Tangible Capital Assets Alberta Regional GFOA Workshops

1
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
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 31
21
Statement of Financial Position New ViewAs at
December 31
22
Statement of Financial Activities/OperationsAs
at December 31
23
Current Balanced Budget Legislation

• Cannot budget more expenditures than anticipated
  revenues
• On a 3 year cumulative basis, actual revenue or
  be gt 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 AssetExample
An 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.
28
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

29
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)

30
Inventory/Valuation
31
Amortization
32
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.

38
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.

39
Transition Accounting Entries

• Note Journal entries are always balanced.
• Adjust Opening Balances of GL
• Reduce the existing TCA account balances to zero
• CR Tangible capital assets
• DR Capital debt
• DR Equity in TCA Prior period adjustment
• Record the updated TCA values
• DR 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)

• 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)

• Record updated TCA inventory values
• Dr Cr
• TCA 50,000
• Accumulated amortization 30,000
• Capital debt 2,000
• Equity in TCA 18,000

43
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)

44
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

45
Purchase to RetirementEquipment Fire truck
(pumper)Information or Decisions Required

• Actual cost 300,000
• Useful life 12 years
• Amortization method Straight line
• Salvage value 60,000
• Annual 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 Equipment
• Sub class Pumper truck

46
Purchase Entries

• Assume 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
  expense
• CR Accumulated amortization Machinery
  Equipment
• (1st year - 10,000, remaining years - 20,000,
  disposal year if year 13 - 10,000)
• Annual closing entry
• DR Accumulated Surplus
• CR Fire department equipment amortization
  expense
• Note These entries demonstrate what will
  normally be done automatically by your financial
  system.

48
Impact on Fire Department Budget

• If 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 Budget

• If 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
12

• Cost 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 13

• Sold for 75,000.
• DR Cash 75,000
• DR Accumulated amortization 240,000
• CR TCA asset 300,000
• CR Profit on disposal of TCA 15,000
• Annual 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 ComponentBuildingSitu
ation Information

• Building 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.

53
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 1,100,000/2050 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.

56
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 Information

• The 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.

59
Paved Road Information
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.

61
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

66
2009 (PS 3150.40-42)

• Disclose for each major category of TCA and in
  total
• Beginning and end of period
• Cost, accumulated amortization, net carrying
  amount
• For the period
• Additions, disposals, write-downs, amortization
• Amortization method, period/rate

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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 Note

• Section 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 Example

• i. 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

72
2007 Financial Statement Note Example (cont)
73
Discussion Question

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

74
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

75
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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• Its Your Turn!