1. tangible capital assets: evaluation and depreciation bob scott, b. comm., cma 542 christopher...
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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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