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Tangible Capital Assets Alberta Regional GFOA Workshops. Series Two January 2008. Workshop Overview. Provincial and local updates Capital policy Impact on budgets and financial reports Transition Examples 2007 Note Q & A/small groups. TCA Project Update – Provincial.

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Tangible capital assets alberta regional gfoa workshops

Tangible Capital AssetsAlberta Regional GFOA Workshops

Series Two

January 2008


Workshop overview
Workshop Overview

  • Provincial and local updates

  • Capital policy

  • Impact on budgets and financial reports

  • Transition

  • Examples

  • 2007 Note

  • Q & A/small groups


Tca project update provincial
TCA Project Update – Provincial

  • Infrastructure valuation manual

  • Bridge inventory & valuation

  • Balanced budget legislation

  • Financial reporting & budgets

  • Position papers


Bridge inventory valuation
Bridge Inventory & Valuation

  • Access AIT bridge information

  • Bridge files

    • Inventory

    • Data

    • Value

    • Accumulated amortization

  • Audit trail


Guideline amendments
Guideline Amendments

  • Capitalization thresholds

  • Valuation date for counties

  • Policy guideline - Amortization start and end date


Position papers priority one
Position Papers – Priority One

  • Government partnerships

  • Undeveloped road allowances and rights of way

  • Networks/components – materiality, valuation

  • Biological assets

  • Grouping and pooling

  • Contributed assets


Position papers priority two
Position Papers – Priority Two

  • Multiple topics

    • Gravel pits

    • Infrastructure with excess capacity and partial retirements

    • Land leases

    • Provincial $1 transfers

    • Fully depreciated assets still in use

    • Municipal reserves


Position papers priority two cont
Position Papers – Priority Two (cont)

  • Multiple topics

    • Treatment of ‘sweat’ equity

    • Tax sale properties acquired by municipality

    • ‘Construction in progress’

    • Useful life and liability relationship

    • Link to full cost recovery requirement by Environment


Position papers priority three
Position Papers – Priority Three

  • Implementation accounting entries


Tca project update locally
TCA Project Update - Locally

What is your project status?



Capital policy
Capital Policy

  • Authority, purpose and scope

  • Definition & classification of assets

  • Recording and valuing assets

  • Amortization methods and rates


Capital policy cont
Capital Policy (cont)

  • Reviews and write-downs

  • Maintaining records

  • Asset disposal

  • Financial system, asset recording system & asset management system

  • Financial reporting and budgets


Tca impact on financial statements budgets
TCA Impact on Financial Statements & Budgets

  • Focus on TCA impact

  • Financial reporting changes


General impact of recording tca
General Impact of Recording TCA

Brings a non-cash dimension to financial reporting and budgeting

Full Accrual Accounting

This change does not require a change in behaviour but it may cause you to change because there will be more information available.


Impacts at transition and ongoing
Impacts at Transition and Ongoing

  • Amount of TCA will probably increase.

  • Total TCA will be reduced by ‘accumulated amortization’.

  • Higher emphasis on Statement of Cash Flow.


Impacts at transition and ongoing1
Impacts at Transition and Ongoing

Statement of Operations

  • TCA purchases not included

  • Capital grants included

  • Non-cash annual amortization expense

  • Gain/loss on disposal of TCA included

  • Write-downs expensed


What will be the impact to our municipality
What Will be the Impact to our Municipality?

Each municipality will be different; some factors determining impact are:

  • Age of TCA

    • Net value of unrecorded TCA

    • Accumulated amortization of recorded TCA

  • Write-down of recorded TCA

  • Assets funded by senior government and donated assets.


Should the budget mirror the financial statements
Should the budget mirror the financial statements?

  • Recommend that amortization expense be included in the budget.

  • If not, PSAB requires a link between the budget and financial statements be provided.





Current balanced budget legislation
Current Balanced Budget Legislation

  • Cannot budget more expenditures than anticipated revenues

  • On a 3 year cumulative basis, actual revenue = or be > than expenditures (Sec 244)

  • Revenue includes transfers from accumulated surplus

  • Cash basis approach

  • Operating and capital funds referenced


Impact of accounting standard changes tca requirement ps 3150
Impact of Accounting Standard ChangesTCA Requirement (PS 3150)

  • TCA to be amortized over useful life.

  • Annual amortization (non-cash) to be expensed; may result in annual deficiencies.

  • CICA requirement does not mandate funding amortization.


Impact of accounting standard changes financial reporting ps 1000 1100 1200
Impact of Accounting Standard ChangesFinancial Reporting (PS 1000, 1100, 1200)

  • One single statement of operations

  • Annual budget replaces operating & capital budgets

  • Capital purchases/proceeds & debt proceeds/retirements are not included in ‘Statement of Operations’

  • ‘Accumulated surplus’ is one amount including ‘Equity in TCA’

  • Focus on financial position (net assets/net debt)


Proposed amendments to legislation and future review
Proposed Amendments to Legislation and Future Review

  • Transitional Amendment

    • Back out amortization expense to comply with Section 244

  • Future Amendments

    • Replace references to operating & capital funds/budgets with ‘annual budget’

    • Consider redefining ‘deficiency’

  • Further Review

    • Measures of municipal financial performance including debt limits


Recording an existing asset example
Recording an Existing AssetExample

An Arena built in 1940 has a 2006 appraisal cost of $10M and a land value of $5M. Component breakdown is as follows:

Description% of costUseful LifeRemainingUseful Life

Building Envelope 50% 60 years 0 years

Roof 10% 20 years 2 years

Mechanical 10% 10 years 8 years

Interior Fit – outs 20% 10 years 2 years

(includes ice sheet)

Exterior Fit – outs 10% 25 years 20 years

There is no salvage value.


Discount factor and deflated cost
Discount Factor and Deflated Cost

Discount Factor

Index for in-service year/index for current year

Deflated Cost

Current cost * Discount Factor

Example

1989 Discount Factor: 70.9/112.3 = 0.631

Roof deflated cost: $1M * 0.631 = $631,000


Discount factors
Discount Factors

Discount Factors for Example

1940 0.071 (8.0/112.3)

1989 0.631 (70.9/112.3)

1999 0.814 (91.4/112.3)

2002 0.890 (100.0/112.3)

2005 0.963 (108.1/112.3)

2006 1.000 (112.3/112.3)




Qualitative considerations
QualitativeConsiderations

What threshold(s) to use

Thresholds in ‘Toolkit’

Cumulative?

Useful life considerations

Asset age exceeds useful life


Qualitative considerations cont
QualitativeConsiderations (cont)

Discount Factor Used

CPI

Other

Supporting Information

Methodology

Valuation

Useful Life


Audit support
Audit Support

Third Party Evidence

Invoice

Qualified Estimator

Industry Standards

CPI

Published lists

Internally developed


Audit support cont
Audit Support (cont)

Documented Methodology

Consistent with methodology used by qualified third party

Sound industry practice

Reasonableness test


Transition process
Transition Process

  • Develop TCA inventory and register information

  • Record information in TCA register

  • Document audit trail

  • Determine accumulated amortization prior to implementation year

  • Adjust General Ledger to implementation year opening balances

  • Link TCA register to GL in implementation year (when all TCA are recorded)

  • Record 2009 TCA transactions under new TCA rules and report in new reporting format


Transitional impact
Transitional Impact

Significant amendment to the financial statements in the first year of reporting due to:

  • Adding existing unrecorded TCA

  • Deducting the recorded amount for TCA which no longer exist.

  • Deducting the recorded amount for TCA having an historical cost below the capitalization threshold.

  • Reporting the net value of the TCA total cost; deduct accumulated amortization.


Accumulated amortization
Accumulated Amortization

  • Identified by asset class in notes to financial statements.

  • Amount prior to first year of reporting treated as a prior years’ adjustment.

  • Annual amortization on the revised TCA expensed in year of implementation for that specific year.


Transition accounting entries
Transition Accounting Entries

Note: Journal entries are always balanced.

Adjust Opening Balances of GL

  • Reduce the existing TCA account balances to zero

    CR: Tangible capital assets

    DR: Capital debt

    DR: Equity in TCA – Prior period adjustment

  • Record the updated TCA values

    DR: Tangible capital assets (historical cost)

    CR: Accumulated amortization

    CR: Capital debt

    CR: Equity in TCA – Prior period adjustment


Transition accounting entry example assumptions data
Transition Accounting Entry ExampleAssumptions & Data

  • Implement in 2009

  • GL accounts December 31, 2008:

    TCA $10,000

    Capital debt $2,000

    Equity in TCA $8,000

  • TCA data at implementation

    TCA historical cost $50,000

    Accumulated amortization $30,000


Transition accounting entry example cont
Transition Accounting Entry Example (cont)

  • Reduce existing TCA account balances to zero:

    Dr Cr

    TCA $10,000

    Capital debt $2,000

    Equity in TCA $8,000


Transition accounting entry example cont1
Transition Accounting Entry Example (cont)

  • Record updated TCA inventory values:

    Dr Cr

    TCA $50,000

    Accumulated amortization $30,000

    Capital debt $2,000

    Equity in TCA $18,000


Transition accounting entry example cont2
Transition Accounting Entry Example (cont)

  • The change in equity will be treated as a ‘prior period restatement/adjustment’ and referenced in the notes to the financial statements.

  • If possible, record 2008 amortization in expense accounts for comparative statement purposes.

  • Retroactive application – expected but not mandatory (CICA guide, pages 34 & 35)


Municipal equity terminology
‘Municipal Equity’ Terminology

Current Terms (Sampleford)

  • Fund Balances

    • Operating Fund

    • Capital Fund

    • Reserve Fund

  • Equity in Capital Assets

    New Term (used in examples)

  • Accumulated Surplus


Purchase to retirement equipment fire truck pumper information or decisions required
Purchase to RetirementEquipment – Fire truck (pumper)Information or Decisions Required

Actual cost $300,000

Useful life 12 years

Amortization method Straight line

Salvage value $60,000

Annual amortization $20,000

(assume ½ year rule for purchase and disposal years) 1st year $10,000 (50%)

TCA asset register Major class Machinery & Equipment

Minor class Fire Equipment

Sub class Pumper truck


Purchase entries
Purchase Entries

Assume that there are links between General Ledger/Accounts Payable/TCA.

DR TCA asset $300,000

CR Cash/debt $300,000

  • No impact on Accumulated Surplus; there may be internal transfers between Equity in TCA and Reserves.

  • No record in Statement of Operations

  • Affects Statement of Financial Position


Amortization expense
Amortization Expense

  • Annual entry:

    DR Fire department – equipment amortization expense

    CR Accumulated amortization – Machinery & Equipment

    (1st year - $10,000, remaining years - $20,000, disposal year if year 13 - $10,000)

  • Annual closing entry

    DR Accumulated Surplus

    CR Fire department – equipment amortization expense

    Note: These entries demonstrate what will normally be done automatically by your financial system.


Impact on fire department budget
Impact on Fire Department Budget

If funds are normally collected annually for future purchases, i.e. transfer to capital:

  • amortization would be funded in the Statement of Operations; move budget from ‘transfer to capital’ to amortization

  • internal financial records would need to identify these funds

  • the department bottom line would be breakeven if the amount annually put away equalled the amortization.


Impact on fire department budget1
Impact on Fire Department Budget

If debt is normally used:

  • the fire department budget would incur an annual deficit of $20,000

  • cash would still need to be available in the organization to pay the debt which would be budgeted with no expense.

    • If debt retirement allocated to the fire department, then offset the deficit resulting from the amortization expense.


Pumper fire truck information at the end of year 12
Pumper Fire Truck Information at the end of Year 12

Cost $300,000

Accumulated amortization $230,000

Net book value $ 70,000

Assume sold in year 13

Amortization entry in year 13 (50/50 rule)

DR Fire Dept – Equipment amortization expense $10,000

CR Accum. Amortization – M & E $10,000


Sale disposal entries in year 13
Sale & Disposal Entries in Year 13

Sold for $75,000.

DR Cash $ 75,000

DR Accumulated amortization $240,000

CR TCA asset $300,000

CR Profit on disposal of TCA $ 15,000

Annual Surplus and Accumulated Surplus will increase $15,000.

(TCA ($300,000) less Accum. Amortization ($240,000) less Cash ($75,000) results in a credit of $15,000 to Accumulated Surplus.


Example replacement of a component building situation information
Example - Replacement of a ComponentBuildingSituation Information

Building originally recorded at $5 M with a useful life of 40 years.

Roof needs to be replaced in 2009:

  • The roof is fully amortized.

  • The life of the roof was 20 years.

  • Replacement cost is $1.1 M.

  • Roof is 14% of the total building cost.


Replacement entries
Replacement Entries

DR Accumulated amortization $ 350,000

DR Loss on disposal of roof $ 350,000

CR TCA – Building $ 700,000

DR TCA – Building – Roof $1,100,000

CR Cash/Debt $1,100,000

Loss on Statement of Operations

Decrease in Accumulated Surplus


2009 amortization entries using 50 rule
2009 Amortization Entries using 50% rule

Old roof: $700,000/40 * 50% $ 8,750

New roof: $1,100,000/20*50% $27,500

Total 2009 amortization expense $36,250

2009 Accumulated amortization $27,500


Impact of amortization on accumulated surplus
Impact of Amortization on Accumulated Surplus

  • Decrease if amortization expense is greater than roof related revenues

  • Remain unchanged if amortization is funded.

  • Increase if funds greater than annual amortization are put away for future roof replacement.

    Statement of Operations will reflect the changes in Accumulated Surplus in the annual deficit/surplus.


Issues to consider
Issues to Consider

  • What are the audit issues if the roof is expensed? Is this cost material so that it will need to be capitalized?

  • Is it better to record the cost of the major components at the time of initially recording the asset?


How are networks determined
How Are Networks Determined?

  • Are the TCA in the proposed network similar?

  • How is age determined?

  • How will the value be established?

  • Should the networks be determined by geographic location?


Example network to segment engineered structure road system situation information
Example – Network to SegmentEngineered Structure – Road System Situation Information

The municipality has 20 km of paved roads. They have been recorded as networks; a separate network each for the asphalt, subsurface and right of way. The municipality plans to gradually segment each network when rehabilitation work is done.



Replace 2 km of asphalt
Replace 2 km of Asphalt

  • Replacement cost is $250,000/km

  • Assume component is fully amortized when replaced.

  • Will set up a separate asset or multiple assets for the two km of asphalt.


Replacement entries1
Replacement Entries

Remove asphalt component from TCA records

DR Accumulated amortization $400,000

(Asphalt – 2 km * 200,000 historical cost)

CR TCA – Engineered Structures – Roads - Asphalt $400,000


New tca records
New TCA Records

  • Create new TCA records in TCA register to provide more detailed information

  • Segments – geographical location and distance established by policy (for example, by block or km)


Impact on tca network records
Impact on TCA Network Records

  • Since the asphalt network is the only network affected, the other networks will not be affected.

  • The other networks may be segmented in the same manner as the asphalt network.

  • If the asphalt, subsurface and right of way were one network, a new asset should be created for the subsurface portion for this specific segment with TCA and accumulated amortization adjustments made to the subsurface network.


Discussion questions
Discussion Questions

  • When networks are used, what methods can be used to determine the average life of the network and the accumulated amortization?

  • What criteria should be used to determine the best method?

  • What is the best method?


Reporting requirements prior to implementation ps 3150 45
Reporting RequirementsPrior to Implementation (PS 3150.45)

  • Report according to PSG-7 during the period of transition.

  • PSG-7 TCA of Local Governments (Toolkit, page 55)

    • Disclose information required for asset classes for which municipality has information.

    • Effective January 1, 2007


2009 ps 3150 40 42
2009 (PS 3150.40-42)

Disclose for each major category of TCA and in total:

Beginning and end of period

Cost, accumulated amortization, net carrying amount

For the period

Additions, disposals, write-downs, amortization

Amortization method, period/rate


2009 ps 3150 40 42 cont
2009 (PS 3150.40-42) (cont)

  • Net book value of TCA not amortized (not in service, under construction)

  • Nature & amount of contributed TCA received during period

  • Nature & use of TCA recognized at nominal value

  • Nature of works of art & historical treasures

  • Amount of interest capitalized in the period


2007 financial statement note
2007 Financial Statement Note

Section 6, TCA Implementation Toolkit

  • Subsection of ‘Significant Accounting Policies’ note

  • Narrative provides authority, background and progress report

  • Table provides the revised TCA information by major class Note: This table will not link to the TCA amount in Statement of Financial Position.

    TCA GL accounts are not revised until implementation.


2007 financial statement note example
2007 Financial Statement Note Example

i. Narrative

  • Assets already amortized noting amortization method.

  • Assets not amortized if some are amortized.

  • Assets classes completely updated.

  • Asset classes still requiring to be completed by December 31, 2008 (2009)

  • Assets disclosed at nominal value

  • Statement regarding capitalizing interest (municipality policy)


2007 financial statement note example cont
2007 Financial Statement Note Example (cont)

ii. List of TCA Classes

  • State that amortization expense not recorded and project the date when it will be recorded.

  • List major classes and minor Engineered Structure classes.

  • Provide range of useful life in years for each class reported.

  • State method of amortization


2007 financial statement note example cont1
2007 Financial Statement Note Example (cont)

iii. Table of Financial Information

  • Table for current year

  • Table for previous year only if TCA project was started in previous year.

  • Beginning year amount to be zero in year respective TCA class is completed.

  • Amount of amortization in financial statements in situations where there has been amortization already in place.

  • Value of assets not amortized because removed from service



Discussion question
Discussion Question

How will accumulated amortization be tracked for asset classes completed prior to implementation?


Note for prior period adjustments
Note for Prior Period Adjustments

  • Restated to comply with PS 3150

  • Adjustments to TCA and Accumulated Surplus

    • Adjust opening 2008 if retroactive

    • If not retroactive, adjust opening 2009


Note for prior period adjustments1
Note for Prior Period Adjustments

  • Add the net amount for

    • Assets capitalized but previously expensed

    • Contributed assets not recorded

    • Disposal of assets

    • Write-down of assets

    • Assets capitalized but below threshold

  • Less

    • Increase in amortization expense



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