1. Governmental Accounting Capital Assets Resource 2016 Local Government Corporation

2. Capital Assets Certified Continuing Professional Education Class 2-hour credit Must remain for the entirety of the class to receive CPE credit Must sign in and sign out to receive CPE credit Certificates of attendance will be emailed for CPE credit

3. Capital Assets Governmental Accounting Standards Board Where are Capital Assets Recorded in the Financial Statements Recording and Valuing Capital Assets Understanding Depreciation

4. Capital Assets Using the Modified Approach in Lieu of Depreciating Infrastructure Assets The Basics of Capitalized Interest Capital Assets Resulting from Capital Lease, Close up Transactions Intangible Assets Impairment of Capital Assets

5. Capital Assets Governmental Accounting Standards Board

6. GOVERNMENTAL ACCOUNTING STANDARDS BOARD What is Generally Accepted Accounting Principles? Who is GASB? GASB Statements Specific to Revenues from Nonexchange Transactions

7. What is GAAP? Proper accounting Decades of accounting practice No authoritative book

8. What is GAAP? Does not account for every situation Make the best choice Rule makers leave room for options

9. What is GAAP? The grey area of materiality Qualitative aspects Quantitative aspects

10. Who Sets Up GAAP? GASB sets the GAAP rules GASB provides: ◦ Accounting principles ◦ Interpretations ◦ Guidance for implementation GASB Statement No. 76 ◦ “The Hierarchy of GAAP for State and Local Governments”

11. GASB Statement No. 76 Category A ◦ GASB Statements Category B ◦ GASB Technical Bulletins ◦ GASB Implementation Guides ◦ American Institute of Certified Public Accountants (AICPA) literature cleared by GASB

12. GASB Statement No. 76 If not Specified in Category A or B ◦ GASB Concepts Statements ◦ Pronouncements and literature from the following:  Financial Accounting Standards Board (FASB)  Federal Accounting Standards Advisory Board (FASAB)  International Accounting Standards Board (IASB)

13. GASB Statement No. 76 If not Specified in Category A or B ◦ AICPA literature not cleared by the GASB ◦ Practices widely practiced by state and local government agencies ◦ Literature from professional organizations, regulatory agencies, and authoritative accounting texts

14. Capital Assets Long-lived assets requiring significant investment of resources Land Buildings Equipment Includes infrastructure assets ◦ Roads ◦ Bridges ◦ Parks

15. Capital Assets Costs of certain assets are capitalized Costs at the time of purchase or construction recorded Asset on the statement of net assets or balance sheet Not charged to an expense

16. Capital Assets Where are Capital Assets Recorded in the Financial Statements?

17. WHERE ARE CAPITAL ASSETS RECORDED IN THE FINANCIAL STATEMENTS? Government-wide financial statements Fund financial statements

18. Government-wide financial statements Recorded as assets Includes accumulated depreciation and depreciation expense Includes assets used in governmental activities and business-type activities Assets related to fiduciary funds are not recorded in the government-wide financial statements

19. Fund financial statements Assets are not current financial resources and accordingly not recorded in the governmental funds and expensed Proprietary funds use the economic resource method and accordingly records assets on the balance sheet Fiduciary funds may have a pension and an office used for this purpose

20. Capital Assets Recording and Valuing Capital Assets

21. RECORDING AND VALUING CAPITAL ASSETS Capitalization policy or threshold Cost of capital assets

22. Capitalization policy or threshold Governments develop an asset capitalization policy to avoid recording minor, short-lived assets Governments set monetary and useful life thresholds for assets to be considered for capitalization

23. Capitalization policy or threshold Example: An assets should cost at least $5,000 and have a useful life of 5 years determined by the policy Repairs and maintenance are expensed even if over the $5,000 threshold Prevents governments from having too many small assets capitalized

24. Capitalization policy or threshold Example: One computer costs $4,000 thus, does not require capitalizing Example: 10 computers purchased for an integrated network for $4,000 each is eligible for capitalization

25. Capitalization policy or threshold Many governments set their thresholds as low as $500 and have not changed through the decades This is a waste of accounting resources and should be periodically reviewed Sometimes grants require capitalization of assets below the set threshold Low thresholds can assist with long-term debt approvals

26. Cost of capital assets GASB defines cost as “the consideration that is given or received, whichever is more objectively determinable” The cost includes: ◦ Purchase price ◦ Construction cost ◦ Ancillary charges

27. Ancillary charges Freight and transportation charges Title fees Professional fees, such as architectural, legal, and accounting fees Legal claims attributable to the asset acquisition or construction ◦ Example: A worker injury claim during construction or damage to the property

28. Ancillary charges Closing costs Appraisal and negotiation fees Surveying fees Land preparation costs Demolition costs Insurance premiums during the construction phase Capitalized interest (discussed later)

29. Cost of capital assets Many assets did not have the documentation so had to be estimated This issue subsides as the older assets retire Assets gifted to the government record at estimated fair value at the time of acquisition by the government

30. GASBS 34 GASBS 34 includes the following as assets: ◦ Land ◦ Improvements to land (for its intended use) ◦ Easements ◦ Buildings ◦ Building improvements ◦ Vehicles

31. GASBS 34 GASBS 34 includes the following as assets: ◦ Machinery ◦ Equipment ◦ Works of art and historical treasures ◦ Infrastructure ◦ Tangible and intangible assets with useful lives of more than one year

32. Infrastructure Governments used to have the option to capitalize infrastructure, now required Examples: ◦ Roads ◦ Bridges ◦ Tunnels ◦ Drainage systems ◦ Sewer systems ◦ Lighting systems

33. Capital Assets Understanding Depreciation

34. UNDERSTANDING DEPRECIATION Depreciation expense Depreciation accounting Estimated useful life of assets Depreciation methods

35. Depreciation expense Spread the cost of an asset over its useful life Only recorded on the financial statements for funds that record capital assets

36. Depreciation expense Example: ◦ Government owns a $5,000 printer and has a useful life of 5 years ◦ Assume straight-line depreciation is used ◦ $1,000 depreciation expense recorded each year in the Statement of Revenues, Expenses, and Changes in Fund Net Assets

37. Depreciation expense Accumulated depreciation is the cumulative amount of depreciation expense recorded on a particular asset Example: ◦ At the end of the first year, the printer will show $1,000 in depreciation expense ◦ Printer shows a value of $4,000 on the balance sheet ◦ This is net of the accumulated depreciation of $1,000

38. Depreciation expense Example: ◦ If the printer has a salvage value of $1,000, then only the value of $4,000 would be depreciated ◦ At the end of the five years the asset would continue to carry the salvage value of $1,000 ◦ All accounts removed once the asset is sold or no longer used

39. Understanding Depreciation Governments have to decide on ◦ salvage value (if any) of an asset, ◦ the estimated useful life of the assets, ◦ and the depreciation method that will be used Common depreciable asset categories: ◦ Buildings ◦ Leasehold improvements ◦ Machinery and equipment ◦ Office equipment ◦ Infrastructure

40. Understanding Depreciation Land is not depreciated Capital lease transactions (discussed later) are depreciated assets

41. Understanding Depreciation Straight-line typically used Must disclose depreciation policy in the notes of financial statements Should disclose major assets and range of estimated useful lives Should disclose the depreciation method used in computing depreciation

42. Understanding Depreciation Capital assets report in the statement of net assets net of accumulated depreciation Land is reported separately Depreciation expense records in the statement of activities Depreciation expense can be calculated individually or in categories

43. Capital Assets Using the Modified Approach in Lieu of Depreciating Infrastructure Assets

44. USING THE MODIFIED APPROACH IN LIEU OF DEPRECIATING INFRASTRUCTURE ASSETS Modified approach Requirements for not depreciating infrastructure assets Required documentation

45. Modified approach Allows the government to not depreciate an asset as long as they maintain it at some stated level of condition Costs to remain at stated level of condition are expensed as incurred

46. Requirements for not depreciating infrastructure assets Government manages eligible infrastructure using an asset management system ◦ Up-to-date ◦ Condition assessments ◦ Annual estimates Government documents eligible infrastructure assets are preserved at the condition legally established and disclosed

47. Required documentation Complete condition assessments of eligible infrastructure assets consistently every 3 years Results of the most recent complete condition assessment providing reasonable assurance assets are being preserved as established

48. Required documentation Asset management system assessed condition performed every 3 years Asset management system estimated annual amount calculated at the beginning of the fiscal year to maintain condition level established Compare with the last 5 reporting periods

49. Capital Assets The Basics of Capitalized Interest

50. Interest costs related to monies paid during the period of time that an asset is being constructed Considered part of the cost of an asset Reported in the government-wide financial statements for proprietary funds Not reported for governmental activities

51. The Basics of Capitalized Interest Interest cost capitalization period starts when three conditions are met ◦ Expenditures have occurred ◦ Activities necessary to prepare the asset have begun ◦ Interest cost has been incurred

52. THE BASICS OF CAPITALIZED INTEREST Background Amount of interest to be capitalized Capitalization period

53. Background Interest cost incurred bringing the asset to the condition and location for intended use is part of the historical cost of the asset Statement of Financial Accounting Standards No. 34 (SFAS 34) “Capitalization of Interest Cost”

54. Statement of Financial Accounting Standards No. 34 (SFAS 34) Statement of Financial Accounting Standards No. 34 (SFAS 34) “Capitalization of Interest Cost” Objectives of capitalizing interest ◦ Obtain a measure of acquisition cost reflecting total investment in the asset ◦ Charge a cost that relates to the acquisition of a resource benefiting future periods against the revenue periods benefiting

55. Statement of Financial Accounting Standards No. 34 (SFAS 34) Statement of Financial Accounting Standards No. 34 (SFAS 34) “Capitalization of Interest Cost” Interest cost should not be capitalized for the following: ◦ Inventories repeatedly produced ◦ Assets already in use or ready for intended purpose ◦ Assets not being used and not undergoing activities necessary for use

56. Statement of Financial Accounting Standards No. 34 (SFAS 34) Statement of Financial Accounting Standards No. 34 (SFAS 34) “Capitalization of Interest Cost” Interest cost should not be capitalized for the following: ◦ Assets not included in the statement of net assets ◦ Assets acquired with gifts or grants restricted ◦ Land not undergoing activities necessary to place in use

57. Statement of Financial Accounting Standards No. 34 (SFAS 34) Statement of Financial Accounting Standards No. 34 (SFAS 34) “Capitalization of Interest Cost” Qualifying assets ◦ Assets constructed or produced for the proprietary fund’s own use for which deposits or profess payments have been made ◦ Assets for sale or lease and are constructed, such as real estate developments

58. Amount of interest to be capitalized In an accounting period this is determined by applying an interest rate (capitalization rate) to the average amount of the accumulated expenditures for the asset during the period Use the current borrowing rates or New borrowing rate with a qualifying asset

59. Capitalization period The previously mentioned conditions are met and continue to be met begins this period Activities are the following: ◦ Administrative and technical activities during preconstruction phase ◦ Development of plans or obtaining permits ◦ Activities to overcome unforeseen obstacles (labor disputes, litigation, etc.)

60. Capitalization period Interest capitalization ends if the project is substantially suspended Once the asset is substantially completed and ready for intended use, interest capitalization period ends

61. Capital Assets Capital Assets Resulting from Capital Lease, Close up Transactions

62. Some leases are structured to appear that the government is buying the asset, rather than leasing it Capital leases are recorded as if the government purchased the asset Record the leased asset and obligation for payments of the lease as a liability

63. CAPITAL ASSETS RESULTING FROM CAPITAL LEASE, CLOSE UP TRANSACTIONS Terminology of leases Accounting for Capital Leases by the Lessee Recording capital leases by the lessee

64. Terminology of leases Using a copier lease as an example, the government is the lessee The office store is the lessor The government will use the present value of the required lease payments to compute asset value

65. Accounting for Capital Leases by the Lessee Capital lease ◦ Transfers substantially all of the benefits and risks of ownership to the lessee ◦ Should be accounted for as the acquisition of an asset and the incurrence of a liability Operating lease ◦ Rental of property

66. Recording capital leases by the lessee Proprietary fund or the government-wide financial statements Fund records the leased property as an asset and the same amount as a liability Reflects the lease as a purchase from the lessor

67. Recording capital leases by the lessee Governmental fund Flow of financial resources, and expenditures are recognized on the modified accrual basis Recorded only in the government-wide statement of net assets

68. Capital Assets Intangible Assets

69. Another group of assets you can’t physically see or touch GASBS 51 “Accounting and Financial Reporting for Intangible Assets” Applies to assets with the following characteristics: ◦ Lack physical substance ◦ Nonfinancial in nature ◦ Initial useful life extends beyond a single report period

70. Intangible Assets Examples are ◦ Easements ◦ Water rights ◦ Timber rights ◦ Patents ◦ Trademarks ◦ Computer software

71. Intangible Assets To be classified as an asset it must be ◦ Capable of being separated from the government ◦ Can be sold, transferred, licensed, rented, or exchanged ◦ Arises from contractual or other legal rights even if separable or transferable

72. Intangible Assets Internally developed intangible assets have to meet criterion to be capitalized, otherwise expensed ◦ Specific objectives of the intangible asset have been determined ◦ Technical feasibility of completing the project have been demonstrated ◦ Intention, ability, and presence of effort to complete the project have been demonstrated

73. Intangible Assets Amortized much like depreciating if the intangible asset has a definite life Example: Patents amortize over its legal term Intangible assets with indefinite lives are not amortized Both types subject to impairment Government funds record as expenses

74. Capital Assets Impairment of Capital Assets

75. Capital Assets GASBS 42 “Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries” Requires governments to write down assets amounts recorded in the statement of net assets when a capital asset is impaired

76. IMPAIRMENT OF CAPITAL ASSETS Definition of impairment Determining whether a capital asset is impaired Measuring impairment Reporting impairment losses Insurance recoveries

77. Definition of impairment A significant, unexpected decline in the service utility of a capital asset Event leading up to impairment are not considered normal and ordinary Should not have happened during the useful lifetime of an asset

78. Determining whether a capital asset is impaired Two-step process ◦ Identifying potential impairments ◦ Testing for impairments

79. Identifying potential impairments Evidence of physical damage that requires restoration Enactment of approval of laws or regulations, such as new water quality standards Technological development Change in the expected duration of usage of a capital asset Construction stoppage

80. Testing for impairment Test for impairment if the following factors are present ◦ The magnitude of the decline in service utility is significant ◦ The decline in service utility is unexpected If one of the two are not present, the remaining useful life and salvage value should be reevaluated

81. Measuring impairment If the impaired asset will not be used anymore by the government report at the lower of carrying value or fair value This includes construction work stoppage

82. Measuring impairment 3 different methods to calculate impairment ◦ Restoration cost method ◦ Service units method ◦ Deflated depreciated replacement cost method

83. Reporting Impairment Losses Write down the asset unless evidence of impairment temporary Report in the statement of activities and statement of revenues, expenses, and changes in fund net assets Disclosures of the impairment if needed for explanation beyond reporting The asset should not be written up in the future

84. Insurance Recoveries Governmental fund financial statements reports insurance recoveries separate Insurance recoveries report as an extraordinary item Government-wide financial statements and proprietary fund reports impairment loss net of insurance recovery in first year Subsequent years recognize as program revenue or extraordinary item

85. Capital Assets Basic understanding of capital assets GASB designed for governments GASB ever-changing model Enhance existing skills

86. Questions?