Accounting for Capital Assets FGFOA Annual Conference June 26, 2013

1. Accounting for Capital AssetsFGFOA Annual ConferenceJune 26, 2013 Sarah C. Koser, CPA, CGFO, CPFO Deputy Director of Finance The Villages Community Development Districts

2. Session Objectives • Capital Assets – Defined • Basic Accounting • Major Asset Classes • Including Intangible Assets • Capitalizable Costs • Valuation of Capital Assets for Financial Reporting Purposes • Financial Statement Presentation and Disclosure • Policies • Inventorying • GFOA Recommended Practices • Compliance with Florida Statutes • Disposals

3. Capital Assets Defined

4. Capital Assets - Defined • Includes all of the following with initial useful lives extending beyond a single reporting period: • Land • Improvements to land • Easements • Buildings • Building improvements • Vehicles • Machinery • Equipment • Works of art and historical treasures • Infrastructure • Other tangible or intangible assets

5. Capital Assets - Defined • Purpose of maintaining asset information by Management: • Control – Good Stewardship • Maintenance – Ensure assets are properly maintained • Replacement – Plan for retirement and replacement as needed • Insurance – Reliable information to properly insure • Cost recovery and rate setting – Proprietary funds • Financial reporting – Follow GAAP • Reasons for failure of adequate capital asset management: • Inadequate scope – focus on some required elements but not all • Overburdening – Collecting unnecessary information • Inadequate system maintenance – Lack of resources necessary to maintain system.

6. Basic Accounting

7. Basic Accounting • Measurement Focus Matters!!! • Governmental Funds – current resources • Modified Accrual Basis of Accounting • Proprietary Funds – economic resources • Full Accrual Basis of Accounting

8. Basic Accounting • Example: • Government purchases a piece of equipment with a cost of $500,000 and an estimated useful life of 10 years.

9. Basic Accounting • Proprietary Fund Entries – Economic Resources Measurement Focus: • Acquisition: • Allocation to expense (depreciation) per period (year):

10. Basic Accounting • Governmental Fund Entries – Current Financial Resources Measurement Focus: • Acquisition:

11. Basic Accounting • Governmental Fund Entries – Current Financial Resources Measurement Focus: • For Government-Wide Financial Statements – Economic Resources Measurement Focus: • WORKSHEET ENTRY – ONLY!!!!

12. Basic Accounting • Capital Asset Reporting Requirements:

13. Basic Accounting • Optional capitalization: • Older Infrastructure • Acquired prior to July 1, 1980 • Smaller Governments – acquired prior to June 30, 2004 • Collections • Works of Art • Historical Treasures • Similar Items • ENCOURAGED TO REPORT – but not required • Criteria – have to meet all three: • Purpose is display or research • Being adequately maintained • Proceeds from sale of collection items must be applied to acquiring new items • Immaterial Items • Below governments capitalization threshold

14. Basic Accounting • Assets capitalized but not depreciated or amortized: • Assets with indefinite useful lives • Land • Some intangibles – cannot “wear out” • Works of art, historical treasures, and similar items • Infrastructure (if government uses modified approach) • Capital assets not yet providing service • Construction in progress (tangible assets) • Development in progress (intangible assets)

15. Basic Accounting • Which government should report assets when one government acquires for use by another? • Ownership – critical criterion • Who holds title? • Exception: Leased to another under Capital Lease. • Example: • County constructs a building • Will be used by school district • County will continue to own (holds title) • COUNTY – will report on their financial statements

16. Basic Accounting • Which government should report assets when one government acquires for use by another? (Continued) • Assets acquired with Grant funds (sometimes) • Reversionary Interest – reverts to grantor should grantee wish to dispose • Does not limit grantee’s right to “use and enjoy” • Grantee reports on Financial Statements

17. Basic Accounting • Which government should report assets when one government acquires for use by another? • When ownership cannot be established (absence of title): • Responsible for maintaining • Owner for Financial Statement purposes • ONLY if ownership cannot be established

18. Major Asset Classes

19. Major Asset Classes • Seven or more major classes: • Land – always separate from an associated asset: • Land under a building or road – report as land • Include in cost of land initial preparation for intended use: • ONLY if preparations have indefinite useful life. Examples: • Excavation • Fill • Grading • Moving Power Lines • Buildings • Includes any improvements (betterments) • Includes restoration from an impairment

20. Major Asset Classes • Seven or more major classes (continued): • Improvements other than buildings (land improvements) • Fences • Retaining Walls • Parking Lots • Landscaping • Furnishings and equipment (machinery and equipment) • Vehicles • Furnishings • Library book collections

21. Major Asset Classes • Seven or more major classes (continued): • Infrastructure • Definition – “Long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets.” • Examples: • Roads • Bridges • Drainage retention areas • Water and sewer systems • Landfill

22. Major Asset Classes • Seven or more major classes (continued): • Infrastructure (continued) • Items of note: • Cost of land associated – report as land • Cost of buildings associated – report as buildings • Exception: Purely ancillary buildings • Examples: • Rest area on turnpike • Water pumping station in water system • Garages associated with a highway system

23. Major Asset Classes • Seven or more major classes (continued): • Construction (or development) in progress • Not yet ready for service • Other capital assets • Items not properly included in another class

24. Capitalizable Costs

25. Capitalizable Costs • GAAP - Include any “ancillary charges necessary to place the asset into its intended location and condition for use”. • Challenges: • Acquisition Costs • Interest incurred during acquisition • Training • Improvements (betterments)

26. Capitalizable Costs • Acquisition Costs: • Examples of POTENTIAL costs: • Legal and title fees • Closing costs • Appraisal and Negotiation fees • Surveying fees • Land preparation costs • Demolition costs • Audit and accounting fees • Transportation Charges

27. Capitalizable Costs • Acquisition Costs: • Preconditions for capitalization: • Only if directly identifiable with a specific asset • Example: Determine BEST location for a school – NOT CAPITALIZABLE • Example: Legal cost acquiring a specific property – CAPITALIZABLE • Only if incurred after acquisition of the related asset has come to be considered probable (likely to occur) • Example: Feasibility study – NOT CAPITALIZABLE

28. Capitalizable Costs • Acquisition Costs: • Internal Costs – Three Guidelines: • General and administrative costs NEVER capitalized (overhead) • Costs directly related to the acquisition of a specific asset – CAPITALIZE • Example: Salary & wages of employee worked on specific construction project (building, etc.) • Costs clearly related to the acquisition of capital assets, but not to specific projects - CAPITALIZE • Example: Cost accounting, design, and other departments providing services that are clearly related to projects. • Allocate to individual projects

29. Capitalizable Costs • Acquisition Costs: • Internal Costs – Intangible asset costs: • GAAP: “no outlays incurred prior to meeting all of the following may be capitalized: • The specific objective of the project has been determined; • The nature of the service capacity to be provided has been determined; • The feasibility of successfully completing the project has been demonstrated; and • The government has demonstrated that it 1) intends, 2) is able, and 3) is making an effort to develop/complete the project.”

30. Capitalizable Costs • Acquisition Costs: • Internal Costs – Intangible asset costs: • Additional guidance for internally generated computer software: • Prohibits capitalization of costs of preliminary project stage. • Examples: • Conceptual formulation • Evaluation of alternatives • Determination of existence of needed technology • Final selection of alternatives for development

31. Capitalizable Costs • Acquisition Costs: • Internal Costs – Intangible asset costs: • Additional guidance for internally generated computer software (continued): • Costs during application development stage – Capitalize *** • Examples: • Design of the chosen path • Coding • Installation to hardware • Testing • Data conversion • ***Only if incurred subsequent to completion of preliminary project stage***

32. Capitalizable Costs • Acquisition Costs: • Internal Costs – Intangible asset costs: • Additional guidance for internally generated computer software (continued): • Costs incurred post-implementation/operations stage – NEVER CAPTIALIZE • Examples: • Training • Software Maintenance

33. Capitalizable Costs • Interest incurred during acquisition

34. Capitalizable Costs • Interest incurred during acquisition (continued) • Financed by tax-exempt – externally restricted debt • Must be “externally restricted” (e.g., bond covenant) to the acquisition of the qualified asset to qualify for “netting” • Net interest expense against interest earnings on borrowing • Begins at date of borrowing/ends when asset placed in service • Example: • Borrows $1 million two months prior to start of construction • Interest rate of 5% • Reinvest unexpended at 2% for those two months

35. Capitalizable Costs • Interest incurred during acquisition (continued) • Financed by tax-exempt – externally restricted debt (continued) • Entry

36. Capitalizable Costs • Interest incurred during acquisition (continued) • Financed by tax-exempt (and non tax-exempt) debt – not externally restricted • Not offset by earnings • Calculation: • Interest rate of borrowing • Applied to the average accumulated expenditures during period

37. Capitalizable Costs • Interest incurred during acquisition (continued) • Financed by tax-exempt (and non tax-exempt) debt – not externally restricted (continued) • Example: • $1 million unrestricted capital improvement bonds (5 percent) • Expenditures first year $500,000 • Capitalized interest first year $25,000 ($500,000 X 5%)

38. Capitalizable Costs • Interest incurred during acquisition (continued) • Financed by existing resources • If debt outstanding in fund, “recycled” debt • No netting • Weighted average rate of interest on outstanding debt to average cumulated expenditures during period

39. Capitalizable Costs • Interest incurred during acquisition (continued) • Financed by existing resources (continued) • Example: • Fund with two bond issues outstanding ($1 million at 5% and $1 million at 4%) • First year accumulated expenditures $500,000

40. Capitalizable Costs • Interest incurred during acquisition (continued) • Financed by existing resources (continued)

41. Capitalizable Costs • Interest incurred during acquisition (continued) • Financed by existing resources (continued) • Entry

42. Capitalizable Costs • Interest incurred during acquisition (continued) • Financed by capital grants restricted for acquisition of qualified asset • No interest is incurred by grantee • Other interest in fund cannot be “recycled” • No interest capitalized on any portion financed by grant

43. Capitalizable Costs • Interest incurred during acquisition (continued) • Mixed financings • Multiple sources (i.e., tax-exempt bonds, capital grants, and existing resources) • Treat each source separately • Follow each of prior examples

44. Capitalizable Costs • Training • Not capitalized – 2 reasons • Does not affect the location nor use • Asset ready to be used – not if government is ready to use it • Cost should provide benefit throughout useful life • Employee turnover

45. Capitalizable Costs • Improvements (betterments) • Two types of costs • Improvements (betterments) - Capitalize • Provides additional value – either by: • Lengthening estimated useful life (reconstruct road with material that has longer useful life – concrete rather than asphalt) or: • Increasing assets ability to provide service (more effective or efficient) (widening a highway from two lanes to four) • Repairs and Maintenance – NOT capitalized • Retains value – new roof on building

46. Valuation of Capital Assetsfor FinancialReporting Purposes

47. Valuation of Capital Assets • Initial Valuation • Assets purchased or constructed • Historical Cost • Estimated historical cost • Standard costing – going price when acquired • Normal costing (back trending) – current cost restated in acquisition-year dollars. • Assigning bundled costs to individual assets (building & land) • Work from known to unknown (if know price of land – subtract from total purchase price for cost of building) • Estimate fair value of each – express as ratio – apply to purchase price

48. Valuation of Capital Assets • Initial Valuation (continued) • Assets obtained through trade-ins • Total cost for new asset • Example: • Vehicle traded – book value of $1,000 • Paid cash of $24,000 for new vehicle (after trade) • New vehicle value - $25,000 ($24,000 + $1,000)

49. Valuation of Capital Assets • Initial Valuation (continued) • Donated assets • GAAP – “estimated fair value at the time of acquisition plus ancillary charges, if any.” • “Buy” price – not “Sell” price • Price at which the government could have “bought” • NOT – price that it could be “Sold” for • If no regular market for donated asset: • Cost paid by donor (if within reasonable period of time) • Example: Developer donates road • Use developer’s costs if recent construction

50. Valuation of Capital Assets • Subsequent changes • Changes in market value – irrelevant • Reassigned to fund that does (not) capitalize interest • General rule – value of asset cannot change solely as result of being moved within the same financial reporting entity. • Improvements (betterments) – direct adjustment • Retirement from service • Held for resale – write down to fair value • Disposal – remove asset • Impairments • Deduct impairment loss and • Add cost of restoration