Chapter 71 Capital Assets and Investments in Marketable Securities

Chapter 72 Learning Objectives  Accounting for capital assets -Fund Statements -Government-wide Statements  Accounting for -- Donated Assets -- Trade-Ins -- Collectibles  GASB’s controversy on Infrastructure Assets  Asset Impairments  Investments in Marketable Securities

Chapter 73  Associated with the government as a whole  They are non financial in character.  Distinguished from other capital assets that are specifically associated with activities reported in proprietary and fiduciary funds.  Cost of capital assets: reported as expenditures General Capital Assets

Chapter 74  Land  Buildings  Improvements other than Buildings  Machinery and Equipment  Construction in Progress  Infrastructure (e.g., roads, streets, bridges) Common Classifications of General Capital Assets

Chapter 75 General capital assets are:  Capitalized in the governmental activities column at the government-wide level  Depreciated at the government-wide level  Debited to Expenditures in the appropriate governmental fund—when the assets are acquired. Accounting for General Capital Assets

Chapter 76 Placing a value (assigning costs) on capital assets 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

Chapter 77 Placing Value (assigning costs) on capital assets (cont’d)  Donated assets: reported at estimated fair market value. Exhaustible assets are depreciated over the remaining useful lives in their government-wide statements.  Use estimated cost if the assets weren’t recorded when initially acquired ("discovered" assets or a new inventory of assets)  Record foreclosures — at aggregate of accumulated taxes, interest, penalties, legal costs, or FMV whichever is lower  Record Trade-Ins at FMV of the new asset

Chapter 78  Tax-supported bonds  Grants from other governmental units (e.g., Federal or state grants )  Transfers from other funds  Gifts from individuals or organizations  Special assessment bonds or taxes  Capital leases  Note: 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. Common Financing Sources for General Fixed Assets

Chapter 79 Accounting for Acquisition of Capital Assets Example: The Sample city purchased office equipment for the Mayor’s office and paid $50,000 cash from the General Fund. General Fund: Dr. Cr. Expenditures $50,000 Cash50,000 Governmental Activities: Equipment $50,000 Cash50,000

Chapter 710 Accounting for Collectibles  GASB No. 34 does not require capitalization of artworks if they are: -held for public exhibition or research -protected and preserved -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.  If capitalized, revenue upon receipt of gifts should be recognized.  If not, both a revenue and an offsetting expense should be recognized.

Chapter 711 Infrastructure  Infrastructure is: –Government’s capital assets –Immovable –Preserved for a longer period. Ex: roads, sidewalks, bridges etc.  GASB 34: requires that infrastructure be accounted in the same manner as the capital assets.  Exception: They need not be depreciated if the government can demonstrate that they are being maintained/preserved at a specified condition level.  To avoid recording depreciation, governments must -perform condition assessments at least every three years ; - have an up-to-date inventory of eligible assets -estimate the amount to maintain and preserve the eligible assets.

Chapter 712 Infrastructure (cont’d) 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.

Chapter 713 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.

Chapter 714 Transition -- Infrastructure  Prospective reporting is required at effective statement date  Retroactive reporting is required as follows: -Phase 1 governments: June 15, Phase 2 governments: June 15, Phase 3 governments: Never  Retroactive reporting is required only for assets acquired after June 30,  Illustration: For example, in 2005 the replacement cost of a road constructed in 1991 was $10 million. A road construction price level index was.90 for 1991 and 120 for The road would be recorded at an initial cost of $7.5 million ($10 million times 90/120). If the road had a useful life of 30 years, then at the end of 2005 (after 15 years, it would be 50% depreciated. Hence it would have a book value of 50% of $7.5 million -- $3.75 million.

Chapter 715 Accounting for Impaired Assets GAAP: GASB Std. # 42  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.

Chapter 716 Investments in Marketable Securities  Reason to invest: to earn a return on resources.  Governments either directly invest in stocks or bonds or small governments may participate in investment pools maintained by other governments.  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.  Derivatives: Governments typically engage in derivative transactions not to speculate but, rather, to reduce the overall investment risk.

Chapter 717 Disclosure requirements  Governments should organize disclosures by investment type and additional disclosures as to specific types of risks:  Credit risks -Concentration of credit risks -Interest rate risks -Foreign currency risks  Governments must explain the nature of derivative transactions  Reasons to enter  Disclose significant terms of the transactions

Chapter 718 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.

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