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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?

Tangible capital assets alberta regional gfoa workshops

Capital Policy Framework

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.

Statement of financial position current view as at december 31

Statement of Financial Position – Current ViewAs at December 31

Statement of financial position new view as at december 31

Statement of Financial Position – New ViewAs at December 31

Statement of financial activities operations as at december 31

Statement of Financial Activities/OperationsAs at December 31

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 years0 years

Roof 10% 20 years2 years

Mechanical 10% 10 years8 years

Interior Fit – outs 20% 10 years2 years

(includes ice sheet)

Exterior Fit – outs 10% 25 years20 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


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)

Inventory valuation




Qualitative considerations


What threshold(s) to use

Thresholds in ‘Toolkit’


Useful life considerations

Asset age exceeds useful life

Qualitative considerations cont

QualitativeConsiderations (cont)

Discount Factor Used



Supporting Information



Useful Life

Audit support

Audit Support

Third Party Evidence


Qualified Estimator

Industry Standards


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:


    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


    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


    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 life12 years

Amortization methodStraight 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 registerMajor 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.

DRTCA asset$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:

    DRFire department – equipment amortization expense

    CRAccumulated amortization – Machinery & Equipment

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

  • Annual closing entry

    DRAccumulated Surplus

    CRFire 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


Accumulated amortization$230,000

Net book value$ 70,000

Assume sold in year 13

Amortization entry in year 13 (50/50 rule)

DRFire Dept – Equipment amortization expense$10,000

CRAccum. Amortization – M & E$10,000

Sale disposal entries in year 13

Sale & Disposal Entries in Year 13

Sold for $75,000.

DRCash$ 75,000

DRAccumulated amortization$240,000

CRTCA asset$300,000

CRProfit 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

DRAccumulated amortization$ 350,000

DRLoss on disposal of roof$ 350,000

CRTCA – Building $ 700,000

DRTCA – Building – Roof$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.

Paved road information

Paved Road Information

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

DRAccumulated amortization$400,000

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

CRTCA – 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

2007 financial statement note example cont2

2007 Financial Statement Note Example (cont)

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

Tangible capital assets alberta regional gfoa workshops

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