chapter 7granof-5e1 chapter 7 capital assets and investments in marketable securities

Chapter 7 Granof-5e 1

Chapter 7

Capital Assets and Investments in Marketable Securities


Learning Objectives

Accounting for GENERAL CAPTIAL ASSETS

Accounting for DONATED ASSETSTrade-InsCollectibles

GASB’s controversy on Infrastructure Assets

Asset Impairments Investments in Marketable Securities


Associated with the government as a whole Non financial in character. Distinguished from other capital assets that are

specifically associated with activities reported in proprietary and fiduciary funds.

Examples: The City of Austin defines capital assets as assets with an initial individual cost of $1,000 or more and an estimated useful life of greater than one year. The City of Houston defines capital assets as assets with an initial cost of more than $5,000 (amount not rounded) and an estimated useful life in excess of four years.

General Capital Assets


Land Buildings Improvements other than Buildings Machinery and Equipment Construction in Progress Infrastructure (e.g., roads, streets, bridges) Intangible assets (GASB 51). “Accounting and

Financial Reporting for Intangible Assets,” (2007).

Common Classifications of GCAs


Acquisition: Purchase, Construction, Contributed/Donated (DCA), Annexed, Capital Leases, Foreclosure, Eminent domain, Escheat

Financed:-Tax-supported bonds -Grants from other governmental units (e.g., Federal

or state grants) -Transfers from other funds-Special assessment bonds or taxes -Capital leases

Acquisition and Common Financing Sources for GCAs & DCAs


Important Recommendation for GCAs & DCAs

If funds received from governmental units, individuals, or organizations is restricted for the purchase or construction of specified capital assets – it is recommended that a Capital Projects Fund be used.


Government-wide Statements: Capitalized in the governmental activities

column Depreciated

Fund Statements: Full Cost debited to Expenditures in the

appropriate governmental fund—when the assets are acquired.

Accounting for GCAs


Accounting for GCAs - ExampleExample: The Sample city purchased officeequipment for the Mayor’s office and paid $50,000cash from the General Fund.

General Fund: Dr. Cr. Expenditures-Capital Outlay $50,000

Cash 50,000

Gov’t –wide (Gov’tal Act.)*:Equipment $50,000 Net Assets, Invested in Cap Assets 50,000

*Note: This entry is not made on the books. It is only a conversion at eoy


Placing a value (assigning costs) on GCAs

For Purchased Assets Follow Cost Principle (subject to materiality

threshold)

Invoice cost or historical cost

All other necessary and reasonable costs incurred to put an asset into use (less cash or other discounts and financing charges)

For constructed assets: Direct labor and materials + overhead + architect

fees + insurance premiums Capitalize interest on constructed assets per

GASB Std. # 34


Placing Value (assigning costs) on GCAs(Miscellaneous items)

Initially unrecorded assets (i.e. “discovered assets” or a new inventory of assets)

--Record at estimated cost

Foreclosures

1) Record at aggregate of accumulated taxes, interest, penalties, legal cost, OR

2)FMV whichever is lower

Trade-Ins

--Record at FMV of the new asset


Placing Value (assigning costs) on DCAs

Donated assets: reported at estimated fair market value. Exhaustible assets are depreciated over the remaining useful lives in their government-wide statements.


Infrastructure Infrastructure is:

o Government’s capital assets o Immovable, stationary in natureo Preserved for a longer period. Ex: roads, sidewalks, bridges,

tunnels, drainage systems, water and sewer systems, dams, lighting systems etc.

GASB 34: requires that infrastructure be accounted in the same manner as the capital assets.*o *Exception: They need not be depreciated if the government

can demonstrate that they are being maintained/preserved at a specified condition level.

o To avoid recording depreciation, governments mustperform condition assessments at least every three years;have an up-to-date inventory of eligible assetsestimate the amount to maintain and preserve the eligible

assets.


TWO Approaches for Infrastructure Accounting

Traditional approach: Capitalize & Depreciate

Modified approach: All expenditures incurred to maintain and

preserve those assets should be expensed. Additions and improvements should be

capitalized. Assessed condition of the assets and the

basis of that assessment must be disclosed.


Criticisms of Statement No. 34's Approach to Infrastructure

No indication that data on the historical cost of infrastructure would be used.

No need to capitalize those assets because they cannot be stolen or misused.

Comparison between measure of output (performance) and monetary value assigned to the assets is not meaningful.

Infrastructure assets seldom have alternative uses.

Past construction costs are of no significance.


Accounting for Collectibles GASB No. 34 does not require capitalization

of artworks if they are:

1) held for public exhibition or research AND

2) protected and preserved AND

3) the proceeds from sale of the collectibles are used to acquire other collectibles.

Art and collectibles that do not meet these conditions must be capitalized.

Capitalized--Revenue upon receipt of gifts should be recognized.


Accounting for Impaired AssetsGAAP: GASB Std. # 42 “Accounting and Financial

Reporting for Impairment of Capital Assets and for Insurance Recoveries.”

Assets that have declined in their service utility significantly and unexpectedly are considered impaired.

If impaired: a portion of the asset’s historical cost representing the impairment must be written off.

Impairment amount measured by 3 methods:-Restoration cost approach-Service Units approach-Deflated depreciated replacement cost approach.


Marketable Securities - OverviewGAAP is GASB Stmt #31 Accounting and Financial

Reporting for Certain Investments and for External Investment Pools.

1) General Investment Governments either directly invest in stocks or bonds or small

governments may participate in investment pools maintained by other governments.

2) Derivatives Governments typically engage in derivative transactions not to

speculate but, rather, to reduce the overall investment risk.3) Repurchase Agreement & Reverse Repurchase Agreement

Repurchase agreement (Repo): short-term investment in which investor transfers cash in exchange for securities and the cash + plus interest is repaid in exchange for the same securities.

Reverse Repurchase agreement (Reverse Repo):

Here, government is the borrower rather than the investor.


1) General InvestmentsExample-FootnoteThe City of Austin, Tx in its CAFR for FY 2008

had the following footnote on investments.• Investments – Certain investments are

required to be reported at fair value, based on quoted market prices. Realized gains or losses resulting from the sale of investments are determined by the specific cost of the securities sold. The City carries all of its investments in U.S. government and agency debt securities and money market mutual funds at fair value as of September 30, 2008. Investments in local government investment pools are carried at amortized cost, which approximates fair value.


Disclosure Requirements Governments should organize disclosures

by investment type Governments should disclose their

vulnerability to specific types of risks oCredit risksoConcentration of credit riskso Interest rate riskso Foreign currency risks


City of Houston: Notes on InvestmentsThese funds are managed internally by City personnel. The

investments listed below do not include the City's three pension funds, which are described elsewhere in this report.

• 1. General Investment Pool 960The General Investment Pool consists of all working capital, construction and debt service funds which are not subject to yield restriction under IRS arbitrage regulations. The funds of the City's enterprise systems, as well as the general fund are commingled in this pool in order to gain operational efficiency. Approximately 98.5% of the City's total investable funds are contained in this portfolio.


2) Derivatives GAAP is GASB Statement No. 53, Accounting and

Financial Reporting for Derivative Instruments which addresses the recognition, measurement, and disclosure of information regarding derivativeinstruments entered into by state and local governments.

Governments must explain the nature of derivative transactions includingo Reasons to enter o Significant terms of the transactionso Vulnerability to specific types of risks

Credit risksConcentration of credit risksInterest rate risksForeign currency risks


Definitions Custodial Credit Risk: Investments are exposed to

custodial credit risk if the investments are uninsured, are not registered in the County’s name and are held by the counterparty.

Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations.

Concentration of credit risk is the risk of loss attributed to the magnitude of an investment in a single issuer.

Interest Rate Risk: All investments carry the risk that changes in market interest rates will adversely affect the fair value of an investment.

Foreign Currency Risk: Foreign currency risk is the risk that fluctuations in the exchange rate will adversely affect the value of investments denominated in a currency other than the US dollar.


3) Repo & Reverse RepoIllustrative example is on the next

ppt. slide


Summary Governments report general capital assets as expenditures when

they construct or acquire them in their governmental fund statements which are accounted for on a modified accrual basis. Thus governments maintain the “off the balance sheet” record of these assets.

GASB Std. # 34 requires that in Government-wide statements, governments capitalize capital assets and depreciate them over their economic lives.

GASB Std. # 34 mandates that governments account for their infrastructure assets just as they do other capital assets. However governments are not required to depreciate infrastructure assets if they preserve them at a specified “condition level.”

Investments made by governments are of concern because of the substantial risk that investors can incur through default, declines in value and even fraud.

GASB through its standards requires disclosure of a wide range of investment information.

chapter 7granof-5e1 chapter 7 capital assets and investments in marketable securities

Documents

constructed assets

unrecorded assets

net assets

cap assets

general capital assets

new inventory of assets

granof5e1 chapter

bridges intangible assets