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CAPITAL ASSETS

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This presentation will address the maintenance of capital asset records for ... provided these preparations have an indefinite useful life, like the land itself. ... – PowerPoint PPT presentation

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Title: CAPITAL ASSETS


1
CAPITAL ASSETS
  • deene.dayton_at_state.sd.us
  • 773-5932

2
Intro
  • GFOA has released a new guide to provide
    direction in accounting for capital assets
  • See GFOA.org

3
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

4
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

5
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.

6
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)

7
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)

8
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.

9
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

10
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.

11
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

12
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

13
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)

14
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

15
Assets Held for Resale
  • For districts that have construction programs,
    assets are held for resale and should be reported
    on governmental fund f/ss 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.

16
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)

17
Capitalizable Costs
  • General and administrative costs should not be
    capitalizedmanagement, accounting, HR
  • Costs relating directly to a purchase should be
    capitalized.salaries of FTE working on the site

18
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

19
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

20
Valuation
  • The purpose of capitalization is not to show how
    much an asset is worthbut rather to defer
    recognizing as expense of the current period a
    cost incurred for the benefit of future periods.

21
Valuation
  • Historical costs or an estimate thereof should be
    used for valuing capital assets
  • Research vouchers, minutes, bids
  • Use of CPI tables

22
Valuation
  • Bundled assets should have their values
    splitwhen land and a building are purchased in
    one transaction

23
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

24
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

25
Depreciation
  • Three types of capital assets that are not
    depreciated
  • Land
  • Intangibles (those with indefinite useful lives)
  • Art, historical treasures (B.M.s computer)

26
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.

27
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

28
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)

29
Depreciation
  • Many governments ignore the use of salvage
    values. Judgment should be applied in the
    application of salvage value to each asset.

30
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.

31
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.

32
Threshold
  • The key to establishing a capitalization
    threshold ought to be financial reporting. The
    proper objective of capitalization is financial
    reporting.not accountability.

33
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.

34
Threshold
  • Cap thresholds may be set for different
    classes/groups of capital assets. Vehicles,
    buildings, food service, improvements other than
    buildings, etc..

35
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)

36
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

37
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/ss
  • Normally this account is Cap Assets less Accum
    Depr less Cap related debt....however

38
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)

39
Financial Reporting
  • When deducting long-term debtmake sure the
    district is not deducting long-term debt incurred
    for non-capital purposes such as, OPEB,
    compensated absences and early retirement.

40
Disclosures
  • Capitalization threshold(s)
  • Estimated useful lives
  • Method used to compute depreciation (straight
    line)

41
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

42
Disposals
  • Immaterial gains and losses are reported as an
    other general revenue

43
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

44
Disposals
  • In enterprise fund f/ss, both gains and losses
    are classified as nonoperating revenues and
    expenses

45
Disposals
  • On rare occasion significant gains and losses may
    be reported as a special item (within control) or
    an extraordinary item (not within control)
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