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CAPITAL ASSETSdeene.dayton@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/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 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 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 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 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 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

split………when 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/s’s

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 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 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/s’s, 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)