Accounting Manual for Departments. Annual Financial... · capital assets (i.e. the expenditure relating to the acquisition / maintenance etc.). This is dealt with in the Chapter on

Issued May 2018

Accounting Manual for Departments

Capital Assets

Capital Assets

Issued May 2018 Page 2

Chapter Content

1 Overview ....................................................................................................................................... 4

2 Key Learning Objectives ............................................................................................................... 4

3 Scope ............................................................................................................................................ 5

4 Control over a capital asset .......................................................................................................... 6

5 Tangible Assets and Intangible assets ......................................................................................... 8

5.1 Tangible Assets .................................................................................................................. 8

5.2 Intangible Assets ................................................................................................................ 8

5.2.1 Identifiability of an intangible asset .......................................................................... 9

5.2.2 Without physical substance .................................................................................... 11

6 Types of Capital Assets .............................................................................................................. 12

6.1 Loose tools, spare parts and servicing equipment ........................................................... 13

6.2 Safety equipment .............................................................................................................. 14

6.3 Library materials ............................................................................................................... 15

6.4 Investment property .......................................................................................................... 15

6.5 Biological assets ............................................................................................................... 18

6.6 Heritage assets ................................................................................................................. 20

6.7 Infrastructure assets ......................................................................................................... 22

6.8 Specialist military equipment ............................................................................................ 23

6.9 Internally generated intangible assets .............................................................................. 23

6.9.1 Research phase ..................................................................................................... 24

6.9.2 Development phase ............................................................................................... 24

6.9.3 Website costs ......................................................................................................... 25

6.10 Immovable assets ............................................................................................................. 26

7 Recording of Capital Assets ....................................................................................................... 28

7.1 General ............................................................................................................................. 28

7.2 Asset register .................................................................................................................... 28

7.3 Components ..................................................................................................................... 29

8 Measurement of Capital assets .................................................................................................. 30

Capital Assets


8.1 Initial measurement .......................................................................................................... 30

8.1.1 Movable assets: ..................................................................................................... 32

8.1.2 Immovable assets: ................................................................................................. 32

8.2 Elements of cost ............................................................................................................... 33

8.3 Warranty costs .................................................................................................................. 40

8.4 Leasehold improvements ................................................................................................. 40

8.5 Assets transferred between departments ......................................................................... 42

8.6 Fair value .......................................................................................................................... 42

9 Subsequent Measurement .......................................................................................................... 47

9.1 Subsequent costs ............................................................................................................. 47

10 Removal (Derecognition) ............................................................................................................ 47

11 Disclosures ................................................................................................................................. 49

12 Summary of Key Principles ......................................................................................................... 52

12.1 Definition and identification ............................................................................................... 52

12.2 Recording and measurement ........................................................................................... 52

12.3 Disclosure ......................................................................................................................... 53

Capital Assets


1 Overview

The purpose of this Chapter is to provide guidance on how to identify and report on capital assets.

The Office of the Accountant-General has compiled a Modified Cash Standard (MCS) and this manual serves as an application guide to the MCS which should be used by departments in the preparation of their financial statements.

Any reference to a “Chapter” in this document refers to the relevant chapter in the MCS and / or the corresponding chapter of the Accounting Manual.

Explanation of images used in the manual:

2 Key Learning Objectives

Understanding the definition for and different types of capital assets

Understand the capital asset transactions and what needs to be disclosed and recorded

Definition

Take note

Management process and decision making

Example

Capital Assets


3 Scope

The Chapter on Capital Assets in the MCS, and consequently this guide does not apply to:

The accounting requirements in respect of the primary financial information for expenditure on capital assets (i.e. the expenditure relating to the acquisition / maintenance etc.). This is dealt with in the Chapter on Expenditure. A department must however consider the provisions of this Chapter in order to correctly classify the type of asset acquired.

The recording of a capital asset subject to a finance lease. This is discussed in more detail in the Chapter on Leases. A department must however apply the provisions of this Chapter on expiry of the lease if the department takes control over the leased asset;

Intangible assets arising from powers and rights conferred to a department by legislation, the Constitution, or by equivalent means;

Departments may execute a regulatory right over certain activities, for example fishing, mining or industries such as telecommunications and energy. These regulatory rights and the power to transfer, license, rent or execute such rights are excluded from the scope of this chapter as these powers and rights are conferred to the department by legislation, the Constitution or other equivalent means. These rights once issued, are usually an intangible asset of those individuals or entities that acquired each right, provided that the acquirer can demonstrate that the definition and criteria for recording an intangible asset are met.

Similarly, a department’s right to levy taxes is granted in terms of statute and are thus excluded from the scope of this Chapter and not required to be valued for the purposes of recording in the financial statements.

Inventories. These are discussed in more detail in the Chapter on Inventory;

Agricultural produce after the point of harvest. This is discussed in more detail in the Chapter on Inventory;

Departments are at present not required to include assets acquired through finance leases in their asset registers until the finance lease period has expired.

These assets must however be reflected in the finance lease register maintained by the department.

Where a finance lease agreement has expired and the department continues to use the asset, and ownership of the asset transfers to the department, the asset must be recorded at its fair value at the date of expiry of the lease in the department’s asset register.

Supply chain regulations should be followed to extend or to enter into a new lease agreement.

Some departments acquire capital assets for distribution as part of their service delivery mandate. These capital assets should be classified as inventory only if they meet the definition of inventory as outlined in the Chapter on Inventory.

These items should also be budgeted for as inventory not capital assets.

Where the budget allocation is for capital assets, the newly acquired capital asset must be recorded in the asset register and if it was to be transferred to

Capital Assets


Consumable items. These are discussed in more detail in the Chapter on Expenditure; and

Capital assets acquired by an agent (on behalf of a principal) are accounted for in accordance with the Chapter on Agent-Principal Arrangements by the agent.

The assets should be accounted for by the Principal when the definition of an asset, as described in the section on control and mandate over a capital asset, is met.

4 Control over a capital asset

The definition of an asset, as discussed in the Chapter on Concepts and Principles as well as the Chapter on Capital Assets, has three components which must all be satisfied in order for an item to be recognised / recorded as ‘a capital asset' for accounting purposes.

These components are:

The department should have the power and capacity to control the service potential or future economic benefits of the asset;

Legal title and physical possession are good indicators of control, but the right of ownership is not essential. However, in the public sector control can also be signified by a specific core mandate over certain assets, which could include the sole power to dispose of such assets. The existence of control should be tested against the extent of control over the whole life of the asset.

another organisation or department, the transfer must comply with the requirements of Section 42 (PFMA).

Example: Assets acquired by an agent

Department A acts as an agent on behalf of Department P to acquire furniture.

This furniture purchased by Department A will not be accounted for by them as capital assets, but rather disclosure thereof will be made in the agent-principal transactions note to the financial statements.

Department P will record and report on the furniture as capital assets in the financial statements.

Assets are resources controlled by a department as a result of past events and from which future economic benefits or service potential are expected to flow to the department.

Control exists where a department has the power to obtain or direct the future economic benefits or service potential from the underlying resource and to restrict the access of others to those benefits throughout the major portion of the lifecycle of the asset.

Capital Assets


The key principle is that of control or power of direction over the utilisation of the economic benefits or service potential of the asset rather than mere 'physical' control.

The capacity of a department to control benefits may be the result of legal rights, but benefits may satisfy the definition of an asset even when there is no legal right.

The service potential or future economic benefits arose from past transactions or events;

Capital assets are recorded from the point when some event or transaction transfers control over the asset to the department. It is essential that the past event giving rise to control be identified, since transactions or events expected to occur in future will not necessarily give rise to assets.

The asset should have future service potential or economic benefit for the department.

Assets that are used to generate net cash inflows are usually described as embodying ‘future economic benefits’. Assets that are used to deliver goods and services in accordance with a department’s mandate, but do not directly generate net cash inflows are often described as embodying ‘service potential’.

The concept of ‘commercial return’ for assessing whether an asset should be recognised / recorded is not always applicable to public sector entities, as they provide public services and redistribute wealth for a variety of social and economic purposes. Therefore in applying the asset definition to the public sector environment, the focus is mostly on service potential rather than future economic benefits.

Example: Existence of control

An ambulance used by a state owned hospital meets the definition of control because (a) the ambulance contributes to the achievement of the department’s overall objectives and thus embodies service potential; and (b) the department can restrict access to the ambulance – only qualified officials of the department can operate the ambulance.

Example: Indicators of past transactions or events are:

When the department pays for the asset;

When it takes possession of the asset; or

When it budgets for a project to develop / construct the asset.

Legislation is enacted that mandates a department to administer the asset.

Future economic benefit or service potential embodied in an asset is the potential to contribute directly, or indirectly, to the flow of cash and cash equivalents to the department or to the rendering of services by the department.

Service potential is the capacity of an asset, singularly or in combination with other assets, to contribute directly or indirectly to the achievement of an objective of a department.

This objective may include provision of services to other institutions or the public at large for which the department receives no or little economic return.

Capital Assets


5 Tangible Assets and Intangible assets

5.1 Tangible Assets

Tangible assets are assets that one can touch, hold or feel that a department uses in the production or supply of goods and or services. Typical examples of tangible capital assets are facilities, equipment and vehicles. Since they are tangible items, they also have the risk of being destroyed by fire, wind/rain, or other disasters or accidents.

These assets form the majority of assets used by departments in the day to day administration of their functions and amounts to huge numbers and billions of rand. Tangible assets can further be separated based on whether they are movable (vehicles, furniture and computer equipment) or immovable (land, school buildings and office buildings). Recording capital assets and reporting thereon has a material impact on financial statements due to the continued investment in new assets on an annual basis and the value involved.

5.2 Intangible Assets

Not all intangible items meet the definition of an intangible asset for the purposes of financial reporting as they are not identifiable. The fact that software is contained on a CD or the right to use included in an agreement on paper, does not mean that the asset has physical substance because there is a physical item to touch. The asset is the knowledge or know-how which cannot be seen or touched. If an item within the scope of this section does not meet the definition of an intangible asset, expenditure to acquire it or generate it internally will be expensed through the statement of financial performance as part of goods and services rather than capital assets.

Example: Service potential

Provincial department of public works (DPW) builds office accommodation as part of its service delivery mandate. The objective is not to make a profit in rendering this service as would be the case for a landlord with a profit motive. Instead, by providing and maintaining the office accommodation for use by other departments it ensures that the service potential of the asset is utilised as well as the objectives/ mandate of the department realised.

Tangible assets are non-monetary assets having physical substance that:

are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes or for the development, construction, maintenance or repair of other capital assets; and

are expected to be used during more than one reporting period.

An intangible asset is an identifiable non-monetary asset without physical substance.

Capital Assets


5.2.1 Identifiability of an intangible asset

An asset meets the identifiability criterion in the definition of an intangible asset when it:

is separable, i.e. is capable of being separated or divided from the department and sold, transferred, licenced, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the department intends to do so; or

arises from binding arrangements (including rights from contracts) regardless of whether those rights are transferable or separable from the department or from other rights and obligations.

For the purpose of this section, a binding arrangement describes an arrangement that confers similar rights and obligations on the parties to it as if it were in the form of a contract.

Example: Examples of intangible assets

Software;

Department X purchases 1 Lenovo Desktop T440 for R12 000. This laptop came with Windows Vista as the operating software.

Windows Vista is not separable (doesn’t meet the identifiability criterion) from the hardware and is the integral part of the laptop without which the laptop wouldn’t work and therefore should be treated as part of the hardware (Computer Equipment) and not disclosed separately as an Intangible asset.

Dr Computer Equipment (Tangible Asset) R12 000

Cr Bank R12 000

Department Y purchases Windows 7 package to replace the still working Windows Vista initially purchased with the laptop as Windows 7 is more advanced and as a result more desirable for R6 000

The newly acquired Windows 7 is not an integral part of the hardware even though it performs the same function as Windows Vista, however this software was purchased separately (Can be sold individually and monitory value attached – Off the shelf package is always likely to be an intangible asset as defined and meet the identifiability criterion)

The acquisition meets the definition on intangible assets and separable and should therefore be treated as the Intangible asset and be disclosed separately

Dr Software (Intangible Asset) R6 000

Cr Bank R6 000

Software licence fees;

Department X purchases Microsoft Office package for R10 000 cash and the department is also to pay R1 000 licence fee on an annual basis for as long as the package is in use. This licence fee will entitle the department to any Microsoft Office update or upgrades in future. Although the benefit of the license will be realised in future and thus it could be seen as a capital asset it would be written off within one year. As the MCS does not make provision for depreciation on assets the license fee is expensed on payment.

The Microsoft Office package is the intangible as per previous example above and annual licence fee will be expensed (Current Expenditure) as the amount relates to the maintenance of the package.

Capital Assets


Initial recognition

Dr Software (Intangible Asset) = R10 000

Dr Annual licence fee = R1 000

Cr Bank R11 000

Subsequent years

Dr Annual License fee (Current expenditure) R1 000

Cr Bank R1 000

The treatment of the licence fee is closely linked to the period it will entitle the department to the use of the software. If the licence fee payable is for benefits for more than 12 months, it becomes a capital expenditure, intangible asset in its own right however, if the department is paying the annual licence fee for the next few years in order to take advantage of a discount, the licence fee still remains current expenditure since contractually it is payable yearly for annual benefits.

Other types of intangible assets include the following:

Rights under licensing agreements for films, videos, plays and manuscripts in entities such as broadcasting, tourism, arts and culture;

Patents and copyrights held by government entities in fields such as tourism, research, education, health, agriculture, archives;

Databases and database management software created and maintained by government entities, such as those containing information on the demographic statistics of the population, land ownership, private sector entity ownership and registers of securities and charges;

Airport landing rights;

Licenses to operate radio or television stations;

Import / export licenses; and

Right to control the extraction of mineral resources.

Termed software licenses versus perpetual software licenses

A distinction should be made between the license fee and the annual maintenance and support paid to the license holder (or its agent).

The software license fee may be regarded as an intangible asset (see discussion below), whereas the annual maintenance and support fee is regarded as a current expense when paid.

Departments either acquire a termed license or a perpetual license in terms of:

(a) A termed license – a department will acquire the “right to use” the software a period specified in the license agreement;

(b) A perpetual license – a department acquires the “right to use” the software in perpetuity.

Where a department acquires a termed license it must assess the term of use and whether the term exceeds 12 months. Where the term of use is greater than 12 months the software shall be classified as a capital intangible asset.

Perpetual software licenses are classified as capital intangible assets when acquired.

Capital Assets


5.2.2 Without physical substance

Intangible Physical substance Why is it still seen as “without physical substance”?

Licenses (software licenses, etc.)

Licence document / agreement

The department pays for the right of use of, e.g. software. Thus a department does not pay for the tangible item being the piece of paper on which the license agreement is printed, but rather for the right to use the knowledge imbedded in the software (you can’t touch a right of use).

Application software CD The value of application software is not driven by the CD that it is loaded on, but rather by the knowledge that it embodies. Thus the physical substance is deemed to be incidental.

Contracts must be analysed to determine what the department is paying for and a policy developed to indicate the criteria used for splitting capital from expense and also update budget processes where the amounts are incorrectly budgeted for.

SITA Act Implications regarding software

Section 7 of the SITA Act 88 of 1998 as amended, provides for the State IT Agency's duties and powers consisting of the “Must” (mandatory) services and “May” (non-mandatory) services with regards to the application software development and maintenance services for both information technology software or infrastructure -[Section 7(1)(b)(ii) & (iii)].

It is therefore not always a requirement that the Agency provides the services. That being said, one must always bear in mind that every department is required to procure all (mandatory or non-mandatory) in terms of section 7(3) of the SITA Act as amended.

In case where the department has procured the services without the assistance of SITA, SITA Regulation 17, with particular reference to 17(1) and 17(2), the department should provide reasons why SITA was not used and if exemption was provided to procure the services without SITA.

Section 7(8) provides that in the performance of the Agency's duties and exercise of its powers, the Agency must amongst others eliminate unnecessary duplication of information technology goods or services. In order to eliminate duplication, SITA Act Regulation 4(6) provides for SITA to compile and maintain an up-to-date inventory of all information systems of departments to serve as basis for determining duplication of information systems. This is to ensure that if any department is trying to procure, or develop a new software application that already exists, SITA will be able to advise of the same so that the product can be used by other departments who have similar needs instead of duplicating what already exists.

It must be noted, that the services rendered to the department, either from or through SITA, becomes the product of the department, and ownership of such product belongs to the department. SITA is only used as a procurement arm of government, and does not become the owner of any product requested for by any department.

Capital Assets


Intangible Physical substance Why is it still seen as “without physical substance”?

Electronic books or books for learners with eye impairment

CD The department buys 20 CD’s for the library. These CD’s can be borrowed and listened to, similar to books being borrowed for reading purposes.

Should a CD be damaged in any way, it will be

replaced by a new CD which must be bought, In

this instance the ‘asset’ is the tangible CD as there

is no right to the information contained on the CD

other than to listen to it.

Although the cost of the CD in question is greater

than that of an ‘empty’ one, the price paid is not for

the ‘right’ to the information contained thereon but

for the work to copy the material onto a CD format.

This is the same with a book. If a department

purchases a book full of information, that

department does not ‘own’ the information but a

physical representation of the information for use

or application of the information. The information

cannot be utilised for future benefit or copied or

sold without specific authorisation.

Educational Material CD In a case where the department purchases a CD from the creator of educational material with the rights to copy, distribute and place the educational material in the library, The ‘asset’ would be the ‘right to copy’. A right to the information on the CD and the ‘asset’ will be intangible. In this instance the CD is the incidental physical embodiment of the right.

Patents Patent registration document

The value of a patent is not driven by the piece of paper that indicates its registration but rather by the knowledge that it embodies. Thus the physical substance is deemed to be incidental.

6 Types of Capital Assets

Capital assets are non-current tangible or intangible assets of a department that are expected to be used or held by that department for longer than one year.

Capital Assets


To distinguish between the different types of capital assets the department should request the Basic Accounting System (BAS) reports that contain the details of the asset segment.

Exclusion list

PFMA section 38(1)(d) states “The accounting officer for a department, trading entity or constitutional institution is responsible for the management, including the safe-guarding and the maintenance of the assets, and for the management of the liabilities, of the department, trading entity or constitutional institution.”

Keeping the above quoted legislation in mind, if the department has capital assets by definition but for whatsoever reason(s) chooses to have the exclusion list of capital assets:

a) The criteria for coming up with that exclusion list must be clearly documented and included in the departmental asset management policy

b) The criteria to be consistently applied and be accompanied by the enforceable alternative control procedures and

c) Those excluded capital assets still need to be controlled and managed.

Examples of capital assets in the public sector:

buildings (including investment properties);

land

biological assets;

specialised military equipment;

heritage assets;

infrastructure assets;

motor vehicles; and

intangible assets.

Capital assets are split into major capital assets and minor capital assets for administrative convenience.

Currently, minor capital assets include those items costing less than R5 000. To align this practice to the budget process they are budgeted for as “current” expenditure.

Costs incurred for research purposes are also classified as “current expenses” without considering the threshold.

6.1 Loose tools, spare parts and servicing equipment

Spare parts and servicing equipment are usually accounted for as inventory or consumables. However, certain spare parts and stand-by equipment qualify as capital assets when a department expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with a specific capital asset, they are accounted for as

Capital Assets


capital assets. Examples of spare parts and servicing equipment are propellers and engines of aircrafts and vessels.

Some loose tools can be used for more than one year. Such tools can be small and relatively inexpensive and can be treated as inventory, consumables or minor capital assets. Examples of loose tools:

saws (manual or electronic);

spades;

axes and hammers;

screwdrivers;

spanners or wrenches; and

hand-held drills and grinders;

6.2 Safety equipment

Safety equipment acquired to meet environmental regulations, qualify as capital assets if they enable related assets to generate future economic benefits or service potential in excess of what these benefits would have been if this safety equipment was not acquired.

Some flexibility is however needed. Depending on the nature and significance of such tools, they may be treated as major capital assets and their acquisition and disposal recorded as such.

An example is where toolboxes are used. The toolbox including all tools can be treated as one unit and as a major capital asset since the value of all the tools in the box could be significant and collectively exceed the capitalisation threshold.

Example: Loose tools

Scenario 1

Department B purchases a medical toolkit which includes scalpels, forceps and tongs for R10 000. The equipment can be treated as one unit.

The toolkit is a major capital asset and will be recorded in the major asset register as a unit since the toolkit can be allocated to a specific custodian who can be held responsible for the content therein.

Scenario 2

A forceps included in the toolkit as per scenario 1 is lost and the Department purchases a new forceps for R300 to replace the lost one

The purchase of individual items within the toolbox is treated as maintenance (Current Expenditure – Goods & Services), the R300 would therefore be expensed. The total value of the toolkit does not change significantly by the replacement of an individual item so the original value remains relevant.

Example: Safety equipment

New legislation is enacted that requires x number of fire hydrants per floor of every building. The installation of the hydrants is needed to enable the continued use of the building and its future economic or service potential, in compliance with the new safety standards. The cost of the hydrants and the installation thereof will be recorded as a capital asset, major or

Capital Assets


6.3 Library materials

Library materials under the control of the department that meet the definition of a capital asset must be accounted for by the department using the principles contained in this chapter, no matter how it was acquired. When testing for control the mandate and ultimate accountability must be considered not just the physical possession or location of the material itself.

6.4 Investment property

In determining whether a capital asset should be classified as investment property, a department considers if the main purpose and most significant use of the property is to earn rental or for capital appreciation.

minor depending on the cost.

An old building still in use has asbestos ceilings which were installed when the building was constructed. As a result of medical conditions that are directly attributed to asbestos the building can no longer be used as is. To enable further use the ceilings must be removed or covered up. A decision is made to cover up the existing ceilings with a new false ceiling made from special material that will protect users of the building from the asbestos particles. The cost of the new technology and installation thereof will be recorded as capital assets;

For detailed guidance on library materials refer to the Accounting for Library Material Guide on the Office of the Accountant-General’s (OAG’s) website.

Investment property is a property (land or a building or part of a building or both) held with the primary purpose of earning rentals or for capital appreciation or both, rather than for:

use in the production or supply of goods or services, or

for administrative purposes; or

sale in the ordinary course of operations.

Example: Investment property

A building owned by the department that is leased out under one or more operating leases in accordance with their service delivery objectives;

Property that is being redeveloped for continued use as an investment property;

Property that is being constructed or developed for future use as investment property;

Land held for an undetermined use.

Capital Assets


Distinction between Investment Property and Other Buildings

Investment property Other buildings

The asset generates its own cash flows (on a commercial basis).

Rental income earned is incidental; the asset is made available for service delivery purposes.

For example, DPW, the mandated custodian of immovable property, in this case, buildings, provides one of those buildings to another government department (Department A) for use and Department A is charged a rental of R20 000 a month. The rent charged in this case is considered as incidental as DPW is doing so in execution of its service delivery mandated

The asset is held for capital appreciation. The asset is held to achieve service delivery objectives rather than to earn rental or for capital appreciation.

For example, all the buildings held by DPW whether occupied by DPW itself or by another department as a result of its service delivery mandate are not held specifically to earn rent or for capital appreciation purposes but rather for service delivery purposes

Includes property that is being constructed or developed for future use as investment property.

Includes owner-occupied property such as office buildings and residential buildings occupied by staff members.

[Assets used by employees, irrespective of whether or not the employees pay rent at market rates, are owner occupied – outside the scope of investment property]

Includes land held for an undetermined use. Includes assets held for strategic purposes.

Investment property is disclosed as part of Buildings and other fixed structures in the financial statements. To distinguish between the different types of buildings and other fixed structures the department must request the Basic Accounting System (BAS) reports that contain the details of the asset segment.

Example: Distinguishing between different types of properties

A department has three properties which are used as follows:

the first property is used as employee accommodation;

the second property is used as the offices of the department; and

the third property was specifically developed and constructed to earn rental income and is rented out to another entity for a monthly rental income.

Capital Assets


First property

The property is held for employee housing to contribute to the department’s provision of services and therefore is not investment property. The building should be classified as residential buildings. It is not important whether there is alternative accommodation available for the employees or not - [Property housing the employees is specifically excluded from the scope of Investment Property]

Second property

The property is held by the department for administrative purposes and is specifically excluded from the definition of investment property. The building should be classified as non-residential buildings.

Third Property

The property is held exclusively to earn rentals and this property is specifically included in the definition of investment property and should therefore be classified as investment property.

There are instances where a portion of a property is held to earn rentals and another portion is used by the department itself for administrative purposes or for delivering goods and services. If the portions of the property can be sold separately then the portion held to earn rental is investment property.

Example: One property used as owner-occupied property and to earn rentals

Scenario1

A department owns a building of 750 square meters. The building consists of four floors of which the bottom floor of 210 square meters are offices used by the department and the top three floors consists of the remaining 540 square meters with 9 apartments which are being rented out to unrelated tenants. The office space and each apartment can be sold separately.

In this example the department has one property with a portion being owner-occupied and a portion being used to earn rentals. These portions are easily identifiable and as a result require different accounting treatment. The portion of the building used to earn rentals is investment property and the portion used by the department itself will be classified as owner-occupied (non-residential buildings).

Scenario 2

Department A owns a property which consists of two adjoining warehouses. The department uses the smaller warehouse of 100 square meters to store inventory and the larger warehouse of 700 square meters is being rented out and the department cannot dispose of these warehouses separately. According to Department A’s policy, significance regarding the classification between the investment property and other buildings is anything more than 40% of the floor space

In this example the department has one property with a portion being owner-occupied and a portion being used to earn rentals.

Before the department can classify the property as investment property it first needs to determine if the owner-occupied portion of the warehouse is insignificant or significant.

Total size of the warehouses = 800 square meters

Owner-occupied portion of total size = 12.5% (100 sqm / 800 sqm)

Capital Assets


Investment Property portion of the total size = 87.5% (700 sqm / 800 sqm)

As per the asset management policy of department A, the property would

therefore be classified as an Investment Property since the owner-occupied

portion is significantly less than 40% of the floor space

6.5 Biological assets

The above definitions are explained by way of the examples below:

Biological assets Agricultural produce Products that are the result of processing after harvest

Sheep Wool Yarn, carpet

Trees in a plantation forest Logs Furniture

Plants Cotton Thread, clothing

Dairy cattle Milk Cheese

Pigs Meat Sausages, bacon

Bushes Leaf Tea, cured tobacco

Vines Grapes Wine

Fruit trees Picked fruit Processed fruit

Wildlife (game) Meat Venison

The key feature that differentiates agricultural activities from other related activities is the intended use of the assets.

Departments often encounter difficulties in deciding what type of asset category should be applied to a biological asset owned by a department. In deciding under which asset category a biological asset should be accounted for, a department should consider the intended use of such asset.

If an activity is for recreational purposes, it is specifically excluded from this section.

Biological assets are living animals or plants.

Agricultural produce is the harvested product of the department’s biological assets and will be reflected as inventory.

Biological transformation is the process of growth, degeneration, production or procreation that causes qualitative and quantitative changes in a biological asset.

For reporting purposes, we do not differentiate between biological assets held for agricultural purposes and other purposes as long as they all meet the definition of biological assets

Agricultural activity is the management by a department of the biological transformation of biological assets: for sale, into agricultural produce, or into additional biological assets.

For example, the Department of Correctional Services operates farms where crops are planted, tended and harvested for sale to the market or for use in the kitchens at the correctional facilities to feed the inhabitants. The Department is actively managing the process and is therefore involved in agricultural activity.

Capital Assets


If the department does not actively manage the activity (being the biological transformation) or the assets do not undergo a biological transformation, it is not an agricultural activity and the assets should be treated as biological capital asset if it meets the definition.

As the MCS does not distinguish between biological assets and agricultural activities all biological assets will be reflected as capital assets where the definition is met.

Slaughtered animals and harvested crops are no longer biological assets, because once a biological asset is slaughtered or harvested it no longer meets the definition of a biological asset and should then be regarded as inventory until it is sold or distributed. Refer to paragraphs below.

Biological assets exclude any cultures, cells, bacteria and viruses used in laboratories for research purposes or as inputs into vaccines, etc. Items used for research purposes are classified as “current expenses”.

An important principle in the MCS is that departments should apply this chapter for agricultural produce only up to the point of harvest.

After harvesting the principles of inventory will apply to the produce.

Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life processes.

Biological Assets examples

Scenario 1

Department A farms chickens, the chickens are to be sold or consumed within three months after their acquisition or birth date.

The chickens are biological assets by nature however due to their purpose or use in this case; they will not be treated as a capital asset since they do not meet the definition of capital assets as per MCS paragraph .09 of Capital assets chapter as they are never kept for more than a year.

These chickens should be classified as inventory

Scenario 2

Department A is mandated to manage the animal numbers for conservation purposes such as in National Parks. The department does not manage these animals individually but as a group (the environment).

The department is therefore not expected to tag these animals and record them in the asset register since the department does not have control as defined over each animal. The same applies for plants, bees flying over and so on.

The department is not also not expected to account for the randomly visiting animals that belong to the neighbouring farms (Animals belonging to the other institutions)

The activities conducted to manage the environment would be part of

Capital Assets


6.6 Heritage assets

performance information.

However in a case of a Zoo where they do not only manage the numbers but

have control over the animals they keep, the animals will be individually

classified and recorded as biological assets

Scenario 3

Department B purchases ten heads of dairy cattle for R20 000 each on the 1st of June 2014.

At year end (31/03/2015), the fair value of the dairy cattle is R25 000 each.

The cattle will be disclosed at R250 000 at year end if the department’s policy is to show the dairy cattle at fair value, if not it must be reported at cost. The MCS Chapter on Capital assets allows the departments to use either of the two.

The department’s choice of either reporting at fair value or cost regarding biological assets must be clearly indicated in the department’s asset management policy.

It is advised that a department that has biological assets maintains a policy and standard operating procedures that clearly state the nature, management, accounting treatment and other useful information on the management of the department’s biological assets.

Heritage assets are assets that have a cultural, environmental, historical, natural, scientific, technological or artistic significance and are held indefinitely for the benefit of present and future generations.

Characteristics of heritage assets, include the following:

Their value in cultural, environmental, educational and historical terms is unlikely to be fully reflected in a financial value based purely on a market price;

Legal and/or statutory obligations may impose prohibitions or severe restrictions on disposal by sale;

They are often irreplaceable and their value may increase over time even if their physical condition deteriorates; and

It may be difficult to estimate their useful lives, which in some cases could be several hundred years.

Capital Assets


Older buildings can be of an age where they may attain heritage status. Prior to any alterations being done the relevant national or provincial agency should be contacted to ascertain whether the structure is considered a heritage assets or not. There may be different conditions attached such as preserving of the façade but the interior could be altered or the entire structure may not be altered. Any conditions should be noted and flagged in the asset register.

In summary, some key features of heritage assets that can be used in identifying an asset as a heritage asset:

The asset is held indefinitely;

A national or provincial agency has declared the asset to be of historical significance;

The asset is protected, cared for and preserved for present and future generations;

The asset’s value increases over time; and

It may be difficult to determine a monetary value of the asset.

If a department still cannot determine whether the asset is a heritage asset or other tangible asset, it should ascertain the purpose of holding the asset, i.e. is it used to execute the department’s activities or for another purpose.

There are instances where heritage assets can have a dual purpose, for example where an historical building meets the definition of a heritage asset, but it is also used for offices.

These assets that are used for more than one purpose should be classified as a heritage asset when a significant portion of the asset meets the definition of a heritage asset.

The department cannot split an asset into more than one classification. For example: a portion of a property cannot be classified as buildings and another portion classified as heritage assets. The full asset is either a heritage asset or it is not a heritage asset.

Examples of heritage assets

Historical buildings and monuments e.g. Union Buildings;

Archaeological sites e.g. Sterkfontein Caves;

Conservation areas and nature reserves e.g. Cradle of mankind; and

Works of art e.g. paintings.

Determining whether or not the heritage portion is significant or not is a judgement that should be made by management. This determination does not have to be performed by an expert though the management is not prohibited from contracting one. Departments are encouraged to err on the side of caution and protection (Heritage assets classification) where it is not clear, rather than allowing disposal that might be costly or impossible to reverse in the future. This judgement should be applied consistently over all the assets.

To ensure consistent application of the criteria, it is recommended that management include the judgement criteria as part of their asset management policy. The asset management policy is also expected to indicate the identification and the valuation criteria of these heritage assets. The valuation technique will depend on the type of asset as some will have

Capital Assets


6.7 Infrastructure assets

Some assets are commonly described as “infrastructure assets”. While there is no universally accepted definition of infrastructure assets, these assets usually display some or all of the following characteristics:

they are part of a system or network;

they are specialised in nature and do not have alternative uses;

they are generally immovable; and

they may be subject to constraints on disposal.

Although ownership of infrastructure assets is not confined to entities in the public sector, significant infrastructure assets are frequently found in the public sector. Infrastructure assets meet the definition for capital assets and must be accounted for in accordance with this chapter.

The examples above illustrate that infrastructure systems or networks consist of multiple different assets that work together to achieve a specific service such as a water supply or purification of water. As a result the asset should be unbundled into its components before recording in the asset register.

active markets, such as paintings, or the restoration or reproduction cost can be determined for constructed heritage assets such as buildings and monuments.

Examples of infrastructure assets

Department A procures fingerprint biometrics systems amounting to R1 Million. This system consists of biometric time and attendance readers, s-bus relay boxes and no-touch exit buttons and other items including the cabling specifications.

As much as this infrastructure would most likely be attached to the building, it is not necessarily immovable asset as it could still be detached from the building when the department permanently vacates the building depending on the occupation contract.

If any of the required items in the infrastructure is not working or malfunctioning, the whole system would fail, therefore the department manages the whole system rather than the individual “components” of the system. For reporting purposes, the department would record this infrastructure in the asset register as a one line item though the management records of the system would list each component for maintenance purposes.

On expiry of the contract or when the department permanently vacates the building and prohibited from detaching the system from the building, the total costs as per the asset register on that day will be

transferred to the books of DPW if the building belongs to DPW via PFMA section 42

written off if the building belongs to the private landlord

Other examples of infrastructure assets

Road networks;

Sewer systems;

Water systems;

Power supply systems;

Telecommunication networks;

Railways; and

Harbours.

Capital Assets


The asset management policies of the department should specify how this should be done and to what level components should be individually recorded.

Departments usually have specific mandated portfolios of infrastructure to administer for example roads are the responsibility of the department of transport or roads and public works depending on the mandate. All roads should therefore be recorded by the mandated department in sections for identification and management and its policies should specify how for example intersections are recorded.

6.8 Specialist military equipment

Specialised military equipment will normally meet the definition for capital assets and should be recorded as such in accordance with this chapter. These assets are only for the use of the Department of Defence.

6.9 Internally generated intangible assets

It is sometimes difficult to assess whether an internally generated intangible asset qualifies as an intangible asset because of problems in:

identifying whether and when there is an identifiable asset that will generate expected future economic benefits or service potential; and

determining the cost of the asset reliably. In some cases, the cost of generating an intangible asset internally cannot be distinguished from the cost of maintaining or enhancing the department’s day-to-day operations.

To assess whether an internally generated intangible asset meets the criteria for being recorded, a department classifies the generation of the asset into:

Guidance on infrastructure assets is included in the following documents:

SCOA Classification Circular 3 of 2009 – SCOA Website

SCOA learners toolkit

MFMA Local Government Capital Asset Management Guide, Annexure C – Although this is a guide for Municipalities which are in an accrual environment, guidance may be of use to departments. – MFMA Website

COGTA (DPLG) guide on Infrastructure

Example: Specialised military assets

Weapons;

Weapons delivery systems;

Exposure equipment;

Flying suits;

Rigging; and

Ships and marine equipment.

Military hospitals and military airports are not included in this category even if they are used by these departments. These are non-residential buildings.

Capital Assets


a research phase; and

a development phase.

Although the terms ‘research’ and ‘development’ are defined, the terms ‘research phase’ and ‘development phase’ have a broader meaning for the purpose of this chapter.

If a department cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the department treats the expenditure on that project as if it was incurred in the research phase only. NB: The department must keep in mind at conception of project and institute processes in order to be able to control spending which should be compared to budget and value for money.

6.9.1 Research phase

No intangible asset arising from research (or from the research phase of an internal project) must be recorded as a capital asset. Research expenditure is included as part of current expenditure in the financial statements.

In the research phase of an internal project, a department cannot demonstrate that an intangible asset exists that will generate probable future economic benefits or service potential.

Examples of research activities are:

activities aimed at obtaining new knowledge;

the search for, evaluation and final selection of, applications or research findings or other knowledge;

the search for alternatives for materials, devices, products, processes, systems or services; and

the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.

6.9.2 Development phase

Recognising / recording of costs to the cost of the capital asset commences with the development phase.

An intangible asset arising from development (or from the development phase of an internal project) must be recorded if, and only if, the department can demonstrate all of the following criteria:

the technical feasibility of completing the intangible asset so that it will be available for use or sale;

its intention to complete the intangible asset and use or sell it;

its ability to use or sell the intangible asset;

Research is the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of production or use.

Capital Assets


how the intangible asset will generate probable future economic benefits or service potential. Among other things, the department can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;

the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

its ability to measure reliably the expenditure attributable to the intangible asset during its development.

In the development phase of an internal project, a department can, in some instances, identify an intangible asset and demonstrate that the asset will generate probable future economic benefits or service potential. This is because the development phase of a project is further advanced than the research phase.

Examples of development activities are:

the design, construction and testing of pre-production or pre-use prototypes and models;

the design of tools, jigs, moulds and dies involving new technology;

the design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production; and

the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services.

Availability of resources to complete, use and obtain the benefits from an intangible asset can be demonstrated by, for example, a strategic plan showing the technical, financial and other resources needed and the department’s ability to secure those resources.

Example: Research and development costs – restoration costs incurred

Department R&D received information of the existence of voice recordings of private conversations between Jan Smuts and Winston Churchill during the Second World War that may be of historical significance and subsequently underwent exploration costs to search for the recordings. At the reporting date, 31 March 20x4, nothing was found as yet.

The exploration cost for the period amounted to R500 000.

On 1 April 20x4, department R&D discovered the voice recordings and preliminarily verified the authenticity. No further costs were incurred.

However, the recordings were badly damaged and had to be restored and digitally re-mastered, after which an extensive verification process was followed to guarantee the authenticity. The costs of the verification, restoration and re-mastering amounted to R300 000.

The R500 000 will be treated as research cost under current expenditure.

The R300 000 will be treated as development cost under capital expenditure - heritage assets.

6.9.3 Website costs

A website does not have physical substance. As a result, development costs associated with a website are intangible assets if they meet the definition of an intangible asset and the development phase criteria.

Some websites are developed to comply with a statute or to be used mainly to provide information on the function, services, objective and performance of a department to the public at large. These websites will not meet the development phase criterion regarding generating probable future economic benefits or service potential and as such the costs incurred for the development of these websites should be expensed.

Capital Assets


Example: Website cost - Determining whether a website can be capitalised as an intangible asset

It is important to note that a department will need to demonstrate how the website will generate probable future economic benefits or service potential, in order to capitalise the website as an intangible asset. If the department cannot demonstrate this, all expenditure on such a website should be recognised as a current expense under goods and services when it is incurred.

It is difficult to demonstrate that probable future economic benefits or service potential will be generated from a website developed solely or primarily to promote and advertise its own products or services; consequently all costs on developing such a website will be classified as a current expense. It is thus treated in the same manner as traditional ‘advertising’ cost as the impact thereof on the business is difficult to estimate or measure.

Where an entity created a website specifically for the use of e-learning students, where study material can be accessed after paying the relevant fees, the entity can show that future economic benefit or service potential will flow to the entity and the cost incurred in development of the website can be recorded as an intangible asset.

Example: Website costs

Department A decided to develop a website for its own use as well as the use by its target market.

Since the department had never developed a website previously, it was decided to first undertake a feasibility study and if successful, define hardware and software specifications, evaluate alternative products and suppliers and then select preferences. These steps were executed and eventually expenses of R60 000 were incurred in this regard.

In the next stage of the project, hardware was purchased, a domain name was obtained and operating software was developed. These developed applications were installed on the web server and the total cost incurred in this stage amounted to R220 000, of which the hardware comprised R80 000, the software R100 000 and the remainder was spent on obtaining the domain name.

Once the above had been completed, the appearance of the web pages was designed. A graphic designer rendered an account of R18 000, which was paid in cash immediately.

The content of the website was then developed. The cost involved in this development amounted to R25 000.

The website was brought into use on 01 April 20xx. During the 6 months following on it being commissioned, graphics were updated, the website was registered with a few new search engines and the usage of the website was analysed to establish the effectiveness thereof as a marketing tool. The costs amounted to R20 000.

Capital Assets


6.10 Immovable assets

Immovable assets are always major assets. However, since some immovable assets were initially recorded in the asset register at a nominal amount they may have been allocated to the minor asset register. It is important to note that separate disclosure in the secondary information is required for immovable assets so recorded.

Description Amount (R) Classification

Feasibility study 60 000 Current Expenditure

Hardware 80 000 Tangible capital asset

Software 100 000 Intangible asset

Domain name

(220 000 – 80 000 – 100 000)

40 000 Intangible asset if the department can demonstrate how the website will generate probable future economic benefits or service potential or else its current expenditure

Graphical design development stage


Content development stage


Website testing 20 000 Current expenditure

An immovable asset is a capital asset consisting of land, infrastructure, buildings or a combination of thereof.

Capital Assets


7 Recording of Capital Assets

7.1 General

For the purposes of recording capital assets, a department should maintain an asset register that will enable it to manage its assets, which includes the maintenance and replacement thereof, as well as to ensure that appropriate safekeeping measures can be put in place. It also assists with compliance with the disclosure requirements in the notes to the financial statements - refer to the Section on Disclosures below which sets out the disclosure required.

Upon initially recording a capital asset, a department must determine whether the capital asset is a minor or major capital asset and record the asset as such.

The threshold value for distinguishing between minor and major capital assets is determined by the Office of the Accountant-General (OAG), which is currently R5 000,meaning any asset costing R5 000 or above should be recorded as a major capital asset.

7.2 Asset register

An adequate asset register is integral to effective asset management and provides details of the values (figures) to be disclosed in the financial statements. Information can be contained in different databases but it is important that the information can be identified as belonging to a specific asset throughout. Where there is no identifier to link the information the management of assets will be negatively impacted.

All capital assets owned and controlled (which includes leased assets and minor assets) should be included in a register regardless of the funding source or value thereof. This need not be the same register. For example, during the lease term of a finance lease, the finance lease assets should be in a lease register and with regards to minor assets these can be included in a separate minor capital assets register.

For detailed guidance on departments that have the responsibility to account for the immovable assets belonging to the state, refer to the Immovable Asset Guide on the Office of the Accountant-General’s (OAG’s) website.

The document takes into account legislation and specific mandates in the vesting and custodianship of immovable assets.

Even though minor capital assets are not recorded under expenditure for capital assets, the total rand value and quantities of these assets are separately disclosed under the capital assets notes (refer to the Section on Notes for the disclosures required). The minor capital assets register must be made available to the external auditors at year-end. The controls over safekeeping, etc. of these assets are the same as for major capital assets. The register should be as at 31 March of the respective year. The minimum requirements of the minor capital assets register are the same as those of the major capital assets register.

An asset register is a database of information on each asset that supports the effective financial and technical management of the assets, and allows for the meeting of statutory requirements.

The asset register should also facilitate proper financial reporting

Capital Assets


7.3 Components

Components are parts of a capital asset. Such items form part of the main capital asset, but have a useful life and/or value that are different to that of the main asset or is significant in value in relation to the asset as a whole and is therefore managed separately. Components may or may not be functional in their own right. These items are often replaced over the lifetime of the main asset. Where an asset is recorded in its component parts and a component is replaced, it is removed from the asset register and the replacement part recorded in the asset register, thus affecting the overall value of the asset.

Thresholds are not applied at a component level where the asset has been recorded in the asset register on a component level.

Examples of components are propellers and engines of aircrafts and vessels as well as ventilation systems of buildings.

The asset register should comply with the “Minimum Requirements for an Asset Register”. This document is available on the OAG website.

Example: Computer equipment

Department A purchases a desktop computer for a new employee. The desktop provided to the new employee comprises of a screen, a keyboard and the CPU. The total cost of the desktop is R8 300 and is made up as follows:

• Screen R2 000

• Keyboard R1 200

• CPU R5 100

The screen, keyboard and the CPU are components of the main asset, the desktop. If any of the parts is not there, the asset is unusable.

How should the department record this acquisition in its asset register?

Under normal circumstances, the components should be capitalised as part of the main asset in the asset register of the department (The main linked with its components whose total would amount to R8 300. However, the departments are currently not required to componentise their capital assets and therefore will record the computer as a unit with the total cost of R8 300

Should a component be replaced at a future date, the transaction will be classified as maintenance. The records are however updated with the new serial number but without amending the existing value of the asset.

Alternatively, systems allowing, where the components are recorded separately as part of the computer asset, replacement of a component will impact on the asset register. The old component will be removed and the new component recorded. The overall value of the asset ‘the computer’ will thus change to reflect the ‘new’ component.

Capital Assets


8 Measurement of Capital assets

A department evaluates all costs on the date of acquisition and subsequent costs to add to, replace part of, or service it. The principles in the following paragraphs should be applied in determining the cost or fair value of a capital asset.

8.1 Initial measurement

A capital asset that qualifies for recording as a capital asset is measured at its cost.

The cost is the cash price equivalent, which for the purpose of this chapter, is the actual amount paid for the asset. Payment can be made as either a single payment or a series of payments over a period of time.

Where a capital asset is acquired through a non-exchange transaction from a non-government entity, its cost must be measured at its fair value as at the date of acquisition. In the case of an interdepartmental transfer the transferring department must fair value the asset if the cost price is not available before transferring the asset in accordance with Section 42 (PFMA) requirements. This ensures that one department is not burdening another department with the requirement to determine a fair value.

The exception to this fair value requirement is for movable assets acquired before 1 April 2002 (or another date as approved by the OAG), where the cost is not available or a fair value had not been determined before the implementation of the MCS. These assets can consequently be transferred at a R1 value, if so recorded in the transferring department’s asset register. Where these assets were however carried at cost or fair value by the transferring department they should be transferred at that value.

Departments are not at present required to componentise their assets in the asset register. The above discussion offers guidance on when a department elects to do so.

The application of a threshold does not apply at a component level. Components are always capital in nature by virtue of being part of a capital asset even where separately recorded in the asset register; they still form part of the overall asset.

Departments are encouraged to begin the process of componentising, where the system capability exists. Policies can be developed to indicate the level of componentising per asset that should be done, based on the asset management strategy. Guidance on componentising will be issued prior to the requirement thereof.

The cost of an asset that must be recorded in the asset register and the financial statements must be the cash price equivalent at the acquisition date, to bring the asset to the position and in the state to be ready for use as intended by management.

Capital Assets


Example: Capital assets acquired through a non-exchange transaction

Scenario 1

Hi & Bye (Pty) Ltd, a private entity not related to any government institution donates a laptop to Government Department A together with all its historical supporting documentation including the original invoice and the asset register details on the 28th of February 2014 and the details as per the asset register are as follows:

Cost Price = R9 000 (Agrees to the invoice supplied)

Accumulated depreciated = R3 000

Book Value = R6 000

Purchase Date = 01/03/2013

The asset is a donation from a non- government entity, therefore Department A is still required to fair value the donated asset even though all the supporting documentation was provided.

This is to ensure that the asset is initially recorded at its fair value as required by the MCS and since the book value of an asset doesn’t translate to the fair value of the asset.

Government in general is gaining an asset that was never on its books

Scenario 2

Government Department A donates a laptop to Government Department B on the 15th of September 2014.

Accompanying the donation is the original purchase invoice amounting to R10 000 with the purchase date of 01/06/2010 and all the applicable PFMA S42 requirements being complied with.

This is a transfer from one department to the other department, therefore Department B will accept and record the laptop at the provided amount of R10 000

Government in general is not gaining any additional asset as the asset was already within the government environment

Scenario 3

Same scenario as in 2 above except Department A recorded the laptop at a value of R1 as it did not keep a proper asset register at the time of acquisition. As the Department did not retain documentation as required by the Treasury Regulations it cannot provide substantiating documentation on the cost of the laptop. Department A must therefore determine the fair value of the laptop; update its asset register, and then transfer (Section 42) to Department B providing documentation as to how the fair value was arrived at. Department B will record the laptop at its fair value as provided.

Scenario 4

Example: Asset was acquired before 1 April 2002

Department A wants to donate a laptop to Department B

(a) Department A could not determine the cost amount of the laptop when the asset register was compiled and recorded the asset at a value of R1 as allowed by the OAG.

Department A will transfer the asset at R1 and Department B will record the asset in its asset register at R1.

Capital Assets


8.1.1 Movable assets:

Where the cost cannot be determined accurately, capital assets are measured at its fair value and where fair value cannot be determined, the capital asset is measured at R1. The use of fair value or R1 as initial measurement for initial recording of a capital asset is deemed cost. This alternative may not be applied where the cost is or should be available (e.g. current year additions). Where the fair value could not be determined a department should have documentation explaining the steps taken to determine a fair value and motivate why it came to the conclusion that it was not possible. This evidence should be retained for audit purposes.

Assets acquired before 1 April 2002 (or another day as approved by the OAG), where the cost is not available for any reason, may be recorded at R1 with no need to determine a fair value. Where an entity however reliably determined the fair value of such assets before the implementation of the MCS they could continue to carry them in the asset register at the determined value.

8.1.2 Immovable assets:

Immovable assets are valued at cost or fair value. The valuation hierarchy on initial recognition is cost of acquisition / construction, then fair value.

A department uses the principles and guidance in the Section on Fair value below in determining the fair value of a capital asset including the municipal valuation roll values where appropriate

(b) Department A could not determine the cost of the laptop when the asset register was compiled in 2005 and recorded the asset at R1 as allowed. During 2007/08 financial year Department A engaged a service provider to fair value all assets where the cost could not be determined. As a result the Department has no more R1 values in its asset register.

The fair value of the laptop was determined as R4000 using the methodology applied by the service provider.

Department A will transfer the laptop to Department B at R4000 and provide a copy of the methodology applied by the service provider to substantiate the value. Department B will record the laptop in its asset register at R4000 as the fair value was reliably estimated before the MCS was implemented.

Scenario 5

Example: Donation of library material

External parties donate five new books to the library of Department E. The donor does not furnish details of the value of the books. The librarian searches three booksellers’ websites on the internet to determine the cost of the books. The average cost of books from the three booksellers is R5 800.

The books meet the definition of capital assets and are in good condition. Each book will be captured in the major asset register at R5 800.

Example: Distinguishing between assets being movable or immovable assets

Portable structures temporarily located in specific areas due to shortage or lack of capacity within other fixed structures, such as a temporary site office constructed on a building site, or at a school to relieve capacity constraints is intended to be immovable and forms part of fixed structures, residential or non-residential depending on the use thereof.

Mobile clinics or libraries that are driven from area to area in delivering a service are movable capital assets and such assets should be classified as transport assets.

Prefabricated structures that are installed or constructed fixed, such as those

Capital Assets


8.2 Elements of cost

The cost of a capital asset comprises:

its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; and

any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

Examples of directly attributable costs are:

compensation of employees directly involved in the construction or acquisition of the asset to the extent that the department can reliably estimate the amounts to be treated as capital expenditure;

costs of site preparation;

initial delivery and handling costs;

installation and assembly costs;

costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and

professional fees.

Recording of costs as part of a capital asset ceases when the capital asset is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using or redeploying an item is not included. For example, the following costs are excluded:

costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity;

initial operating losses, such as those incurred while demand for the item’s outputs build up; and

costs of relocating or reorganising part or all of the department‘s operations.

The cost of a self-constructed asset is determined using the same principles as for an acquired asset.

mounted on a concrete slab on brick plinths and prefabricated units on suspended floors that cannot be relocated due to health and safety risks, are immovable assets. Such structures should be classified as non-residential buildings.

The portable structures should be recorded by the department that budgets for it as the intention is to maintain the structure for a period of time (could be more than a year) and then move it to another location for another project or to increase capacity with a few classrooms at a school. The decision to stay in position or move the structure, thus remain with the mandate holder who will move the structure and not necessarily the custodian of immovable property.

Directly attributable costs

Scenario 1

National department A purchases a Dell laptop for R5 000 and the laptop gets delivered to its premises at the head office in Pretoria for a fee of R500.

The total attributable costs for the laptop would be the cost price of the laptop (R5 000) plus the initial delivery costs(R500) = R5 500

Capital Assets


Scenario 2

Department A transports the laptop mentioned in scenario 1 to one of its regions at a cost of R300.

The movement (costs of relocating the laptop) of the laptop within the department does not affect its cost price as it was already in the location and condition necessary for it to be capable of operating in the manner intended by management when it was delivered by the supplier. Therefore the subsequent transport cost of R300 is not capitalised meaning that the value of the laptop remains at R5 500

Scenario 3

National department B purchases a table from the supplier B for R6 000 and supplier B delivers this table directly to region C of the department as intended and charges R700. Furthermore this table needed to be assembled and Supplier B charged R500 for these services.

The total cost of the table is therefore (Cost price = R6 000) + delivery costs (R700) + Assembling costs (R500) = R7 400

The table is not a table if it’s not assembled and therefore cannot be used for its intended purposes by the management hence the assembling costs are included as part of the cost of the table. The delivery costs are the initial delivery costs hence included as part of the table costs.

Project expenditure - construction of capital assets

Costs incurred to acquire a capital asset through construction by way of a project that spans over more than one financial year should be accumulated and will be added to determine the cost of the ultimate asset once available for use based on the principles above, when it will be recorded in the asset register of the budget holder.

During the stage where the capital asset is being constructed, all costs will be shown as capital work in progress. Self–constructed capital assets costs include direct costs (e.g material and labour costs), overheads costs (e.g allocated electricity consumption costs) and any other relevant costs.

Example: Capital Working in Progress(CWIP)

Regarding reporting requirements for capital work in progress (CWIP), MCS 11.91 & 91A should be considered.

Department A, in delivering on its mandate has to provide suitable learning facilities to the whole province. A decision was taken to replace temporary structures with permanent structures over a period of ten years. Due to migration of people to the province for economic reasons there is a backlog in the provision of suitable facilities of learning for the additional learners who were not planned for. The Department has increased its budget over the next five years to enable it to construct (new) and renew (upgrade) more schools to meet the demand.

During the year under review the Department has five major projects in progress brought forward from the previous year of which two reached the

Capital Assets


stage of ‘ready for use’. In addition it started three new projects, two for new schools and another one for substantial renewal and addition to an existing school. In addition, there are five maintenance projects being undertaken at existing schools.

At the end of the reporting period the Department has to report on its CWIP in line with the modified cash standard (MCS) requirements as indicated in the template. The department has been reflecting its projects in an Annexure in the past. The information is derived from the BAS Project Segment Reports that have been printed at year end, every year, for the duration of a project to ensure total cost can be calculated by adding the annual totals per project together to obtain an accumulated cost.

The closing balance of CWIP at the end of the previous reporting period is as follows:

Project Number Project Name Classification Cost to date

R’000

001 (started 3 years ago)

Newmarket School

SCHOOLS NEW – PRIMARY

15 000


Old Market School


18 500


No Market School


25 000

004 (started 2 year ago)

Young School SCHOOLS OLD – PRIMARY

5 000

005 (started 1 year ago)

Better School SCHOOLS OLD – PRIMARY

850

TOTAL 64 350

Project cost during the financial year as per the project segment on BAS reflects the following expenditure incurred:

Project Number

Project Name

Classification

Cost Current year

R’000

Project Status at the end of the current year

001 NMS SNP 1 500 Ready for use (Completed)

002 OMS SNP 1 000 Active

003 NoMS SNP 500 Active

004 YS SOP 3 000 Ready for use

Capital Assets


(Completed)

005 BS SOP 2 500 Active

006 FSS SNP 5 000 Active

007 SFY SNP 1 500 Active

008 (planned)

LAS SOP 800 Active

009 PS P/P:CONTR MAINT

200 Active

010 BLS P/P:CONTR MAINT

150 Active

011 LPS P/P:CONTR MAINT

250 Active

012 SoE P/P:CONTR MAINT

300 Active

013 SoS P/P:CONTR MAINT

450 Active

The Department has further reported on the Infrastructure Reporting Model (IRM) regarding all its projects. The IRM reports indicate the difference between capital and current (maintenance) projects. The reports further reflect the amounts spent per project during the current reporting period as well as the cumulative spending (should agree with the BAS reports) at the beginning of the reporting period, the status of each project and the total budgeted amount for each project.

Project numbers 001 to 008 are capital projects based on the classification column above. The total expenditure for these capital projects in the current year amounts to R15 800 000.00

Project numbers 009 to 013 are current expenditure (Repairs & Maintenance) whose total expenditure in the current year amounts to R1 350 000.00. The reporting requirements as per Modified Cash Standard (MCS) capital assets chapter are not applicable to the current expenditure but applicable only to the capital expenditure. Therefore only project numbers 001 to 008 are relevant for illustrative purposes in this example.

Summary of Capital Work in progress expenditure

Project Number

Opening Balance

R’000

Current Year Expenditure

R’000

Cumulative Project Costs

R’000

Transfer to the asset Register

R’000

Closing Balance

R’000

001 15 000 1 500 16 500 (16 500) -

002 18 500 1 000 19 500 - 19 500

Capital Assets


003 25 000 500 25 500 - 25 500

004 5 000 3 000 8 000 (8 000) -

005 850 2 500 3 350 - 3 350

006 - 5 000 5 000 - 5 000

007 - 1 500 1 500 - 1 500

008 - 800 800 - 800

TOTAL 64 350 15 800 80 150 (24 500) 55 650

MOVEMENT IN CAPITAL WORK IN PROGRESS FOR THE YEAR ENDED 31 MARCH 20ZZ

Extract from Notes to the financial statements

Opening Balance

Current Year Capital WIP

Ready for use (Completed) Assets

Closing balance

MOVEMENT IN CAPITAL WORK IN PROGRESS FOR THE YEAR ENDED 31 MARCH 20ZZ

R’000 R’000 R’000 R’000

BUILDINGS AND OTHER FIXED STRUCTURES

Dwellings

Non-residential buildings 64 350 15 800 (24 500) 55 650

Other fixed structures

Age analysis on on-going

projects

Number of projects 31 MARCH 20ZZ

Planned, No construction

started

Planned, Construction

started

Total

R’000

0 to 1 Year (Project numbers 006 + 007+008)

1 2 7 300

1 to 3 Years (Project number 005)

1 3 350

3 to 5 Years ( 1 25 500

Capital Assets


Project number 003)

Longer than 5 Years(Project number 002)

1 19 500

Total 1 5 55 650

(Include discussion on projects longer than 5 years in Capital WIP)

The project was interrupted due to a lack of required material as a result of the building of the World Cup stadiums which were given preference over other projects due to the tight deadlines for completion of the stadiums.

Example: Fully constructed assets ready for use in the current financial year

Regarding reporting requirements for capital work in progress (CWIP), MCS 11.91 & 91A should be considered.

Department ABC completes construction phase of an office building in 20x2, it is ready for use. The construction commenced in 20x0. Over the past three years the costs incurred were as follows:

R’000

20x0 1 200

20x1 2 500

20x2 1 500

Scenario 1: Department ABC is the budget holder and custodian of the immovable asset and as such records it in its own asset register when ready for use.

In this instance the department must capitalise the total cost of construction (R5,2 million) of the office building as a non-cash addition in its asset register during the current financial year.

The department will reflect the annual expenditure under ‘additions’ for the year in the “cash” column and will remove these costs using the “capital work-in-progress” column as follows (this is to ensure there is no double accounting).

To illustrate the above:

For 20X1 (prior year - office building not yet ready for use):


Cash Non-cash

(Capital Work in Progress current costs and finance lease payments)

Received current, not paid

(Paid current year, received prior

Total

Capital Assets


year)

ADDITIONS TO IMMOVABLE TANGIBLE CAPITAL ASSETS PER ASSET REGISTER FOR THE YEAR ENDED 31 MARCH 20x1

R’000 R’000 R’000 R’000 R’000


Dwellings

Non-residential buildings

2 500 (2 500) -


For 20X2 (current year - office building is ready for use )


Cash Non-cash

(Capital Work in Progress current costs and finance lease payments)

Received current, not paid

(Paid current year, received prior year)

Total

ADDITIONS TO IMMOVABLE TANGIBLE CAPITAL ASSETS PER ASSET REGISTER FOR THE YEAR ENDED 31 MARCH 20x2

R’000 R’000 R’000 R’000 R’000


Dwellings

Non-residential buildings

1 500 5 200 (1 500) - 5 200


Capital Assets


It is common for a structure to be taken into use before all the contractual obligations have been fulfilled. The outstanding issues are usually to determine the professional fees to add to the pure construction cost and the retention money that needs to be paid usually after a certain period specified in the contract. Once the retention period has passed the retention will be paid to the contractor if he fulfilled his obligations. The retention money will be added to the cost of the asset in the asset register on payment due to the uncertainty around the timing and amount that will be paid.

The retention period and amount can vary depending on the contact. The definitions in the Chapter on Provisions and Contingents should be applied to determine where the rention money should be reported prior to payment thereof for year-end purposes.

It is important that all contractual obligations are fulfilled to enable the the final costing to be done. Where the asset must be transferred to a custodian department, the transferor must update its asset register to agree with the final costing and at that stage initiate the transfer of the asset while complying with the requirements of Section 42 (PFMA). Where the transfer is not complete by year-end the transferor should keep the asset in its asset register, report thereon and also complete the relevant note to indicate that the transfer is pending.

Once the transfer is complete (Section 42 complied with) the asset will be reported on as a transfer and the asset register updated.

8.3 Warranty costs

When a department acquires an asset, such as a motor vehicle, the invoice price sometimes includes an element relating to the manufacturer’s warranty. These costs are deemed to form part of the initial cost of the asset as they are directly attributable to bringing the asset to its location and condition necessary for it to be capable of operating in the manner intended by management. The warranty enables the department to derive service potential from the related asset in at a reduced cost than could have been derived had the warranty not been there. The cost of the warranty is therefore accounted as part of the asset acquisition cost.

Where a warranty is bought subsequently the definition of an asset should be applied to determine whether it should be recorded as such or not. There should be future service potential or significant savings flowing to the department as a result and extend over more than one financial years. An example is the warranty on major parts which can be purchased for vehicles or extended service warranties. These items will not form part of the cost of the asset but may be assets in their own right, depending on the terms of the contract.

8.4 Leasehold improvements

A leasehold improvement is an improvement made to a leased building by a department that has the right to use this leasehold improvement over the term of the lease. Leasehold improvements are disclosed and recorded as capital assets if they meet the definition of a capital asset. Repairs and

Scenario 2: Department ABC is the budget holder but not the custodian of the immovable asset.

If the building is being constructed by Department ABC using its own allocated budget, the department would accumulate all the related expenditure incurred, transaction by transaction as part of work in progress. When the asset is ready for use, the accumulated work in progress will become the cost of the asset and be recorded in the asset register of Department ABC. Any additional expenditure such as the payment of retention will be added to the cost of the asset in the asset register when paid. Once the contractual obligations are fulfilled and final costing can be done, the asset register is updated and a transfer is initiated to transfer the building to the custodian complying with PFMA S42 requirements.

Capital Assets


maintenance is expensed as current expenditure as they are done to retain the status of the capital asset rather than improve it and they do not meet the definition of capital asset.

As a lessee, the department is generally responsible for recording the improvement that they have paid for in the asset register as the future economic or service benefit will flow to the department. The terms of the binding agreement may specify if the improvements will revert to the lessor at the expiration of the lease or the lessee should remove them without damaging the leased property. In the situation where the asset reverts to the landlord the asset register will be updated on expiry of the lease to indicate that control over the asset has been relinquished.

Examples of leasehold improvement include:

Electric lighting fixtures

Interior partitions

Floor finishing such as carpets

Machinery attached to a building

Filing room with built in filing system

An additional wing to a hospital

Where an improvement is done to a structure such as a hospital, the cost of the improvement should

be transferred complying with Section 42 (PFMA) when all the contractual obligations under the

project contract have been fulfilled to allow the custodian department to update its asset register

accordingly. In a situation where specialized machinery or equipment is fixed to a structure being

leased by a department, they should be recorded in the asset register of the department enjoying the

service potential and also reported on. Where a custodian is the landlord, the custodian should be

informed of the installation prior to the action.

Where improvements are done to leased premises that are on a month to month lease basis an

agreement should be entered into with the landlord to ensure that expenditure can be recouped on

termination. Motivation for the expenditure in this scenario must be carefully considered.

In the event that there is uncertainty whether the expenditure represents an improvement (capital) or

maintenance (current) the following can be considered:

Will the cost incurred enhance the service provision capacity of the asset beyond original expectation?

Will the expenditure result in an increase in performance beyond the original performance?

Will the cost incurred increase the useful life of the main asset?

Will the cost incurred increase the size of the asset or change its shape?

Will the cost incurred amount to significant savings in future?

Where any of the answers to the questions above result in a positive response it is likely to be an

improvement rather than maintenance.

Departments must document their own policy on how to differentiate between improvements and maintenance expenditure. The policy should clearly indicate the approach to the decision making process.

All conclusions should also be documented and made available to the auditors for review as and when required.

Capital Assets


8.5 Assets transferred between departments

All capital assets must be transferred at cost where cost information is available. Where the asset is recorded at R1 or at its fair value in the asset register of the transferor, then the asset should be transferred at fair value, except for movable assets acquired before 1 April 2002 (or another date approved by the OAG) where they have been recorded at R1.

All the documentation supporting the value should accompany the assets transferred.

8.6 Fair value

Fair value can be determined by applying one of three methods:

The fair value of most capital assets can be determined by reference to quoted prices in an active and liquid market. For example, current market prices can usually be obtained for land, non-specialised buildings, motor vehicles and many types of machinery and equipment;

Where market values are not available, estimates can be made with reference to the market value of assets with similar characteristics, in similar circumstances and location or with reference to recent arm’s length transactions concluded for similar assets. For example, the fair value of vacant land that has been held for a long period during which time there have been few transactions may be estimated by reference to the market value of land with similar features and topography in a similar location for which market evidence is available; or

If an asset is of a specialised nature, and market-based fair value is not available, a department may need to estimate the fair value using either the reproduction cost or replacement cost. In many cases, the depreciated replacement cost of an asset can be established by reference to the buying price of a similar asset with similar remaining service potential and similar condition in an active and liquid market. In some cases, an asset’s reproduction cost will be the best indicator of its replacement cost. For example, in the event of loss, a parliament building may be repaired to its original state rather than be replaced with alternative accommodation because of its significance to the community.

Accounting for an immovable asset where contractual obligations were completed before year end and subject to transfer to another department after year end

Transfer of assets should take place in terms of Section 42 of the PFMA. In instances where the contractual obligations with regards to an immovable asset construction was fulfilled before year end, but the immovable asset has not yet been transferred to the custodian department as required (or where no agreement has been reached between the custodian and the transferor), the transferring department will report on the immovable asset as per its asset register but must also include a note disclosing the details of the immovable asset to be transferred subsequent to year end. The intention of this requirement is to encourage departments not to take long periods in finalising asset transfers.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Capital Assets


Depreciated replacement cost

The depreciated replacement cost represents the value of the asset as is after use with the condition thereof and the age taken into account. It should therefore reflect the remaining service potential of the asset being valued.

The value is determined by the cost of a new asset of the same type (gross replacement cost). The cost is then adjusted to take into account the differences between the old asset and the new in terms of bigger capacity, higher performance, etc. and depreciation to reflect the remaining useful life of the actual asset on hand.

The depreciated replacement cost is calculated using the following steps

Step 1

Determine the gross replacement cost.

Gross replacement cost is defined as the cost that entity has to bear in order to replace the asset with such resource that can provide the same benefits in pursuing business objectives under normal conditions. Normally the market price is a good point to start from however; current market price is not always what entity has to bear as a consideration for benefits to be obtained.

Step 2

Determine accumulated depreciation. This is done to have equitable basis of valuation as if current asset for which replacement cost is determined has been in use and has depreciated over a period of time then replacement cost needs to be reduced as well to reflect the devaluation in future economic benefits on the same pattern. But as value under replacement cost may be different so it is up to valuer to decide at what rate replacement cost needs to be depreciated that reflects the same level of devaluation of asset that fairly equates with devaluation in the original asset.

Step 3

Calculate the depreciated replacement cost by deducting the value of step 2 (accumulated depreciation) from the value from step 1

The reproduction cost is the cost of creating an exact replica of the asset. This method is usually used for specialised structures of heritage assets of a structural nature.

Example: Calculation of depreciated replacement cost

During the asset verification conducted at the end of the current financial year – 31 March 2015, an asset, a Glugle, a very specialised machine used for testing air purity in an office environment was identified on the floor but could not be traced to the asset register. The asset management officials could not tell the exact date or year the above mentioned asset was purchased or the supplier from which it was purchased. The users, new to the department, indicated that they have been using the specialised machine since the beginning of 2013 when they were employed in March and thought the machine looked new at the time .

The machine did not have any visible defaults and working as intended, the users were satisfied with the performance of the Glugle.

The department’s asset management policy is to write-off machines of this nature over a period of 5 years using the straight line method

Capital Assets


The fair value of an immovable capital asset is usually its market value determined by an appraisal. An appraisal of the value of the asset is normally, but not necessarily undertaken by a member of the valuation profession, who holds a recognised and relevant professional qualification.

For some assets, it may be difficult to establish their market value because of the absence of market transactions for these assets. Some departments may have significant holdings of such assets. In certain circumstances, it may also be costly to undertake a detailed professional valuation of each individual property, particularly for those departments that act as default custodians of the state’s immovable assets.

To facilitate cost-effective compliance with the MCS and to avoid unnecessary duplication of costs across different spheres of government, departments are encouraged to as far as possible make use of existing available information (for example municipal valuation rolls) as an alternative to undertaking their own professional valuations on each individual immovable asset. Should the municipal valuation change the department should not revise the initial recognition amount except if there is evidence that the initial recognition value was erroneous.

In cases where the depreciated replacement cost of a capital asset is required in lieu of fair value, this may be established by reference to the market buying price of components used to produce the asset or the indexed price for the same or a similar asset based on a price for a previous period. When the indexed price method is used, judgement is required to determine whether production technology has changed significantly over the period, and always differences identified and allowances made therefor such as whether the capacity of the reference asset is the same as that of the asset being valued.

Step 1

Obtained quotations from the few known suppliers selling this specialised machine for the price of a similar new machine and the prices from these suppliers were relatively the same and the average price being R100 000.

The gross replacement cost is therefore R100 000

Step 2

Two years is to be assumed as the period the machine has been in use due to its good condition and lack of other evidence to the contrary

Accumulated depreciation (R100 000/5*2) = R40 000

Step 3

Depreciated replacement cost at 31 March 2015 (R100 000 – R40 000) = R60 000

It is not a requirement that costs should be incurred in engaging external valuators for establishing the fair value of assets. Employees of a department with the necessary skills and experience will be able to determine a fair value for assets within their field of expertise. It is of utmost importance that the methodology used including all the assumptions made are documented in detail and applied consistently. It is also good practice to include the methodology to be used for specific asset classes in the asset management policy.

Capital Assets


Fair value of biological assets and agricultural produce

When determining the fair value of biological assets, the following should be considered:

No

If an active market is not available, a department can consider using one or more of the following:

The most recent market transaction price, given that the economic circumstances between the date of that transaction and the reporting date has not changed significantly;

The market price for similar assets adjusted to reflect differences;

Sector benchmarks, for example value of cattle expressed per kilogramme of meat.

Sometimes the sources above may result in different values for an asset. It is then necessary to consider the reasons for the differences in order to determine the most reasonable estimate of fair value.

No available market-determined values

Where biological transformation is negligible or the impact of the biological transformation on the price is not expected to be material, the cost of the assets may approximate fair value.

Under some circumstances, the market prices or values (i.e. the two methods of determining the fair value as above) are not available for a biological asset in its present condition. In such a situation the department uses the present value of expected net cash flows from the asset. The net expected cash flows are discounted at a current market determined rate.

Active market

exists

No active market

exist

No available

market-based

values

Use quoted

price in that

market

Use market

values for similar

asset

Use discounted

cash flow

calculation

Capital Assets


Bear in mind when using the discounted cash flow method of valuation that:

It is used to determine the fair value of a biological asset in its present location and condition. This should be taken into account in determining an appropriate discount rate to be used;

Fair value is determined for a biological asset in its present condition; therefore it excludes any increase in value from additional biological transformation not yet occurred;

Cash flow for financing the assets, taxation (if applicable) or re-establishing biological assets after harvest should be excluded; and

Fair value reflects any possibility of variations in cash flows of the transaction therefore the expectations about possible variations in cash flows will be included in either the cash flows or the discount rate or a combination of the two.

The important thing to remember is that double-counting must be avoided, therefore if a specific assumption or condition is included in the cash flows, the same assumption or condition cannot be included in the discount rate.

It is further important to document the process followed and to motivate why specific assumptions were made, the weight allocated to an assumption and reasons for that.

Example: Fair value valuation of biological asset

Department C owns a sugar plantation on approximately 220 hectares of land. Currently no active market exists for the plantation in its current stage of biological transformation and condition.

The fair value for the land with the plantation together however, can be determined and is estimated at R25 million. Empty or undeveloped land in the neighbouring area are sold at a market price of R72 000 per hectare.

The fair value of the sugar plantation can thus be determined as follows:

Fair value of combined asset R 25 000 000

Fair value of land (R72 000 x 220) R15 840 000

Fair value of plantation R 9 160 000.

The fair value of the plantation could change over a period of time as biological transformation takes place, therefore it will be necessary to determine the fair value of both the neighbouring land and combined asset on a regular basis. The fair value determination should be done at year-end to ensure the value is relevant for reporting purposes.

Other measurement considerations

In the unlikely situation where market-determined prices or values are not available and alternative estimates of fair value cannot be reliably measured, biological assets should be measured at cost. As soon as the fair value can be reliably measured, biological asset should be measured at fair value less estimated point-of-sale costs.

It is of the utmost importance that the methodology used is documented and applied consistently for a class of assets. This will ensure systematic and comparable values period on period. The specific methodology per class should also form part of the asset management policy to ensure the consistent use and application thereof.

Capital Assets


9 Subsequent Measurement

Since departments are on the modified cash basis of accounting, capital assets are not depreciated and not subject to impairment testing or revaluation adjustments, i.e. in terms of any policy to apply a revaluation accounting model. Capital assets should therefore continue to be recorded at cost after initial recording thereof in the financial statements and asset register.

9.1 Subsequent costs

Should a department incur costs relating to a capital asset already recorded (i.e. an existing capital asset), the subsequent costs will be treated according to the nature thereof.

10 Removal

A capital asset must be removed from the secondary information to the financial statements (and from the asset register):

on disposal; or

when no future economic benefits or service potential are expected from its use and the necessary approval from the delegated authority or officials to do so has been obtained.

This means all assets sold, donated / transferred, scrapped, lost, damaged, etc. are removed from the asset register after the approval process and control has been relinquished.

For immovable assets, de-recognition includes the transfer of the immovable asset to a custodian in terms of GIAMA.

All proceeds must be recognised in departmental revenue - sale of capital assets when received.

NOTE: If an immovable asset is to be disposed of by way of a sale and was kept at a value less than its fair value in the asset register, the fair value of the asset must be determined before the asset is disposed of. This is to avoid a situation where a department has, for example, an immovable asset valued much lower than the market value and sells the immovable asset at the lower value.

Assets in general should not be sold for their carrying value but a fair market value.

If an immovable asset is not disposed of at least at its fair value, the lower value should be properly motivated.

Capital

expenditure

Project expenditure

relating to project that

spans over more than one

financial year

Current

expenditure

Add to the cost

of existing

capital asset

Add to cost of capital asset

at the point in project when

available for use (final

costing differences to

include at end)

Recognise as

expenditure

under goods

and services

Capital Assets


Example: Disposal of a capital asset

Department R has a printing press which is recorded as machinery and equipment in its financial records. After careful consideration Department R made a decision to sell this printing press. A potential buyer was found on the 25th of November 20x0 and after several meetings a sale agreement was signed on the 28th of January 20x1. The buyer deposited the funds into the department’s bank account on 28 February 20x1.

The following information pertains to the example:

Cost of capital asset R650 000

Selling price - at fair value R1 500 000

The Department’s financial year is 31 March 20x1.

The following will be disclosed in the notes to the financial statements regarding this disposal:


Sold for cash

Transfer out or destroyed or scrapped

Total disposals

Cash Received Actual

DISPOSALS OF MOVABLE TANGIBLE CAPITAL ASSETS PER ASSET REGISTER FOR THE YEAR ENDED 31 MARCH 20x1

R’000 R’000 R’000 R’000

HERITAGE ASSETS

Heritage assets

MACHINERY AND EQUIPMENT

xxx xxx Xxx Xxx

Transport assets

Computer equipment

Furniture and office equipment

Other machinery and equipment

650 Xxx 1 500

SPECIALISED MILITARY ASSETS

Specialised military assets

Capital Assets


BIOLOGICAL ASSETS

Biological assets

TOTAL DISPOSALS OF MOVABLE TANGIBLE CAPITAL ASSETS

xxx xxx Xxx Xxx

The R1 500,000 proceeds received will be disclosed under “Sales of capital assets” under “Departmental Revenue”. Department should make sure that this amount agrees to the amount as shown above in the extract as “Cash Received Actual”.

11 Disclosures

Refer to the Specimen Annual Financial Statements for the illustrated disclosure requirements.

For the purposes of preparing the asset reconciliations and the notes disclosure, the LOGIS team has prepared a detailed presentation on the reports available for the reconciliation and reporting requirements for all minor and major assets. This document can be found on either the LOGIS website or on the OAG website. Also refer to the Chapter on Basic Accounting Transactions of the Accounting Manual where these reports are shown as well as example of asset reconciliation.

With effect from 1 April 2016 Annexure on Movement In Capital Work In Progress will form part of the notes to the financial statements.

Assets written off represents assets removed from the asset register during the year because they were lost, stolen or scrapped etc.

Capital Assets


Section 42 transfers

Where an asset is transferred to another department the requirements of Section 42 (PFMA) must be complied with. The transfer is recorded as a non-cash disposal (or addition) when the process has been finalised and both accounting officers signed off. At that stage the transferring and receiving departments can update their respective asset registers.

Where the process had not been finalised at the end of the year the transferring department must reflect the assets subject to a Section 42 transfer in a note to ensure that users of the financial statements are made aware of the value of assets that will be transferred out of its control in the future.

WIP projects – asset ready for use

Once a project asset is ready for use, the budget holder must bring the total cost to bring the asset to that position and condition into its asset register. Once all obligations in terms of the contract are concluded the final costing must be done and the asset register updated.

In the case of immovable assets where the budget holder is not the custodian of the asset, the asset at total cost must be transferred through the asset register complying with Section 42 to the custodian.

CAPITAL WORK IN PROGRESS (CWIP) DISCLOSURE NOTE

Opening Balance: This is the closing balance reported in the prior year

Current capital WIP: Cash expenditure incurred in the current year relating to the specific capital WIP project (Cash Addition)

Ready for use (Completed) assets: Total project capital costs accumulated since the inception of the project. This includes current’s year’s cash additions. These completed projects would then be cleared from CWIP and added as non-cash addition to the asset register of the relevant department at the same cost cleared from CWIP.

Closing balance: Accumulated CWIP costs at year end for the projects that are still on-going (not yet completed).

AGE ANALYSIS ON ON-GOING PROJECTS

Number of projects planned, no construction started: These are the projects that have already approved, project activities started and some capital spending incurred but whose actual construction has not yet begin. This could be as a result of professional fees incurred and capitalised when appropriate.

Number of projects planned, construction started: Projects that have already reached the construction stage but not yet completed or ready for use.

Capital Assets


Assets under investigation

The assets are only removed from the assets register once the investigation is complete and the decision to remove them has been approved by the relevant authority.

Therefore the assets still under investigation at year end will still be part of the asset register as much as they are disclosed separately in accordance with MSC par .105

What are the recording and removal requirements for capital assets that could not be found during the asset verification exercise?

Assets that could not be found during the asset verification exercise should be documented in a loss control register. These discrepancies must be followed up and investigated. The outcome of the investigation will determine whether the asset has been lost, stolen, or possibly sold but not updated. Where the asset has been lost or stolen the authorisation process should be followed to allow for the asset to be written off and the asset register updated. This write-off is disclosed in the note for Assets written-off.

Where the process has not been completed the department must include a narrative with a summary of assets that could not be found and are under investigation. These assets will remain in the asset register until the investigation is complete and the outcome of that investigation will determine the way forward regarding the treatment of these assets.

The investigation process and period (timelines) should comply with the departmental asset management policy

Capital Assets


12 Summary of Key Principles

This chapter provides guidance on how to identify and report on capital assets.

12.1 Definition and identification

To classify an asset as capital assets, management should consider the definition, nature, timing and materiality of the item.

Capital asset types:

Assets used in production, supply of goods or services

E.g. machinery and equipment

Rental to others E.g. buildings

For administrative purposes E.g. administration building, furniture

To be used for more than one year.

Assets with a purchase price of less than R5,000 are called minor capital assets and separately reported in the chapter on Expenditure.

12.2 Recording and measurement

Capital assets are recorded and disclosed in the notes and annexures to the financial statements when it meets the recognition criteria:

it is probable that future economic benefits or service potential will flow to the department; and

its cost or fair value can be measured reliably.

Capital assets are recorded at cost, except when it is acquired at no cost in which case it is recorded at fair value.

Where the cost cannot be determined reliably, capital assets, except for immovable assets, are measured at fair value and where fair value cannot be determined, at R1. Where the cost cannot be determined reliably for immovable assets, they are measured at their fair value. (Should only hold true for older assets).

Costs include:

Cost of purchase;

Restoration and rehabilitation costs; and

Other cost.

For capital assets being constructed, all related costs would be shown as capital work in progress until the asset is ready for use and once ready for use, it would be recorded in the asset register of the budget holder at the total construction costs incurred. Once all obligations of the contract have been fulfilled, the final costing must be done and the asset register updated. If the asset must be transferred to a custodian in terms of legislation , it would be transferred to the relevant department in compliance with PMFA section 42 requirements.

Regarding reporting requirements for capital work in progress (CWIP), MCS 11.91 &91A should be considered.

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Refer to FAQ 11.5 issued 17 May 2019.

Capital Assets


Any gain on disposal of capital assets, which is the cash received on disposal, is recognised as departmental revenue.

12.3 Disclosure

Capital assets purchased are recorded as expenditure under “expenditure for capital assets” in the statement of financial performance.

Capital assets are also recorded in the notes to the financial statements where more detail is provided, such as opening balance, additions, disposals and closing balance.

Details of capital work in progress are shown in the annexures to the financial statements.

NB: This will become the note to the annual financial statements as from 01 April 2016

Documents

Accounting Manual for Departments. Annual Financial... · capital assets (i.e. the expenditure relating to the acquisition / maintenance etc.). This is dealt with in the Chapter on