sarah c. koser, cpa, cgfo, cpfo deputy director of finance the villages community development...

Accounting for Capital AssetsFGFOA Annual Conference

June 26, 2013

Sarah C. Koser, CPA, CGFO, CPFODeputy Director of FinanceThe Villages Community Development Districts

Capital Assets – Defined Basic Accounting Major Asset Classes◦ Including Intangible Assets

Capitalizable Costs Valuation of Capital Assets for Financial Reporting Purposes Financial Statement Presentation and Disclosure Policies Inventorying GFOA Recommended Practices Compliance with Florida Statutes◦ Disposals

Session Objectives

Capital Assets Defined

Includes all of the following with initial useful lives extending beyond a single reporting period:◦ Land◦ Improvements to land◦ Easements◦Buildings◦Building improvements◦Vehicles◦Machinery◦ Equipment◦Works of art and historical treasures◦ Infrastructure◦Other tangible or intangible assets

Capital Assets - Defined

Purpose of maintaining asset information by Management:◦ Control – Good Stewardship◦ Maintenance – Ensure assets are properly maintained◦ Replacement – Plan for retirement and replacement as needed◦ Insurance – Reliable information to properly insure◦ Cost recovery and rate setting – Proprietary funds ◦ Financial reporting – Follow GAAP

Reasons for failure of adequate capital asset management:◦ Inadequate scope – focus on some required elements but not all◦ Overburdening – Collecting unnecessary information◦ Inadequate system maintenance – Lack of resources necessary to

maintain system.

Capital Assets - Defined

Basic Accounting

Measurement Focus Matters!!!◦Governmental Funds – current resources Modified Accrual Basis of Accounting◦Proprietary Funds – economic resources Full Accrual Basis of Accounting

Basic Accounting

Example:◦Government purchases a piece of

equipment with a cost of $500,000 and an estimated useful life of 10 years.

Basic Accounting

Proprietary Fund Entries – Economic Resources Measurement Focus:

Acquisition:

Allocation to expense (depreciation) per period (year):

Basic Accounting

Debit CreditEquipment $500,000

Cash $500,000

Debit CreditDepreciation Expense $50,000

Accumulated Depreciation $50,000

Governmental Fund Entries – Current Financial Resources Measurement Focus:

Acquisition:

Basic Accounting

Debit CreditExpenditure – Capital Outlay – Equipment $500,000

Cash $500,000

Governmental Fund Entries – Current Financial Resources Measurement Focus:

For Government-Wide Financial Statements – Economic Resources Measurement Focus:

WORKSHEET ENTRY – ONLY!!!!

Basic Accounting

Debit CreditDepreciation Expense $50,000

Accumulated Depreciation $50,000

Capital Asset Reporting Requirements:

Basic Accounting

Funds in which Activity Reported

Reported in Fund Financial Statements?

Reported in Government-Wide

Financial Statements?Governmental funds No Yes

Proprietary funds Yes Yes

Fiduciary funds* Yes No

*Only pension trust funds typically will have any capital assets to report

Optional capitalization:◦ Older Infrastructure

Acquired prior to July 1, 1980 Smaller Governments – acquired prior to June 30, 2004

◦ Collections Works of Art Historical Treasures Similar Items

ENCOURAGED TO REPORT – but not required Criteria – have to meet all three:

Purpose is display or research Being adequately maintained Proceeds from sale of collection items must be applied to acquiring new items

◦ Immaterial Items Below governments capitalization threshold

Basic Accounting

Assets capitalized but not depreciated or amortized:◦ Assets with indefinite useful lives

Land Some intangibles – cannot “wear out” Works of art, historical treasures, and similar items Infrastructure (if government uses modified approach)

◦ Capital assets not yet providing service Construction in progress (tangible assets) Development in progress (intangible assets)

Basic Accounting

Which government should report assets when one government acquires for use by another?◦Ownership – critical criterion

Who holds title? Exception: Leased to another under Capital Lease.

◦ Example: County constructs a building Will be used by school district County will continue to own (holds title) COUNTY – will report on their financial statements

Basic Accounting

Which government should report assets when one government acquires for use by another? (Continued)

Assets acquired with Grant funds (sometimes)◦ Reversionary Interest – reverts to grantor should grantee wish

to dispose◦ Does not limit grantee’s right to “use and enjoy”◦ Grantee reports on Financial Statements

Basic Accounting

Which government should report assets when one government acquires for use by another?

When ownership cannot be established (absence of title):◦ Responsible for maintaining

Owner for Financial Statement purposes ONLY if ownership cannot be established

Basic Accounting

Major Asset Classes

Seven or more major classes:◦ Land – always separate from an associated asset:

Land under a building or road – report as land Include in cost of land initial preparation for intended use:

ONLY if preparations have indefinite useful life. Examples: Excavation Fill Grading Moving Power Lines

◦ Buildings Includes any improvements (betterments) Includes restoration from an impairment

Major Asset Classes

Seven or more major classes (continued):◦ Improvements other than buildings (land improvements)

Fences Retaining Walls Parking Lots Landscaping

◦ Furnishings and equipment (machinery and equipment) Vehicles Furnishings Library book collections

Major Asset Classes

Seven or more major classes (continued):◦ Infrastructure

Definition – “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.”

Examples: Roads Bridges Drainage retention areas Water and sewer systems Landfill

Major Asset Classes

Seven or more major classes (continued):◦ Infrastructure (continued)

Items of note: Cost of land associated – report as land Cost of buildings associated – report as buildings

Exception: Purely ancillary buildings Examples:

Rest area on turnpike Water pumping station in water system Garages associated with a highway system

Major Asset Classes

Seven or more major classes (continued):◦ Construction (or development) in progress

Not yet ready for service◦Other capital assets

Items not properly included in another class

Major Asset Classes

Capitalizable Costs

GAAP - Include any “ancillary charges necessary to place the asset into its intended location and condition for use”.

Challenges:◦ Acquisition Costs◦ Interest incurred during acquisition◦ Training◦ Improvements (betterments)

Capitalizable Costs

Acquisition Costs:◦ Examples of POTENTIAL costs:

Legal and title fees Closing costs Appraisal and Negotiation fees Surveying fees Land preparation costs Demolition costs Audit and accounting fees Transportation Charges

Capitalizable Costs

Acquisition Costs:◦Preconditions for capitalization:

Only if directly identifiable with a specific asset Example: Determine BEST location for a school – NOT

CAPITALIZABLE Example: Legal cost acquiring a specific property –

CAPITALIZABLE Only if incurred after acquisition of the related asset has

come to be considered probable (likely to occur) Example: Feasibility study – NOT CAPITALIZABLE

Capitalizable Costs

Acquisition Costs:◦ Internal Costs – Three Guidelines:

General and administrative costs NEVER capitalized (overhead) Costs directly related to the acquisition of a specific asset –

CAPITALIZE Example: Salary & wages of employee worked on specific

construction project (building, etc.) Costs clearly related to the acquisition of capital assets, but not to

specific projects - CAPITALIZE Example: Cost accounting, design, and other departments providing

services that are clearly related to projects. Allocate to individual projects

Capitalizable Costs

Acquisition Costs:◦ Internal Costs – Intangible asset costs:

GAAP: “no outlays incurred prior to meeting all of the following may be capitalized: The specific objective of the project has been determined; The nature of the service capacity to be provided has been determined; The feasibility of successfully completing the project has been

demonstrated; and The government has demonstrated that it 1) intends, 2) is able, and 3)

is making an effort to develop/complete the project.”

Capitalizable Costs


Additional guidance for internally generated computer software: Prohibits capitalization of costs of preliminary project stage.

Examples: Conceptual formulation Evaluation of alternatives Determination of existence of needed technology Final selection of alternatives for development

Capitalizable Costs


Additional guidance for internally generated computer software (continued): Costs during application development stage – Capitalize ***

Examples: Design of the chosen path Coding Installation to hardware Testing Data conversion ***Only if incurred subsequent to completion of preliminary project

stage***

Capitalizable Costs


Additional guidance for internally generated computer software (continued): Costs incurred post-implementation/operations stage – NEVER

CAPTIALIZE Examples:

Training Software Maintenance

Capitalizable Costs

Interest incurred during acquisition

Capitalizable Costs

Fund in Which Related Activity is Reported

Fund Financial Statements

Government-Wide Financial Statements

Governmental Funds Not applicable * Not capitalizedProprietary funds Capitalized CapitalizedFiduciary funds Capitalized Not applicable ^*Governmental funds do not report capital assets.

^ Fiduciary funds are not included in government-wide financial statements

Interest incurred during acquisition (continued)◦ Financed by tax-exempt – externally restricted debt◦Must be “externally restricted” (e.g., bond covenant) to the

acquisition of the qualified asset to qualify for “netting” Net interest expense against interest earnings on borrowing Begins at date of borrowing/ends when asset placed in service Example:

Borrows $1 million two months prior to start of construction Interest rate of 5% Reinvest unexpended at 2% for those two months

Capitalizable Costs

Interest expense $8,333 (i.e., $1 million x 5 percent x 2/12

Less: Interest revenue $3,333 (i.e., $1 million x 2 percent x 2/12

Net: Capitalizable interest $5,000

Interest incurred during acquisition (continued)◦ Financed by tax-exempt – externally restricted debt

(continued) Entry

Capitalizable Costs

Debit Credit

Construction in progress $5,000

Accrued interest receivable $3,333

Accrued interest payable $8,333

(To record interest accrued on capital borrowings, interest accrued on the reinvested proceeds, and the net amount capitalized)

Interest incurred during acquisition (continued)◦ Financed by tax-exempt (and non tax-exempt) debt – not

externally restricted Not offset by earnings Calculation:

Interest rate of borrowing Applied to the average accumulated expenditures during period

Capitalizable Costs

Interest incurred during acquisition (continued)◦ Financed by tax-exempt (and non tax-exempt) debt – not

externally restricted (continued) Example:

$1 million unrestricted capital improvement bonds (5 percent) Expenditures first year $500,000 Capitalized interest first year $25,000 ($500,000 X 5%)

Capitalizable Costs

Debit Credit

Construction in Progress $25,000

Interest expense $25,000


(To record interest accrued on outstanding debt and the portion capitalized as part of construction in progress

Interest incurred during acquisition (continued)◦ Financed by existing resources

If debt outstanding in fund, “recycled” debt No netting Weighted average rate of interest on outstanding debt to average

cumulated expenditures during period

Capitalizable Costs

Interest incurred during acquisition (continued)◦ Financed by existing resources (continued)

Example: Fund with two bond issues outstanding ($1 million at 5% and $1

million at 4%) First year accumulated expenditures $500,000

Capitalizable Costs


Capitalizable Costs

Outstanding Bond Issues Amount Rate Interest

Bond A $1,000,000 5.00% $50,000

Bond B $1,000,000 4.00% $40,000

Total $2,000,000 $90,000

(a) Total interest expense $90,000

(b) Total bonds outstanding $2,000,000

(c) Weighted average interest rate (a)/(b) 4.5%

(d) Average accumulated expenditures $500,000

(e) Capitalizable interest (c) x (d) $22,500


Entry

Capitalizable Costs

Debit Credit

Construction in Progress $22,500

Interest Expense $67,500


(To recognize interest accrued on outstanding debt and portion capitalized

Interest incurred during acquisition (continued)◦ Financed by capital grants restricted for acquisition of

qualified asset No interest is incurred by grantee Other interest in fund cannot be “recycled” No interest capitalized on any portion financed by grant

Capitalizable Costs

Interest incurred during acquisition (continued)◦Mixed financings

Multiple sources (i.e., tax-exempt bonds, capital grants, and existing resources)

Treat each source separately Follow each of prior examples

Capitalizable Costs

Training◦ Not capitalized – 2 reasons

Does not affect the location nor use Asset ready to be used – not if government is ready to use it

Cost should provide benefit throughout useful life Employee turnover

Capitalizable Costs

Improvements (betterments)◦ Two types of costs

Improvements (betterments) - Capitalize Provides additional value – either by:

Lengthening estimated useful life (reconstruct road with material that has longer useful life – concrete rather than asphalt) or:

Increasing assets ability to provide service (more effective or efficient) (widening a highway from two lanes to four)

Repairs and Maintenance – NOT capitalized Retains value – new roof on building

Capitalizable Costs

Valuation of Capital Assets

for FinancialReporting

Purposes

CCIITTRRUUSS CCOOUUNNTTYY FFLLOORRIIDDAA CCOOMMPPRREEHHEENNSSIIVVEE AANNNNUUAALL

FFIINNAANNCCIIAALL RREEPPOORRTT

FFIISSCCAALL YYEEAARR EENNDDEEDD SSEEPPTTEEMMBBEERR 3300,, 22001122

Initial Valuation◦ Assets purchased or constructed

Historical Cost Estimated historical cost

Standard costing – going price when acquired Normal costing (back trending) – current cost restated in acquisition-

year dollars. Assigning bundled costs to individual assets (building & land)

Work from known to unknown (if know price of land – subtract from total purchase price for cost of building)

Estimate fair value of each – express as ratio – apply to purchase price


Initial Valuation (continued)◦ Assets obtained through trade-ins

Total cost for new asset Example:

Vehicle traded – book value of $1,000 Paid cash of $24,000 for new vehicle (after trade) New vehicle value - $25,000 ($24,000 + $1,000)


Initial Valuation (continued)◦ Donated assets

GAAP – “estimated fair value at the time of acquisition plus ancillary charges, if any.”

“Buy” price – not “Sell” price Price at which the government could have “bought” NOT – price that it could be “Sold” for

If no regular market for donated asset: Cost paid by donor (if within reasonable period of time) Example: Developer donates road

Use developer’s costs if recent construction


Subsequent changes◦ Changes in market value – irrelevant◦ Reassigned to fund that does (not) capitalize interest

General rule – value of asset cannot change solely as result of being moved within the same financial reporting entity.

◦ Improvements (betterments) – direct adjustment◦ Retirement from service

Held for resale – write down to fair value Disposal – remove asset

◦ Impairments Deduct impairment loss and Add cost of restoration


Financial Statement

Presentation andDisclosure

Presentation◦ Statement of Net Assets/Balance Sheet (Government-wide)

Separate depreciable from non-depreciable Land – Construction-in-progress – non-depreciable Buildings – Infrastructure – Machinery & Equipment – depreciable

Separate line for each major class◦ Statement of Activities/Statement of revenues, expenses and

changes in net assets (equity) Depreciation expense – report by function (i.e., public safety,

transportation, etc.) Multi function – either in “General government” or separate line

(i.e., “unallocated depreciation expense”)

Financial Statement Presentation and Disclosure

Presentation◦ Governmental Fund Statements

Classified by “character” (i.e., capital outlay)◦ Reporting impairments (three ways)

Component of program cost Cost of doing business Report in function that uses asset

Extraordinary Item (unusual in nature AND Infrequent in occurrence) (Outside management control)

Special Item (Unusual in nature OR infrequent in occurrence) (Within the control of management)


Presentation◦ Reporting disposals

Immaterial gains and losses Can be direct adjustment to depreciation expense for period

Material gains and losses – Government-wide reporting Governmental activities

Gains – general revenues Losses – general government function line

Business-type activities Gains – general revenues Losses – program cost

Material gains and Losses – Enterprise fund statements Non-operating revenues and expenses


Presentation◦Movement within entity

Intra-entity sales Value cannot change as long as remains in same entity

Fund Statements – Governmental to Enterprise Governmental – no entry Enterprise – Credit capital contribution

Fund Statements – Enterprise to Governmental Governmental – no entry Enterprise – show as transfer out (note disclosure in transfers – why

one-sided)


Note Disclosure◦ Summary of Significant Accounting Policies (SSAP)

Disclose all policies including: Capitalization threshold Methodology for estimating historical cost Extent of infrastructure reporting for items exempt from mandatory

reporting Methodology used for calculating depreciation or amortization

expense (i.e., straight-line method) Estimated useful lives used for depreciating or amortizing capital

assets


Note Disclosure◦ Detailed Note Disclosure

Recorded value by major class Changes in recorded value by major class Accumulated depreciation by major class Changes in accumulated depreciation by major class

Separate depreciable from non-depreciable Gross – not net

Value of asset separate from depreciation (not net out) Changes separate (additions and deletions – not net out)


Note Disclosure◦ Detailed Note Disclosure (continued)

Depreciation expense by function◦ Required supplementary information

Management’s discussion and analysis Description of capital asset activity Information on modified approach

Infrastructure condition data (modified approach) Results of condition assessment Amounts needed and amounts spent to maintain and preserve

infrastructure


Statistical Section◦ Ratio of debt service to total noncapital expenditures

Need Capital Outlay to get total “non-capital” expenditures Reconciliation to government-wide from fund statement of

revenues, expenditures and changes in fund balance ◦Operating information concerning capital assets

Information concerning the volume, usage, or nature of capital assets. Examples:

Number of parks Number of patrol vehicles Number of library books


Policies

Setting policies – decisions:◦ Which items should be capitalized?◦ How should discrete components of larger assets be treated?◦ How should fair value be determined for donated capital assets?◦ What major asset classes should be used?◦ Which items should be depreciated or amortized and how?◦ How should control be maintained over items that were not

capitalized?◦ Which capital assets should be tagged?◦ How should disposals be handled?◦ How often should a physical inventory of capital assets be

performed?

Policies

Setting policies – decisions:◦Which items should be capitalized?

Infrastructure and collections Infrastructure prior to required date? Collections: Works of art, historical treasures, similar items?

Capitalization thresholds Single capitalization threshold or different for different major classes? What will the threshold(s) be? Applied to individual items in a group of similar items or to a group of

items in the aggregate?

Policies

Setting policies – decisions:◦ How should discrete components of larger assets be treated?

Will discrete components of capital assets with significantly shorter lives be treated as separate capital assets in their own right? If so, which ones?

If not, will the eventual replacement of a discrete component that is included as part of the cost of the larger asset be treated as a repair or as a disposal?

Policies

Setting policies – decisions:◦ How should fair value be determined for donated capital

assets? What methodology will be used to estimate fair value for donated

assets? Who will be making and documenting estimates of fair value?

◦What major asset classes should be used? What will the major classes be for capital assets? Which specific items will be reported in each?

Policies

Setting policies – decisions:◦Which items should be depreciated or amortized and how?

Will the government use the modified approach? For depreciated/amortized:

Will the useful lives of capital assets be estimated for individual assets or for major classes of assets?

What will be the basis for those estimates? How will the reasonableness of those estimates be evaluated on an

ongoing basis? What will be government’s policy be on estimated salvage value? What method will be used to calculate depreciation/amortization? Will depreciation be applied to individual items or groups of items? How will depreciation be applied to partial years?

Policies

Setting policies – decisions:◦ How should control be maintained over items that were not

capitalized? What criteria will be used to determine that a noncapitalized property

item poses a special risk to the government? How will departments ensure that there is proper control over such

items? How will the central accounting function ensure that departments are

meeting their responsibility in this regard?◦ Which capital assets should be tagged?

Which property items will be tagged? For which items will a unique identification number be necessary? Where will tags be placed on each type of property item? Who will be responsible for tagging?

Policies

Setting policies – decisions:◦ How should disposals be handled?

Who may authorize a disposal and in what circumstances? What procedures are to be followed to ensure that the

government receives maximum benefit from the disposal?◦ How often should a physical inventory of capital assets be

performed? How often will physical inventories of capital assets be

performed? Who will be responsible for performing the inventories?

Policies

Inventorying

Initial inventory◦ Responsibility and staffing

In-house staffing Outside staffing Combination of in-house and outside

◦ Design elements (Policies – last section)◦ Input forms

Inventorying

Initial inventory◦Work plan

“As of” date Staffing and workspace Timing Data collection Training Sequencing Use of existing data sources Source materials to be brought to the site by the inventory team

◦ Notification – notify departments in advance

Inventorying

Periodic inventories – Three essential elements1. The data in the accounting records are compared with actual

capital assets.2. An exception report is generated.3. The exception report is used to make any necessary

adjustments to the accounting records.

Inventorying

GFOA Recommended

Practices

Capitalization Thresholds Periodic Inventories Estimated Useful Lives Use of the Modified Approach Control over Noncapitalized Items

GFOA Recommended Practices

Capitalization Thresholds Approved February 24, 2006 Recommendation:◦ Capitalize only if useful life of at least two years ◦ Capitalization thresholds best applied to individual items◦ Never capitalization threshold of less than $5,000◦ Be aware of federal requirements on assets acquired with

federal grants.


Periodic Inventories Approved February 24, 2006 Recommendation:◦ Periodic inventory so all assets accounted for◦ No less than once every five years


Estimated Useful Lives Approved March 2, 2007 Recommendation:◦ Best source own past experience◦ Consider potential effects of these factors when looking at

experience of others: Quality (are the items of the same quality, i.e., asphalt/concrete) Application (i.e., residential street vs major thoroughfare) Environment (different climate)


Use of the Modified Approach Approved October 25, 2002


Control over Noncapitalized Items Approved October 11, 2005 Recommendation:◦ Control normally should occur at the departmental level.◦ Control responsibility should be assigned within each department.◦ Individuals responsible for controller capital-type items should prepare

and maintain a complete list of those items each year within the department.

◦ Departments should certify each year to the central accounting function (or other designated finance function) that updated lists of controlled capital-type items are on file and available for inspection.

◦ The central accounting function (or other designated finance function) should periodically verify the data on controlled capital-type items on file in each department.


Florida Statutes

Florida property rules:Florida Statutes ◦Chapter 274

Florida Administrative Code ◦69I-73

Florida Statutes

Florida Statutes How does Florida Statute differ from GASB

requirements?

◦ Florida Statute requirement: Assets with value of $1000 or more to be booked.

◦GASB: Government to set their own Capitalization Threshold

GFOA recommends that it is never less than $5,000. Higher thresholds for Infrastructure and Buildings – often

$50,000.

Florida Statutes Authorizing and Recording the Disposal of

Property 274.07◦Authority for the disposal of property shall

be recorded in the minutes of the governmental unit.

Florida Statutes

Florida Administrative Code - 69I-73.005Disposition of Property Methods of Disposition – ◦ Rules for disposition are provided in Sections 274.05, 274.06 and

274.07, F.S. ◦ Property which is not accounted for during an inventory is subject to

the rules regarding unaccounted for property in 69I-73.006, F.A.C. Required Information – Shall be recorded on the individual property

record for each item lawfully disposed of:◦ Date of disposition.◦ Authority for disposition (resolution of the governing body properly

recorded in the minutes as required by Section 274.07, F.S.).◦ Manner of disposition (sold, donated, transferred, cannibalized,

scrapped, destroyed, traded).

Florida Administrative Code - 69I-73.005 (continued)Required Information (continued)◦ Identity of the employee(s) witnessing the disposition, if

cannibalized, scrapped or destroyed.◦ For items disposed of, a notation identifying any related transactions

(such as receipt for sale of the item, insurance recovery, trade-in).◦ For property certified as surplus, reference to documentation

evidencing that such property was disposed of in the proper manner. Transfer of Property Records – The individual property record for each

item lawfully disposed of shall be transferred to a disposed property file. Destruction of such records shall be governed by the provisions of Chapter 119, F.S.

Control Account – The cost or value of items shall be removed from the control account at the time of disposition.

Florida Statutes

“Accounting for Capital Assets, A Guide for State and Local Governments” – Stephen J. Gauthier – GFOA Publication

Florida Statutes - Chapter 274

Florida Administrative Code - 69I-73

Presentation sources:

Sarah C. Koser, CPA, CGFO, CPFODeputy Director of FinanceThe Villages Community Development Districts3201 Wedgewood LaneThe Villages, Florida 32162352-753-0421

Contact Information:

sarah c. koser, cpa, cgfo, cpfo deputy director of finance the villages community development...

Documents

intangible assets slide

fund financial statements

measurement focus matters

debitcredit equipment

expense depreciation

asset information

accumulated depreciation

inadequate scope focus