by donor (if within reasonable period of time)Example: Developer donates roadUse developer’s costs if recent constructionValuation of Capital Assets

35. Policies

36. Overview – Decisions in setting policies:Which items should be capitalized?How should discrete components of larger assets be treated?How should fair value be determined for donated capital assets?What major asset classes should be used?Which items should be depreciated or amortized and how?How should control be maintained over items that were not capitalized?Which capital assets should be tagged?How should disposals be handled?How often should a physical inventory of capital assets be performed?Policies

37. Decisions in setting policies :Which items should be capitalized?Infrastructure and collectionsInfrastructure prior to required date?Collections: Works of art, historical treasures, similar items?Capitalization thresholdsSingle capitalization threshold or different for different major classes?What will the threshold(s) be?Applied to individual items in a group of similar items or to a group of items in the aggregate?Policies

38. Decisions in setting policies :How should discrete components of larger assets be treated?Will discrete components of capital assets with significantly shorter lives be treated as separate capital assets in their own right? If so, which ones?If not, will the eventual replacement of a discrete component that is included as part of the cost of the larger asset be treated as a repair or as a disposal?Policies

39. Decisions in setting policies :How should fair value be determined for donated capital assets?What methodology will be used to estimate fair value for donated assets?Who will be making and documenting estimates of fair value?What major asset classes should be used?What will the major classes be for capital assets?Which specific items will be reported in each?Policies

40. Decisions in setting policies :Which items should be depreciated or amortized and how?Will the government use the modified approach?For depreciated/amortized:Will the useful lives of capital assets be estimated for individual assets or for major classes of assets?What will be the basis for those estimates?How will the reasonableness of those estimates be evaluated on an ongoing basis?What will be government’s policy be on estimated salvage value?What method will be used to calculate depreciation/amortization?Will depreciation be applied to individual items or groups of items?How will depreciation be applied to partial years?Policies

41. Decisions in setting policies How should control be maintained over items that were not capitalized?What criteria will be used to determine that a noncapitalized property item poses a special risk to the government?How will departments ensure that there is proper control over such items?How will the central accounting function ensure that departments are meeting their responsibility in this regard?Which capital assets should be tagged?Which property items will be tagged?For which items will a unique identification number be necessary?Where will tags be placed on each type of property item?Who will be responsible for tagging?Policies

42. Decisions in setting policies :How should disposals be handled?Who may authorize a disposal and in what circumstances?What procedures are to be followed to ensure that the government receives maximum benefit from the disposal?How often should a physical inventory of capital assets be performed?How often will physical inventories of capital assets be performed?Who will be responsible for performing the inventories?Policies

43. Inventorying

44. Initial inventoryResponsibility and staffingIn-house staffingOutside staffingCombination of in-house and outsideDesign elements (Policies – last section)Input formsInventorying

45. Initial inventoryWork plan“As of” dateStaffing and workspaceTimingData collectionTrainingSequencingUse of existing data sourcesSource materials to be brought to the site by the inventory teamNotification – notify departments in advanceInventorying

46. Periodic inventories – Three essential elementsThe data in the accounting records are compared with actual capital assets.An exception report is generated.Follow-up - use exception report to make any necessary adjustments to the accounting records.Inventorying

47. GFOA RecommendedPractices

48. Capitalization ThresholdsPeriodic InventoriesEstimated Useful LivesUse of the Modified ApproachControl over Noncapitalized ItemsGFOA Recommended Practices

49. Capitalization ThresholdsApproved February 24, 2006Recommendation:Capitalize only if useful life of at least two years Capitalization thresholds best applied to individual itemsNever capitalization threshold of less than $5,000Be aware of federal requirements on assets acquired with federal grants.GFOA Recommended Practices

50. Periodic InventoriesApproved February 24, 2006Recommendation:Periodic inventory so all assets accounted forNo less than once every five yearsGFOA Recommended Practices

51. Estimated Useful LivesApproved March 2, 2007Recommendation:Best source own past experienceConsider potential effects of these factors when looking at experience of others:Quality (are the items of the same quality, i.e., asphalt/concrete)Application (i.e., residential street vs major thoroughfare)Environment (different climate)GFOA Recommended Practices

52. Use of the Modified ApproachApproved October 25, 2002Points to consider in deciding to use modified approachUsefulness of data for management purposesPotential impact of prospective depreciation (if later decide to convert to depreciation method)Inherent capital bias (toward capital outlays)Unmatched debt (issued to lengthen useful life of asset – not capitalized)Reliance upon interested parties (can promote their agenda)Decreased comparability (with other governments)GFOA Recommended Practices

53. Control over Noncapitalized ItemsApproved October 11, 2005Recommendation:Control normally should occur at the departmental level.Control responsibility should be assigned within each department.Individuals responsible for controller capital-type items should prepare and maintain a complete list of those items each year within the department.Departments should certify each year 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 (or other designated finance function) should periodically verify the data on controlled capital-type items on file in each department.GFOA Recommended Practices

54. Florida Statutes

55. Florida property rules:Florida Statutes Chapter 274Does not apply to MunicipalitiesAGO 98-04Does not apply to State Chapter 273Florida Administrative Code 69I-73Florida Statutes

56. Florida StatutesHow does Florida Statute differ from GASB requirements?Florida Statute requirement:Assets with value of $1000 or more to be booked.GASB:Government to set their own Capitalization ThresholdGFOA recommends that it is never less than $5,000. Higher thresholds for Infrastructure and Buildings.

57. Florida StatutesAuthorizing and Recording the Disposal of Property 274.07Authority for the disposal of property shall be recorded in the minutes of the governmental unit.Does not apply to Municipalities.

58. “Accounting for Capital Assets, A Guide for State and Local Governments” – Stephen J. Gauthier – GFOA PublicationFlorida Statutes - Chapter 274Florida Administrative Code - 69I-73Presentation sources:

59. Sarah C. Koser, CPA, CGFO, CPFOInterim Finance DirectorThe Villages Community Development Districts984 Old Mill RunThe Villages, Florida 32162352-753-0421Sarah.Koser@DistrictGov.org Contact Information: