Tangible Capital AssetsAlberta Regional GFOA Workshops Series Two

January 2008

2

Workshop Overview

Provincial and local updates Capital policy Impact on budgets and financial reports Transition Examples 2007 Note Q & A/small groups

3

TCA Project Update – Provincial

Infrastructure valuation manual Bridge inventory & valuation Balanced budget legislation Financial reporting & budgets Position papers

4

Bridge Inventory & Valuation

Access AIT bridge information Bridge files

Inventory Data Value Accumulated amortization

Audit trail

5

Guideline Amendments

Capitalization thresholds Valuation date for counties Policy guideline - Amortization start and

end date

6

Position Papers – Priority One

Government partnerships Undeveloped road allowances and rights of

way Networks/components – materiality,

valuation Biological assets Grouping and pooling Contributed assets

7

Position Papers – Priority Two

Multiple topics Gravel pits Infrastructure with excess capacity and partial

retirements Land leases Provincial $1 transfers Fully depreciated assets still in use Municipal reserves

8

Position Papers – Priority Two (cont)

Multiple topics Treatment of ‘sweat’ equity Tax sale properties acquired by municipality ‘Construction in progress’ Useful life and liability relationship Link to full cost recovery requirement by

Environment

9

Position Papers – Priority Three

Implementation accounting entries

10

TCA Project Update - Locally

What is your project status?

11

Presentation

Accounting

Write-downs

Disposals

Amortization

Segmentation

Aggregation

Thresholds

Principles

Scope

Policy

Capital Policy Framework

12

Capital Policy

Authority, purpose and scope Definition & classification of assets Recording and valuing assets Amortization methods and rates

13

Capital Policy (cont)

Reviews and write-downs Maintaining records Asset disposal Financial system, asset recording system &

asset management system Financial reporting and budgets

14

TCA Impact on Financial Statements & Budgets

Focus on TCA impact Financial reporting changes

15

General Impact of Recording TCA

Brings a non-cash dimension to financial reporting and budgeting

Full Accrual Accounting

This change does not require a change in behaviour but it may cause you to change

because there will be more information available.

16

Impacts at Transition and Ongoing

Amount of TCA will probably increase. Total TCA will be reduced by ‘accumulated

amortization’. Higher emphasis on Statement of Cash

Flow.

17

Impacts at Transition and Ongoing

Statement of Operations TCA purchases not included Capital grants included Non-cash annual amortization expense Gain/loss on disposal of TCA included Write-downs expensed

18

What Will be the Impact to our Municipality?Each municipality will be different; some

factors determining impact are: Age of TCA

Net value of unrecorded TCA Accumulated amortization of recorded TCA

Write-down of recorded TCA Assets funded by senior government and

donated assets.

19

Should the budget mirror the financial statements? Recommend that amortization expense be

included in the budget. If not, PSAB requires a link between the

budget and financial statements be provided.

20

Statement of Financial Position – Current ViewAs at December 31Financial Assets

Cash and investments $ 480,000

Accounts receivable 104,000

Inventory for resale 155,000

739,000

Physical Assets

Inventory for consumption 5,000

Capital assets 14,003,000

14,008,000

Total Assets 14,747,000

Liabilities

Accounts payable 264,000

Deferred revenue 56,000

Long term debt 2,900,000

3,220,000

Municipal Equity

Operating fund 372,000

Capital fund 42,000

Equity in capital assets 11,113,000

11,527,000

Total Liabilities & Municipal Equity $ 14,747,000

21

Statement of Financial Position – New ViewAs at December 31

Financial Assets

Cash and investments $ 480,000

Accounts receivable 104,000

Inventory for resale 155,000

739,000

Liabilities

Accounts payable 264,000

Deferred revenue 56,000

Long term debt 2,900,000

3,220,000

Net Debt (2,481,000)

Non-financial Assets

Inventory for consumption 5,000

Tangible capital assets 14,003,000

14,008,000

Accumulated Surplus $ 11,527,000

22

Statement of Financial Activities/OperationsAs at December 31

Budget Current New

Revenue

Net municipal taxes $ 1,430,000 $ 1,430,000 $ 1,430,000

Capital grants 200,000 200,000 200,000

Capital debt issued 300,000

Other revenue 1,014,000 1,014,000 1,014,000

2,944,000 2,644,000 2,644,000

Expenditures

Operating 2,151,000 2,151,000 2,151,000

Capital purchases 693,000 693,000

Capital debt repayment 100,000

Amortization of TCA     225,000

2,944,000 2,844,000 2,376,000

Excess (Deficiency) 0 (200,000) 268,000

Capital debt issued 300,000

Capital debt repaid   (100,000)  

Change in Fund Balances $ 0 $ 0 $ 268,000

23

Current Balanced Budget Legislation Cannot budget more expenditures than

anticipated revenues On a 3 year cumulative basis, actual

revenue = or be > than expenditures (Sec 244)

Revenue includes transfers from accumulated surplus

Cash basis approach Operating and capital funds referenced

24

Impact of Accounting Standard ChangesTCA Requirement (PS 3150) TCA to be amortized over useful life. Annual amortization (non-cash) to be

expensed; may result in annual deficiencies. CICA requirement does not mandate funding

amortization.

25

Impact of Accounting Standard ChangesFinancial Reporting (PS 1000, 1100, 1200) One single statement of operations Annual budget replaces operating & capital budgets Capital purchases/proceeds & debt

proceeds/retirements are not included in ‘Statement of Operations’

‘Accumulated surplus’ is one amount including ‘Equity in TCA’

Focus on financial position (net assets/net debt)

26

Proposed Amendments to Legislation and Future Review Transitional Amendment

Back out amortization expense to comply with Section 244

Future Amendments Replace references to operating & capital

funds/budgets with ‘annual budget’ Consider redefining ‘deficiency’

Further Review Measures of municipal financial performance

including debt limits

27

Recording an Existing AssetExampleAn Arena built in 1940 has a 2006 appraisal cost of $10M and a land value of $5M. Component breakdown is as follows:

Description % of cost Useful Life Remaining Useful Life

Building Envelope 50% 60 years 0 years

Roof 10% 20 years 2 years

Mechanical 10% 10 years 8 years

Interior Fit – outs 20% 10 years 2 years (includes ice sheet)

Exterior Fit – outs 10% 25 years 20 years

There is no salvage value.

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Discount Factor and Deflated Cost

Discount Factor

Index for in-service year/index for current year

Deflated Cost

Current cost * Discount Factor

Example

1989 Discount Factor: 70.9/112.3 = 0.631

Roof deflated cost: $1M * 0.631 = $631,000

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Discount Factors

Discount Factors for Example

1940 0.071 (8.0/112.3)

1989 0.631 (70.9/112.3)

1999 0.814 (91.4/112.3)

2002 0.890 (100.0/112.3)

2005 0.963 (108.1/112.3)

2006 1.000 (112.3/112.3)

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Inventory/Valuation

Item

Number

Item

Description

Replacement Reproduction or Appraisal

Const

Year

Useful Life in Years

Discount Factor

Salvage Value

CalculatedHistorical

Cost

1 Land $5M 1940 0.071 $0.36M

2 Building Envelope

$5M 1940 60 0.071 $0 $0.36M

3 Roof $1M 1989 20 0.631 $0 $0.63M

4 Mechanical $1M 2005 10 0.963 $0 $0.96M

5 Interior Fit – outs

$2M 1999 10 0.814 $0 $1.63M

6 Exterior Fit – outs

$1M 2002 25 0.890 $0 $0.89M

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Amortization

Item

Number

Item

Description

Historical

Cost

Age

(Yrs)

Useful Life in Years

Amortization Rate

(S/L)Amortization

1 Land $0.36M 67

2 Building Envelope

$0.36M 67 60 * 60/60 $0.36M

3 Roof $0.63M 18 20 * 18/20 $0.57M

4 Mechanical $0.96M 2 10 * 2/10 $0.19M

5 Interior Fit – outs

$1.63M 8 10 * 8/10 $1.30M

6 Exterior Fit – outs

$0.89M 5 25 * 5/25 $0.18M

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Qualitative Considerations

What threshold(s) to use Thresholds in ‘Toolkit’ Cumulative?

Useful life considerations Asset age exceeds useful life

33

Qualitative Considerations (cont)

Discount Factor Used CPI Other

Supporting Information Methodology Valuation Useful Life

34

Audit Support Third Party Evidence

Invoice Qualified Estimator

Industry Standards CPI Published lists Internally developed

35

Audit Support (cont)

Documented Methodology Consistent with methodology used by

qualified third party Sound industry practice

Reasonableness test

36

Transition Process Develop TCA inventory and register information Record information in TCA register Document audit trail Determine accumulated amortization prior to

implementation year Adjust General Ledger to implementation year

opening balances Link TCA register to GL in implementation year

(when all TCA are recorded) Record 2009 TCA transactions under new TCA

rules and report in new reporting format

37

Transitional Impact

Significant amendment to the financial statements in the first year of reporting due to:

Adding existing unrecorded TCA Deducting the recorded amount for TCA which no

longer exist. Deducting the recorded amount for TCA having

an historical cost below the capitalization threshold.

Reporting the net value of the TCA total cost; deduct accumulated amortization.

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Accumulated Amortization

Identified by asset class in notes to financial statements.

Amount prior to first year of reporting treated as a prior years’ adjustment.

Annual amortization on the revised TCA expensed in year of implementation for that specific year.

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Transition Accounting EntriesNote: Journal entries are always balanced.

Adjust Opening Balances of GL

a. Reduce the existing TCA account balances to zeroCR: Tangible capital assets

DR: Capital debt

DR: Equity in TCA – Prior period adjustment

b. Record the updated TCA valuesDR: Tangible capital assets (historical cost)

CR: Accumulated amortization

CR: Capital debt

CR: Equity in TCA – Prior period adjustment

40

Transition Accounting Entry ExampleAssumptions & Data Implement in 2009 GL accounts December 31, 2008:

TCA $10,000

Capital debt $2,000

Equity in TCA $8,000 TCA data at implementation

TCA historical cost $50,000

Accumulated amortization $30,000

41

Transition Accounting Entry Example (cont)a. Reduce existing TCA account balances

to zero:

Dr Cr

TCA $10,000

Capital debt $2,000

Equity in TCA $8,000

42

Transition Accounting Entry Example (cont)b. Record updated TCA inventory values:

Dr Cr

TCA $50,000

Accumulated amortization $30,000

Capital debt $2,000

Equity in TCA $18,000

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Transition Accounting Entry Example (cont) The change in equity will be treated as a

‘prior period restatement/adjustment’ and referenced in the notes to the financial statements.

If possible, record 2008 amortization in expense accounts for comparative statement purposes.

Retroactive application – expected but not mandatory (CICA guide, pages 34 & 35)

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‘Municipal Equity’ Terminology

Current Terms (Sampleford) Fund Balances

Operating Fund Capital Fund Reserve Fund

Equity in Capital Assets

New Term (used in examples) Accumulated Surplus

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Purchase to RetirementEquipment – Fire truck (pumper)Information or Decisions Required

Actual cost $300,000Useful life 12 yearsAmortization method Straight lineSalvage value $60,000Annual amortization $20,000(assume ½ year rule for purchase and disposal years)

1st year $10,000 (50%)TCA asset register Major class Machinery & Equipment

Minor class Fire EquipmentSub class Pumper truck

46

Purchase EntriesAssume that there are links between General

Ledger/Accounts Payable/TCA.

DR TCA asset $300,000

CR Cash/debt $300,000 No impact on Accumulated Surplus; there

may be internal transfers between Equity in TCA and Reserves.

No record in Statement of Operations Affects Statement of Financial Position

47

Amortization Expense Annual entry:DR Fire department – equipment amortization expenseCR Accumulated amortization – Machinery &

Equipment(1st year - $10,000, remaining years - $20,000, disposal year if year 13 - $10,000)

Annual closing entryDR Accumulated SurplusCR Fire department – equipment amortization expenseNote: These entries demonstrate what will normally be

done automatically by your financial system.

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Impact on Fire Department BudgetIf funds are normally collected annually for future

purchases, i.e. transfer to capital: amortization would be funded in the Statement of

Operations; move budget from ‘transfer to capital’ to amortization

internal financial records would need to identify these funds

the department bottom line would be breakeven if the amount annually put away equalled the amortization.

49

Impact on Fire Department BudgetIf debt is normally used:

the fire department budget would incur an annual deficit of $20,000

cash would still need to be available in the organization to pay the debt which would be budgeted with no expense. If debt retirement allocated to the fire department, then

offset the deficit resulting from the amortization expense.

50

Pumper Fire Truck Information at the end of Year 12Cost $300,000

Accumulated amortization $230,000

Net book value $ 70,000

Assume sold in year 13

Amortization entry in year 13 (50/50 rule)

DR Fire Dept – Equipment amortization expense $10,000

CR Accum. Amortization – M & E $10,000

51

Sale & Disposal Entries in Year 13Sold for $75,000.DR Cash $ 75,000DR Accumulated amortization $240,000CR TCA asset $300,000CR Profit on disposal of TCA $ 15,000Annual Surplus and Accumulated Surplus will

increase $15,000.(TCA ($300,000) less Accum. Amortization

($240,000) less Cash ($75,000) results in a credit of $15,000 to Accumulated Surplus.

52

Example - Replacement of a ComponentBuildingSituation InformationBuilding originally recorded at $5 M with a

useful life of 40 years.

Roof needs to be replaced in 2009: The roof is fully amortized. The life of the roof was 20 years. Replacement cost is $1.1 M. Roof is 14% of the total building cost.

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Replacement Entries

DR Accumulated amortization $ 350,000

DR Loss on disposal of roof $ 350,000

CR TCA – Building $ 700,000

DR TCA – Building – Roof $1,100,000

CR Cash/Debt $1,100,000

Loss on Statement of Operations

Decrease in Accumulated Surplus

54

2009 Amortization Entries using 50% rule

Old roof: $700,000/40 * 50% $ 8,750

New roof: $1,100,000/20*50%$27,500

Total 2009 amortization expense $36,250

2009 Accumulated amortization$27,500

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Impact of Amortization on Accumulated Surplus

Decrease if amortization expense is greater than roof related revenues

Remain unchanged if amortization is funded. Increase if funds greater than annual

amortization are put away for future roof replacement.

Statement of Operations will reflect the changes in Accumulated Surplus in the annual deficit/surplus.

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Issues to Consider

What are the audit issues if the roof is expensed? Is this cost material so that it will need to be capitalized?

Is it better to record the cost of the major components at the time of initially recording the asset?

57

How Are Networks Determined?

Are the TCA in the proposed network similar? How is age determined? How will the value be established? Should the networks be determined by

geographic location?

58

Example – Network to SegmentEngineered Structure – Road System Situation InformationThe municipality has 20 km of paved roads. They have been recorded as networks; a separate network each for the asphalt, subsurface and right of way. The municipality plans to gradually segment each network when rehabilitation work is done.

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Paved Road Information

Historical Cost Useful Annual Replace Average Accumulated

Description Total per km Life Amort. Cost Age Amortization

Years per km Total per km

Asphalt 4 M 200,000 15 13,333 250,000 10 2,666,667 133,333

Subsurface 2.5 M 125,000 40 3,125 850,000 35 2,187,500 109,375

Right of way 1 M 50,000 0 0 0

60

Replace 2 km of Asphalt

Replacement cost is $250,000/km Assume component is fully amortized when

replaced. Will set up a separate asset or multiple

assets for the two km of asphalt.

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Replacement Entries

Remove asphalt component from TCA records

DR Accumulated amortization $400,000

(Asphalt – 2 km * 200,000 historical cost)

CR TCA – Engineered Structures – Roads - Asphalt $400,000

62

New TCA Records

Create new TCA records in TCA register to provide more detailed information

Segments – geographical location and distance established by policy (for example, by block or km)

63

Impact on TCA Network Records Since the asphalt network is the only network

affected, the other networks will not be affected. The other networks may be segmented in the

same manner as the asphalt network. If the asphalt, subsurface and right of way were

one network, a new asset should be created for the subsurface portion for this specific segment with TCA and accumulated amortization adjustments made to the subsurface network.

64

Discussion Questions

When networks are used, what methods can be used to determine the average life of the network and the accumulated amortization?

What criteria should be used to determine the best method?

What is the best method?

65

Reporting RequirementsPrior to Implementation (PS 3150.45) Report according to PSG-7 during the period

of transition.

PSG-7 TCA of Local Governments (Toolkit, page 55) Disclose information required for asset classes for

which municipality has information. Effective January 1, 2007

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2009 (PS 3150.40-42)

Disclose for each major category of TCA and in total:

Beginning and end of periodCost, accumulated amortization, net carrying amount

For the periodAdditions, disposals, write-downs, amortization

Amortization method, period/rate

67

2009 (PS 3150.40-42) (cont)

Net book value of TCA not amortized (not in service, under construction)

Nature & amount of contributed TCA received during period

Nature & use of TCA recognized at nominal value

Nature of works of art & historical treasures Amount of interest capitalized in the period

68

2007 Financial Statement NoteSection 6, TCA Implementation Toolkit

Subsection of ‘Significant Accounting Policies’ note Narrative provides authority, background and

progress report Table provides the revised TCA information by

major class Note: This table will not link to the TCA amount in Statement of Financial Position.

TCA GL accounts are not revised until implementation.

69

2007 Financial Statement Note Examplei. Narrative

Assets already amortized noting amortization method.

Assets not amortized if some are amortized. Assets classes completely updated. Asset classes still requiring to be completed by

December 31, 2008 (2009) Assets disclosed at nominal value Statement regarding capitalizing interest

(municipality policy)

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2007 Financial Statement Note Example (cont)ii. List of TCA Classes

State that amortization expense not recorded and project the date when it will be recorded.

List major classes and minor Engineered Structure classes.

Provide range of useful life in years for each class reported.

State method of amortization

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2007 Financial Statement Note Example (cont)iii. Table of Financial Information

Table for current year Table for previous year only if TCA project was

started in previous year. Beginning year amount to be zero in year

respective TCA class is completed. Amount of amortization in financial statements in

situations where there has been amortization already in place.

Value of assets not amortized because removed from service

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2007 Financial Statement Note Example (cont)

Cost -

Beginning

of Year Additions

Disposal

s

Write-

down

s

Cost -

End of

Year

Amortization

in Year

Accumulated

Amortization NBV

Land 0 250,000 0 0 250,000 0 0 250,000

Land Improvements

Buildings

Engineered Structures

Machinery & Equipment

Vehicles 0 125,000 0 0 125,000 93,750 93,750 31,250

               

Sub-total and Total 0 375,000 0 0 375,000 93,750 93,750 281,250

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Discussion Question

How will accumulated amortization be tracked for asset classes completed prior to implementation?

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Note for Prior Period Adjustments Restated to comply with PS 3150 Adjustments to TCA and Accumulated

Surplus Adjust opening 2008 if retroactive If not retroactive, adjust opening 2009

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Note for Prior Period Adjustments Add the net amount for

Assets capitalized but previously expensed Contributed assets not recorded Disposal of assets Write-down of assets Assets capitalized but below threshold

Less Increase in amortization expense

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It’s Your Turn!