Tangible Capital AssetsAlberta 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 • Infrastructure valuation manual • Bridge inventory & valuation • Balanced budget legislation • Financial reporting & budgets • Position papers
Bridge Inventory & Valuation • Access AIT bridge information • Bridge files • Inventory • Data • Value • Accumulated amortization • Audit trail
Guideline Amendments • Capitalization thresholds • Valuation date for counties • Policy guideline - Amortization start and end date
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 • 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) • 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 • Implementation accounting entries
TCA Project Update - Locally What is your project status?
Capital Policy • Authority, purpose and scope • Definition & classification of assets • Recording and valuing assets • Amortization methods and rates
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 • Focus on TCA impact • Financial reporting changes
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 • 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 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? 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? • 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 • 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 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 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 • 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 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 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 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)
QualitativeConsiderations What threshold(s) to use Thresholds in ‘Toolkit’ Cumulative? Useful life considerations Asset age exceeds useful life
QualitativeConsiderations (cont) Discount Factor Used CPI Other Supporting Information Methodology Valuation Useful Life
Audit Support Third Party Evidence Invoice Qualified Estimator Industry Standards CPI Published lists Internally developed
Audit Support (cont) Documented Methodology Consistent with methodology used by qualified third party Sound industry practice Reasonableness test
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 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 • 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 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 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) • 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 (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 (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 Current Terms (Sampleford) • Fund Balances • Operating Fund • Capital Fund • Reserve Fund • Equity in Capital Assets New Term (used in examples) • Accumulated Surplus
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 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 • 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 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 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 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