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Tangible Capital Assets: Evaluation and

Depreciation Bob Scott, B. Comm., CMA

542 Christopher Lane

Saskatoon SK S7J 3S5

(306) 222-9098

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Sample Balance Sheet

The following Sample Balance Sheet is a Detailed Balance Sheet

A Board Member might expect to see this level of information for use in decision making

The objective is to provide a clear and transparent statement Assets and Liabilities to Board Members

Accounts might be grouped for financial statement presentation especially fixed assets

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5ASSET

Current AssetsCredit Union Share 5.00 Equity Account #003 3,761.88 Boat Pass Revenue Account 16,678.78 Special Savings Account 2,253.65 Chequing Bank Account 69,329.89 Total Cash 92,029.20 Due From Capital Account 0.00 Visa Receivable 0.00 MasterCard Receivable 0.00 Debit Card Receivable 0.00 Total Credit Card Receivables 0.00 Investments 0.00 Accounts Receivable 0.00 Payroll Advances 0.00 Total Receivable 0.00 Prepaid Expense & Deposits 0.00 Total Current Assets 92,029.20

6Fixed AssetsFixed Assets 1,289,706.14 Improvements - Campground Office 9,788.00 Improvement - Washroom Sports Area 38,941.95 Improvements - Gate System 10,406.93 Improvements - Waterfront Beach 45,493.04 Software - Reservation System 2,110.50 Improvements - Campground 165,739.99 Improvements - Maintenance 6,529.96 Improvements - Cabin Area 15,617.34 Improvements - Playground 20,459.05 Improvements - Sportsground 17,773.99

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Office Furniture & Equipment 9,065.24

Accum. Amort. -Furn. & Equip. 0.00 Net - Furniture & Equipment 9,065.24

Vehicle 10,775.00

Accum. Amort. -Vehicle 0.00 Net - Vehicle 10,775.00

Building 4,024.71

Accum. Amort. -Building 0.00 Net - Building 4,024.71 Land 0.00

Equipment 442,995.80

Accum Deprec - Equipment 0.00 Net - Equipment 442,995.80 Total Fixed Assets 2,089,427.64

TOTAL ASSET 2,181,456.84

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LIABILITY

Current Liabilities

Accounts Payable 0.00

Customer Deposits 500.00

Due to Maintenance Fund 0.00

Current Portion of Long Term Debt 62,777.38

Total Current Liabilities 63,277.38

Long Term Liabilities

Equipment Loan 0.00

Loan One 19,609.43

Loan Two 49,471.77

Total Long Term Liabilities 69,081.20

TOTAL LIABILITY 132,358.58

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EQUITY

Owners Equity

Maintenance Fund Surplus 801,091.63

Capital Fund Surplus 427,892.54 Retained Earnings - Previous Year 687,840.26

Current Earnings 132,273.83

Total Owners Equity 2,049,098.26

TOTAL EQUITY 2,049,098.26

TOTAL EQUITY 2,049,098.26

LIABILITIES AND EQUITY 2,181,456.84

Summary of Statements

Current Assets contain regular items we would expect to seeare well defined and easily identifiable

Current LiabilitiesMinimal accounts payableCurrent portion of long term debtAre well defined and easily identifiable

Long Term LiabilitiesLong term debt less current portionare well defined and easily identifiable

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Questionable ItemsFixed Assets are pooled and not easily identifiable

Net Income appears to be overstated

Equity / Surplus appears to be overstated

I understand a number of Regional Parks have these issues

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The Issue

The Balance Sheet does not give the reader confidence that the true financial and operating position of the Regional Park is shown.

There is no indication of the condition of the assets

There is no indication of the remaining useful life of the assets

Assets are recorded at cost with no depreciation

The reduction in the value / remaining life of fixed assets is not being charged against current income

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The Solution

Analyze your Fixed Asset Account(s)

Determine the Depreciated Value of the Fixed AssetsOriginal CostLess Depreciation and Write Downs

Remove the value of any assets that have been disposed of (if any)

Create an Asset Management Information Listing

Expensing the depreciation of fixed assets annually

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What is in it for me?

Have better information for decision making

Have a list of assets for Insurance Purposes

Have detailed information about the stock, condition and costs of assets – replacement / major repairs?

Have the information needed to make informed decisions

Be prepared for Funding Opportunities – Grants – Donations – Volunteer work.

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What is a Tangible Capital Asset?

• roads, • buildings,• vehicles, • equipment,• computer

hardware and software,

• water and other utility systems,

• land, • dams, • canals, • and bridges

Tangible capital assets include such diverse items as

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Asset Identification

Network approach Views an asset as one unit even if the respective asset

is comprised of a number of significant components E.g. a well is composed of the pump, the liner, electrical

connections, etc.

Component approach Identifies major, significant components of asset. E.g. a water treatment system includes separate assets

- settling pools, filters, chlorine pump, distribution pumps, etc.

Segments Linear systems may be divided into segment or sections E.g. water distribution divided by subdivision

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Betterments / Improvements or MaintenanceDefinition of a Betterment:

increase the capacity reduce the operating cost orextend the useful life of a TCA.Considered to be an addition to the related asset. Recorded as separate asset - amortized over useful

life.

Definition of Repairs and Maintenance:maintain the asset over its given useful life.Expensed in the period and are not capitalized.

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Betterment or Maintenance - Examples

Replace old windows with energy efficient windows Betterment

Replace old air conditioner with same model unit Maintenance

Paved gravel road Betterment

Extended Water System to New Subdivision Betterment

Replaced broken water main with more durable material Betterment

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Definitions

Cost

Fair Value - also know as Fair Market Value

Net Book Value

Residual Value

Service Potential

Useful Life

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Cost

Includes the purchase price of the asset and acquisition costs such as: installation – design – engineering legal – survey site preparation – freight transportation insurance

Includes portion funded by grants or donationsGrants / Donations are recorded as transfers /

donations

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A Practical Approach to Cost

Historical Cost is the most appropriate method

Because Historical cost information may be incomplete there are three alternative methodsEach of the three methods attempts to estimate the

historical cost

Nominal Value for Fully Amortized Network AssetsE.g. roads

Now for a more practical approach

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General Ledger / General Journal

You may have sufficient information in your records to determine the Historical Cost

You might be able to determine the cost of larger projects from the annual statements

After determining the cost, you may want to confirm that the assets found still exist

My experience is assets which have served there purpose are disposed of without much concern for the bookkeeping

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Walk about

I am a firm believer that the best way a Park Manager or Board Member can understand the condition of their park is to go for a walk

The walk is good exercise, relaxing and can be very informative if you look closely

Take somebody with you and take a notebook or pad of paper

Even better do the walk about as a Board with the Park Manager

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Condition

For that concession building, what are the shingles like, how is the paint holding up

For the roadway, are there pot holes, is gravel required

Are the park vehicles new or old, in good condition or need work?

How many buildings do you really have

How are the playgrounds and recreational facilities

Take notes, sometimes memory is not reliable

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Talk to local trades

Local Trades can be very helpful in determining the estimated cost of assets, the condition of assets and the cost / timing of required maintenance

Trades people can also help you identify assets

When looking around the park, I noticed a large number of trades are represented in the cabin owners and seasonal campers ( volunteers maybe)

Remember this is an estimate of cost / condition / required maintenance, not an exact reconstruction

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The Hard Part

You have accumulated all the information you can, now what do you do?

The information collected needs to be accumulated and organized to allow for future use

The information can be put in a written list, a simple spread sheet or a computerized asset tracking system for parks with more assets

Each park will find the approach that works for them

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Capitalization Thresholds

Materiality

Record Keeping

Asset Management

Rate Setting

Examples of capitalization thresholdsBuildings – $10,000Machinery & Equipment - $2,000Vehicles - $2,000

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A Sample Spread Sheet

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Asset List

Asset IDAsset Description

Asset Class

General Ledger In Service Year

Useful Life

Historical Cost

Residual Value

Building 1 Office Building 1976 40 250000 5000

Building 2 Quonset Building 1985 40 100000 0

Tractor 1 Green One Equip 2000 15 25000 3000

Identify the data set required for each asset; for example:

Asset description

Location

Department responsible for asset

Other unique identifiers

Date of purchase

Manufacturer and/or supplier

Historical cost – actual or estimated

Residual value

Useful and remaining life

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The Concepts

Historical Cost

Less Depreciation

Less Write Downs

Equals Net Book Value

Less Residual Values

Equals Remaining Cost to be Depreciated

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Straight Line Depreciation

Based on useful life

Cost $10,000

Useful Life 10 years

Residual Value $2,000

Amount to be Depreciated - $8,000

Depreciation - $800 per year

Equal depreciation each year

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Maximum Recommended Useful Life

Parking Lot Gravel – 15 years Asphalt – 25 years

Fences – 20 years

Playground Structures – 15 years

Outdoor Lighting – 20 years

Buildings - Frame – 50 years

Light Duty Vehicles – 10 years

Food Services – 10 years

Roads – ACP hot mix – 30 years Gravel – 15 years Street Lights – 30 years

Water System Distribution Mains – 75

years Plant Structures – 45 years Treatment Equip. – 45 years

Office Equipment – 20 Years

Computers Hardware – 5 years Software – 10 years

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Declining Balance Depreciation

Based on percentage e.g. 30%

Cost $10,000

Depreciation in first year $3,000

Net Book Value at end of first year - $7,000

Depreciation in second year - $2,100

Net Book Value at end of second year - $4,900

More depreciation early vs. later

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The Result

You have a list of significant assets that actually exist in your park

You have reasonable historical costs for each asset

You have an idea of how long each of those assets will be useful

You have an estimate of when major assets will require major repairs or replacement

You can make good decisions based on accurate information

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