PLANNING FOR CAPITAL ASSETS ACCOUNTING AND IMPAIRMENT Assets.pdf · PLANNING FOR CAPITAL ASSETS – ACCOUNTING AND IMPAIRMENT ... • Group or composite depreciation methods may be

PLANNING FOR CAPITAL ASSETS – ACCOUNTING AND IMPAIRMENT

Christopher Telli, CPA, Partner

Anna L. Thigpen, CPA, Manager

CGFOA Annual Conference - November 19, 2014

AGENDA

Basics

Intangible Assets

Donated Capital Assets

Capitalization of Interest

Internal Controls over Capital Assets

Financial Reporting for Capital Assets

Impairment of Capital Assets

1

WHAT IS A CAPITAL ASSET?

GASB Statement No. 34

• Capital assets are tangible or intangible assets (land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures and infrastructure) that are used in operations and that have initial useful lives extending beyond a single reporting period

• Assets acquired for the purpose of sale or investment do not qualify as capital assets because they are not used in operations

• Should only be reported once proper ownership has been determined

2


Land improvements consist of betterments, other than buildings, that ready land for its intended use. Examples include:

• Site improvements

Excavation

Fill

Grading

Utility installation

• Removal, relocation, or reconstruction of property of others

Railroads and telephone and power lines

• Retaining walls

• Parking lots

• Fencing

• Landscaping

3


Library books considered to have a useful life of greater than one year are capital assets and should be depreciated

• Group or composite depreciation methods may be appropriate due to the large volume of library collections and relatively low dollar value of each item (generally)

• Situations do exist where library books may be considered works of art or historical treasures and they should be reported accordingly

4

DETERMINE OWNERSHIP Generally, holding title to an asset equates to

ownership, and the entity that holds title to an asset should report the asset in its financial statements

Facts and circumstances of the situation should be considered

• There may be instances in which title is held by one entity, yet some rights of ownership are held by another entity. For example, the lessee reports assets under a capital lease although the lessor holds title.

5

EXPENSE OR CAPITALIZE?

Increased capacity?

• Adding square footage, adding new lanes to existing road

Extended useful life?

• Beyond original useful life expectation

Purchase price in relation to capitalization policy

6

EXPENSE

Repair and maintenance expense

• Outlays that allow assets to continue to be used during their originally established useful life Building

– Paint, roof replacement, upgrade of electrical/HVAC

Roads

– Re-stripe, re-surface considered repair

– Street overlay likely extends the service life of a roadway and therefore would be capitalized

7

CAPITALIZE

Only expenditures that exceed a predetermined amount (capitalization threshold) are normally capitalized

Government Finance Officers Association (GFOA) recommends a minimum capitalization threshold of $5,000

• Have seen organizations increase threshold; still needs to remain at $5,000 for federally funded assets

• Effective December 26, 2014, under the OMNI Circular, a computing device is a supply if the acquisition cost is less than the lesser of the capitalization level of the entity or $5,000

Typically involves considerable change in structure as well as useful life of asset

8

CAPITALIZE

In addition to the cost to purchase or construct the asset

• Capitalize interest (discussed later), in certain situations, and ancillary charges necessary to place the asset into its intended location and condition for use

• Ancillary charges include costs that are directly attributable to asset acquisition, such as freight and transportation charges, site preparation costs and professional fees

9

CAPITALIZATION POLICIES

GASB Statement No. 34 does not specify a minimum level for capitalization

Consider separate thresholds for different types of assets

• Assets whose individual acquisition costs are less than the threshold for an individual asset (computers, library books, classroom furniture)

Different agencies within an entity can have distinct capitalization thresholds

10

DEPRECIATION

Depreciation expense should occur over the estimated useful life of asset

Depreciation of individual assets is not required; can be calculated based on:

• Asset class

• Network of assets

11

DEPRECIATION

Depreciation on land improvements

• Permanent benefit – non depreciable Grading

Fill dirt

Certain landscaping

• Considered part of structure or deteriorates – depreciate Parking lots

Fencing

Retaining walls

12

MODIFIED APPROACH

Infrastructure assets that are part of a network or subsystem of a network are not required to be depreciated if the modified approach is used Requirements for use are:

• Government manages the eligible infrastructure assets using an asset management system having certain specified characteristics

• Government documents that the eligible infrastructure assets are being preserved approximately at (or above) a condition level established and disclosed by the government

13

SENSITIVE ASSETS

Inexpensive but important/sensitive assets such as:

• Police, fire, public works Radios, breathing apparatus, computers, communication devices

• Don’t overlook them due to asset value

• Assets purchased with federal funds require specific inventory management procedures

14

USEFUL LIVES

Should be based on entity’s experience as well as plans for the use of asset

Useful life is an estimate that can change

• Review in later period, after asset has been placed in service

• Components of an asset may have different useful lives

• A change in estimated lives is a change in accounting estimate under GASB 62 and is reported prospectively in accordance with paragraphs 83-85 of GASB 62

Review useful lives assigned within the system to ensure they correspond with policy

15

INVENTORY

Annual or semiannual inventory should be performed to ensure accurate reporting of capital assets

• Required under C.R.S. 29-1-506

Data regarding retirements may be difficult to acquire

• Departments may be unwilling or unable to determine retirements

• Can lead to overstated balances if proper attention is not applied

16

CAPITAL ASSETS ASSOCIATED WITH MORE THAN ONE GOVERNMENT

Ownership is the decisive factor

Government that has ultimate control over its “use and enjoyment” should report the capital asset in its financial statements

• Legal title is typically sufficient

If entity that holds title does not exercise ultimate control – entity who exercises ultimate control reports the asset

17

What if ownership cannot be determined?

• Which entity is responsible for managing the asset? The entity responsible for maintaining the asset would be

responsible for reporting capital assets

18

CAPITAL ASSETS ASSOCIATED WITH MORE THAN ONE GOVERNMENT

STATEMENT OF CASH FLOWS

Report under “Noncash Investing, Capital, and Financing Activities” the following: • Capital assets acquired by assuming directly related liabilities (e.g.

purchasing a building by incurring a mortgage or purchasing on credit and taking delivery of a vehicle in the current period and paying for it in subsequent periods) Note – accounts payable at year-end need to be analyzed for payables related to capital asset acquisitions and reported here

• Obtaining a capital asset by entering into a capital lease

• Receiving donated capital assets

• Transfers of capital assets between funds

19

INTANGIBLE ASSETS – GASB 51

Lack of physical substance

Nonfinancial nature

• Represents neither a claim nor right to assets in monetary form

Initial useful life extending beyond a single reporting period

If assets are acquired or created primarily for the purpose of obtaining income or completing a project, they do not meet criteria of intangible assets

20

INTANGIBLE ASSETS

Intangible must be identifiable

• Asset is capable of being separated or divided from the government and sold, transferred, licensed, rented or exchanged either individually or together with a related contract, asset or liability

• Asset arises from contractual or other legal rights, regardless of whether those rights are transferrable or separable from entity or from other rights or obligations

21

INTERNALLY GENERATED

Created or produced by the government or entity contracted by the government

Capitalize outlays incurred related to development of intangible asset if there is:

• Specific objective of project and nature of service capacity that is expected to be provided by intangible asset

• Demonstration that asset will provide its expected service capacity

• Demonstration of intention, ability and presence of effort to complete development of intangible asset

22

Computer software

Patents

Trademarks

Copyrights

23

INTERNALLY GENERATED

INDEFINITE USEFUL LIFE

Criteria of indefinite useful life

• No legal, contractual, regulatory, technological or other factors that limit useful life Do not amortize

• Permanent right-of-way easement

24

AMORTIZATION OVER USEFUL LIFE

Intangible asset that arises from contractual or other legal rights should be amortized over the service capacity

Renewal periods may be considered if the government intends and will be able to achieve renewal

25

DONATED CAPITAL ASSETS

Should be reported at estimated fair value at the time of acquisition

Estimated fair value may be calculated from:

• Manufacturers’ catalogs or price quotes in periodicals

• Recent sales of comparable assets

26

CAPITALIZATION OF INTEREST

CAPITALIZABLE INTEREST – GASB 62

In accordance with GASB 62, interest capitalization is limited to capital assets reported in enterprise funds (GASB 37 eliminated capitalization of construction-period interest requirement on capital assets used in governmental activities)

Capitalize the amount of interest that could have been avoided had the asset not been acquired — thus a government that has debt, but no debt directly related to construction projects, still capitalizes interest, if applicable

The total amount of interest cost capitalized in an accounting period should not exceed the total of interest cost incurred by the government in that period

28

ASSETS QUALIFYING FOR INTEREST CAPITALIZATION

Assets that are constructed or otherwise produced for a government’s own use

Assets intended for sale or lease that are constructed or otherwise produced as discrete projects

• Real estate developments

Donated assets

Investments accounted for by the equity method

29

NONQUALIFYING ASSETS

Inventory

Assets that are in use or ready for intended use

Assets not undergoing the activities necessary to get them ready for use

Assets not included in financial statements

Assets acquired with gifts and grants that are restricted by donor or grantor

30

CAPITALIZATION PERIOD

Capitalization period should begin when following conditions are present:

• Outlays for asset have been made

• Activities necessary to get the asset ready for its intended use are in progress

• Interest cost is being incurred

31

AMOUNT OF INTEREST TO CAPITALIZE

Average cumulative expenditures since inception

multiplied by

Borrowing rate (weighted average or specific to borrowing)

equal

Capitalizable Interest

32

Capitalization period should begin when conditions shown on previous slide are present

AMOUNT OF INTEREST TO CAPITALIZE

Tax-exempt debt

Amount of interest capitalized should include interest from the date of borrowing until assets are ready for their intended use

33

Interest expense on tax-exempt debt

less Interest revenue on reinvested proceeds

equal


CAPITALIZED INTEREST

Netting of expense and related interest revenue applies to tax-exempt debt that is externally restricted to finance specific qualifying assets

If using a grant to construct assets, interest is not capitalized if the grant is externally restricted to the acquisition of specified assets

Capitalized interest is not removed from the cost of capital assets transferred from an enterprise fund to be used in governmental activities

34


Interest payments that are capitalized should be reported as cash payments to lenders and other creditors under capital and related financing activities as an outflow for interest and not as a capital asset acquisition on the statement of cash flows

35

CAPITAL INTEREST EXAMPLE – TAX-EXEMPT DEBT

Govt issues tax-exempt debt, externally restricted to construction of specified qualifying asset

Invest proceeds in interest paying account

Earnings from proceeds: $250,000, interest incurred $750,000

As tax-exempt debt, must net interest revenue and interest expense to calculate capitalized interest

36

CAPITALIZED INTEREST EXAMPLE

37

Interest expense on tax-exempt debt

less Interest revenue on reinvested proceeds

equal


Interest expense $750,000

Less: revenue on invested proceeds

$(250,000)

Capitalized interest $500,000

CAPITALIZED INTEREST EXAMPLE – TAX-EXEMPT DEBT

Entries:

Interest expense is netted with revenue –remainder is capitalized

38

DR CR

Construction in progress $500,000

Accrued interest receivable $250,000

Accrued interest payable $750,000

To capitalize interest on project XYZ and accrue interest receivable and payable

CAPITALIZED INTEREST EXAMPLE

If debt not tax-exempt or isn’t externally restricted to specified qualifying assets:

• Use formula:

• Weighted average borrowing rate computed using all outstanding interest bearing liabilities in enterprise funds

• NO netting of interest revenue and expense

39

Average cumulative expenditures since inception

X Borrowing rate (weighted average or specific to borrowing)

= Capitalized Interest

MULTIPLE FUNDING SOURCES

Use combination of methods when multiple funding sources

• Formula in example #1 for tax-exempt debt externally restricted, specified for qualifying assets

• Formula in example #2: Taxable debt

Tax-exempt debt not meeting above criteria

Available resources

“Opportunity costs” (debt unrelated to the capital construction)

• No capitalization of interest on portion or project financed from grant proceeds (no netting of revenue)

40


Build America Bonds

• Taxable bonds

• Use formula for non tax-exempt bonds

Note disclosure:

• No capitalized interest: disclose total interest costs incurred and charged to expense during the period

• Capitalized interest: amount of interest incurred and capitalized

41

INTERNAL CONTROLS OVER CAPITAL ASSETS

ACQUISITION AND DISPOSAL

Approval of property and equipment

Difference in approval process for assets acquired via general purchases cycle vs. capital expenditures

Policies and procedures to identify and record disposals

43

ACQUISITION AND DISPOSAL

Ensure acquisitions and disposals are recorded on a timely basis

• Is subsidiary ledger updated monthly, quarterly, annually?

• Accumulation of construction costs, including interest and retainage

44

DEPRECIATION

Documented policies for useful life determination and how is this information communicated to the accounting department if not determined by accounting personnel?

How is depreciation calculated and recorded in general ledger?

45

DEPRECIATION

If depreciation is an automated calculation

• How does the organization ensure calculations are complete and accurate?

46

PHYSICAL INVENTORY

Is a physical inventory performed annually or every other year?

• Keep in mind inventory requirements for assets purchased with federal funds

Are results of inventory reconciled to detail fixed asset records?

Physical safeguards

47

PROPERTY RECORDS

Property tags are placed on equipment

Property records contain all pertinent information, including

• Description

• Serial number or identification number

• Source

• Who holds title

• Acquisition date and cost

48

REPORTING AND DISCLOSURE

Process to reconcile all components of property and equipment in subsidiary ledger to general ledger

Process to identify all project-related expenditures for assets under construction

49

FINANCIAL REPORTING FOR CAPITAL ASSETS

What is required?

• MD&A

• Government-wide statement of net position

• Proprietary fund financial statements

• Disclosures

50

MANAGEMENT’S DISCUSSION AND ANALYSIS

Condensed data should include

• Total assets Distinguish capital assets from other assets

• Total net position Distinguish net investment in capital assets from restricted net

position and unrestricted net position

Should refer readers interested in more detailed information to the notes to financial statements

51

GOVERNMENT-WIDE STATEMENT OF NET POSITION

Information on capital assets by major asset class may be shown either on the face of financial statements or in notes

Capital assets not being depreciated – land, construction in progress or infrastructure

• If significant, report separately from depreciable capital assets

• Land or easements associated with infrastructure (e.g. right-of-way easements for highways) should not be reported as infrastructure

52

GOVERNMENT-WIDE STATEMENT OF NET POSITION

Transfers of capital assets or financial assets within financial reporting entity

• Report at their carrying value at the time of transfer

53

GOVERNMENT-WIDE STATEMENT OF NET POSITION AND PROPRIETARY FUND F/S

Net Investment in Capital Assets

54

Capital assets (including intangibles)

plus Capital-related deferred outflows of resources

less

Accumulated depreciation

less

Outstanding principal of capital-related debt

(including A/P)

less

Capital-related deferred inflows of resources equal

Net investment in capital assets

NET INVESTMENT IN CAPITAL ASSETS

Should not be included in calculation

• Interfund loans

• Noncapital accrued liabilities

• Unspent proceeds from debt

• Interest payable and accrued interest on deep discount debt

55

NET INVESTMENT IN CAPITAL ASSETS

Capital assets, net $ 10,000,000

Note payable (current and noncurrent) (500,000)

Bonds payable (current and noncurrent) (1,000,000)

Accounts/retainage payable for capital assets (75,000)

Bond premium (100,000)

Bond discount 25,000

Deferred loss on refunding 65,000

Unspent proceeds (200,000)

Net investment in capital assets $ 8,215,000

56

DISCLOSURES

Summary of significant accounting policies

• Should address accounting policies for capital assets

• Capitalization thresholds

• Method(s) used to calculate depreciation expense

• Estimated useful lives of capital assets

57

DISCLOSURES

Footnotes should report capital assets associated with governmental activities separately from capital assets associated with business-type activities

Nondepreciable capital assets reported separately from depreciable capital assets

Accumulated depreciation should be shown as a separate item

58

DISCLOSURES

Disclose changes in capital asset balances, including depreciation/amortization during the period

Depreciation/amortization charged to each governmental function and business-type activity

59

DEPRECIATION BY FUNCTION

Depreciation expense was charged to governmental activities functions as follows:

General Government $ 1,250,000

Public Safety 2,000,000

Culture and Recreation 575,000

Human Services 260,000

Parks and Recreation 800,000

$ 4,885,000

60

DISCLOSURES

Capitalized interest

• If interest is capitalized on qualifying assets for business-type activities and/or enterprise funds, disclosures should include: Total amount of interest cost incurred and amount thereof that

has been capitalized

61

IMPAIRMENT OF CAPITAL ASSETS

GASB 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, issued in November 2003, provides guidance to governments for the process of determining impairment of capital assets and the reporting requirements related thereto

Prior to GASB 42, GASB had not previously established requirements for asset impairments

GASB concluded that a capital asset is considered impaired when its service utility has declined significantly and unexpectedly

62

Definition – A significant, unexpected decline in the service utility of a capital asset. Service utility of a capital asset is the usable capacity that, at acquisition, was expected to be used to provide service, as distinguished from the level of utilization, which is the portion of the usable capacity currently being used. Examples of impairment include:

• Building with mold contamination – physical damage

• Office building damaged by earthquake – physical damage

• Underground storage tanks not meeting current environmental standards – change in legal or environmental factors

• Underutilized piece of medical equipment – technological development or evidence of obsolescence

• School used for storage – change in manner or duration of use

63

IMPAIRMENT

ASSESSMENT OF IMPAIRMENT

Two-step process—Step 1

1) Identifying potential impairments

• Identified through events or changes in circumstances that are prominent and that denote the presence of indicators of impairment

Events or circumstances that may indicate impairment generally are expected to have prompted discussion by the governing board, management or the media – if event is not conspicuous or known to management, then the government is not required to perform additional procedures to identify potential impairments

Indicators of impairment

Evidence of physical damage – e.g. by fire or flood

Enactment or approval of laws or regulations or other changes in environmental factors – e.g. new water quality standards that cannot be met

Technological development or evidence of obsolescence – e.g. newer equipment renders existing equipment obsolete

A change in the manner or expected duration of use of a capital asset – e.g. closure of a school prior to the end of its useful live

Construction stoppage – e.g. due to a lack of funding

A change in demand for the services of a capital asset is not considered a separate indicator of impairment

64

ASSESSMENT OF IMPAIRMENT

Two-step process – Step 2

2) Test for impairment – if a capital asset is identified under step 1 as potentially being impaired, then the government must determine whether both of the following two factors are present:

i. The magnitude of the decline in service utility is significant – measured by the significance of expenses associated with continued operation and maintenance or costs of restoration in relationship to the current service utility – other than physical damage, if management takes action to address the situation, then deemed significant

ii. The decline in service utility is unexpected – costs associated with restoration or other impairment circumstance is not part of the normal life cycle of a capital asset

65

MEASUREMENT OF IMPAIRMENT

GASB 42 differentiates between capital assets that will continue to be used by the government and those that won’t

For capital assets that will continue to be used by the government – use one of the following approaches to determine what amount of the historical cost that should be written off:

Restoration cost approach – uses a methodology to determine the estimated costs to restore the utility of the capital asset – typically used for impairment resulting from physical damage

Service units approach – uses a methodology to isolate the historical cost of the service utility of the capital asset that cannot be used due to the impairment event – use for impairments resulting from enactment or approval of laws or regulations or other changes in environmental factors or from technological development or obsolescence

Deflated depreciated replacement cost approach – uses a methodology that replicates the historical cost of the service produced – use for impairments caused by a change in manner or duration of use of the capital asset

66

MEASUREMENT/REPORTING OF IMPAIRMENT

For capital assets that will no longer be used by the government and construction stoppage – report at the lower of carrying value or fair value – e.g., a hospital closes its operations before the estimated useful life of the building is reached and begins efforts to sell the facility

Unless the impairment is considered temporary, report loss in the statement of activities and statement of revenues, expenses and changes in fund net position(program, operating expense, special item, or extraordinary item) – if program expense, then report as a direct expense of the program that uses the capital asset

If impairment is temporary – don’t write-down the capital asset – typically the impairment is permanent

Do not reverse impairment losses recognized in accordance with this statement in future years even if the events or circumstances causing the impairment have changed

67

INSURANCE RECOVERIES

In governmental fund financial statements, any insurance recovery is reported as an other financing source or extraordinary item – restoration or replacement cost should be reported separately as an expenditure

In governmental and business-type activities in government-wide financial statements:

• Restoration or replacement costs should be reported as a separate transaction from the impairment loss and associated insurance recovery

• The impairment loss should be reported net of the associated insurance recovery when the recovery and the loss occur in the same year (Note: Calculations may actually result in a gain, depending on the extent of insurance recoveries)

• Insurance recoveries reported in subsequent years should be reported as program revenue, nonoperating revenue or extraordinary item, as appropriate

68

EXAMPLE 1 – PHYSICAL DAMAGE – BUILDING WITH STRUCTURAL DAMAGE

Office building damaged by earthquake

• Considered infrequent and unusual in nature

• Original cost: $28 million – 30 year life – in service 7 years

• Building closed – structural repairs cost of $3.5 million (all capitalizable under government’s capitalization policy)

• Insurance proceeds of $2.5 million

• Physical damage indicates impairment, magnitude significant

• $3.5 million repair cost significant vs. $0 asset service provided (not in use)

• Replacement cost not available – construction costs increasing 3% annually

• Restoration cost approach to be used

• Impairment loss $2,181,872, netted against insurance recoveries = gain of $318,128

69 SOURCE: GASB 42 Illustration 2

Evaluation of impairment

70

a Historical cost $28,000,000

Accumulated depreciation (after 7 years) 6,533,333

b Carrying amount $21,466,667

Restoration cost $3,500,000

Deflation factor 0.81309

c Deflated restoration cost $2,845,815

d Restoration cost ratio (c/a) 10.164%

Impairment loss (b x d) $2,181,872

Insurance recovery $2,500,000

net gain $318,128


SOURCE: GASB 42 Illustration 2

Reporting • Government-wide statements

Gain reported as an extraordinary item ($318,214)

Restoration costs ($3,500,000) capitalized, thus increasing capital assets

Impairment loss ($2,181,786) reduces capital assets, for a net increase in capital assets of $1,318,214.

• Governmental fund financial statements Insurance recovery ($2,500,000) reported as an other financing source

Restoration costs ($3,500,000) as expenditures

Offsets to cash in each case – net cash decrease of $1,000,000

71



EXAMPLE 2 – PHYSICAL DAMAGE – SCHOOL WITH MOLD CONTAMINATION

School with mold contamination

• Considers event unusual in nature, not infrequent in occurrence

• Original cost: $1.3 million included land $100,000, 60 year life

• Improvements made during life: $135,000 classroom addition, $1.1 million for AC and addition

• Total remediation costs of $4 million: $1.6 million demolition and mold removal – $2.4 million rebuilding the walls (capitalizable)

• Estimated replacement cost of school: $6.2 million

• No insurance recovery

• Impairment loss of $586,452 using restoration cost approach

• In the government-wide statements – loss reported as a program expense ($586,452), remediation costs ($2,400,000) capitalized, thus increasing capital assets, remediation costs reported as program expense ($1,600,000) and capital assets reduced for impairment loss ($586,452), thus capital assets increase by $1,813,548 and cash decreases by $4,000,000

• In the governmental fund financial – restoration costs ($4,000,000) recorded as expenditures – with the offset to cash of $4,000,000


Evaluation of impairment

73

Accumulated Carrying

Historical Estimated Depreciation, Amount,

Cost Useful Life

Land $100,000

Building acquisition-YR1 $1,200,000 60 $600,000 $600,000

Renovation, YR 15 135,000 45 45,000 90,000

Addition/air conditioning-Yr 20 1,100,000 40 275,000 825,000

Total buildings $2,435,000 $920,000 $1,515,000

Total mold remediation cost $4,000,000

Percentage rebuilding cost 60%

Restoration cost $2,400,000

Restoration cost (current dollars) $2,400,000

Replacement cost (current dollars) 6,200,000

Restoration cost ratio 38.71%

Carrying amount (historical cost) 1,515,000

Impairment loss $586,452



Reporting • Government-wide statements –

Loss reported as a program expense ($586,452),

Remediation costs ($2,400,000) capitalized, thus increasing capital assets

Remediation costs reported as program expense ($1,600,000)

Capital assets reduced for impairment loss ($586,452), thus capital assets increase by $1,813,548 and cash decreases by $4,000,000

• Governmental fund financial

• Restoration costs ($4,000,000) recorded as expenditures with the offset to cash of $4,000,000

74



EXAMPLE 3 – CHANGE IN MANNER OR DURATION OF USE

School used as storage (not education)

Unexpected closure due to drop in enrollments

Not unusual or infrequent

Original cost: $10 million, 50 year life

Current replacement cost: $4.2 million (warehouse space)

Commercial construction index at closure – 150

Impairment indicated – change in manner or use

Passes magnitude test


Evaluation of Impairment

76

Historical cost $10,000,000

Accumulated depreciation (12 / 50 years) 2,400,000

a Carrying amount $7,600,000

Replacement cost of warehouse $4,200,000

Accumulated depreciation (12 / 50 years) 1,008,000

b Depreciated replacement cost $3,192,000

c Commercial construction index 100

d Commercial construction index 150

e Deflation factor (c / d) 66.67%

f Deflated depreciated replacement cost (b × e) $2,128,000

Impairment loss (a – f) $5,472,000



Reporting

• Impairment loss reported as program expense in statement of activities and allocated accordingly

Disclosure

• “Program expense includes an impairment loss of $5,472,000 due to the change in the use of an elementary school from education to storage. The impairment loss is allocated to program expense as follows:”

77


Impairment Loss

Regular instruction $ 3,009,600 Special education instruction 820,800 Pupil support services 547,200 Instructional staff services 547,200 School administration services 547,200

$ 5,472,000 SOURCE: GASB 42 Illustration 5

A SAMPLE OF RESOURCES

GASB Statement No. 34, Basic Financial Statements-and Management’s Discussion and Analysis-for State and Local Governments

GASB Statement No. 37, Basic Financial Statements-and Management’s Discussion and Analysis-for State and Local Governments: Omnibus

GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets

78

A SAMPLE OF RESOURCES

GASB Statement No. 62, Codification of Accounting and Financial Report Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements

2013-14 GASB Comprehensive Implementation Guide, Chapter 7, et al.

GFOA Governmental Accounting, Auditing and Financial Reporting (GAAFR) – “Blue Book”

Accounting for Capital Assets: A Guide for State and Local Governments (GFOA publication)

Others

79

THANK YOU! Christopher J. Telli, CPA | Partner | 303.861.4545| [email protected]

Anna L. Thigpen, CPA| Manager | 303.861.4545| [email protected]

The information in BKD seminars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these seminars.

81

August 13, 2013

Planning for Capital Assets:

Budgeting

Peggy Bunzli, Budget Officer

City of Boulder

CGFOA 2014 Annual Conference

November 19, 2014

Agenda

83

The Need for Capital Budgeting

and Planning

Best Practices and Steps

Financing Options

Capital Budgeting - Why?

84

Capital projects are expensive Don’t fit into to short-term budget cycle Require special financing Notorious for budget overrun

Capital projects have long-term implications Project can extend over multiple fiscal years Decisions extend into future

Capital projects can be politically charged May require public input

Capital Planning - Why?

85

Capital Improvement Plan (CIP)

The CIP is a guide to public investment in

infrastructure and the community

Community priorities and values

Coordination

Cost control

Long-term implications

Ongoing budgetary implications

Planning and Budgeting - example

86

Capital Planning and Budgeting

87

Financial/budget policies

Identify capital needs

Prioritize needs and projects

Develop projects and estimate costs

Develop financing strategies

Identify operating costs/impact

Execute and manage projects (project

managers)

Financial and Budget Policies

88

Revenue

Debt

Maintenance

Replacement

CIP

Other public policy

(see handout for example)

Capital Needs

89

Infrastructure development and

enhancement– e.g.

Facilities, fleet, land, space, streets,

equipment, utilities, waste management

Maintenance and replacement – e.g.

Buildings, fleet, equipment

Capital Needs

90

Strategic planning

Economic and community development

Comprehensive planning

Community priorities

Public safety

Service level

Elected officials

Boards and Commissions

Response to emergencies/disasters

Prioritizing Capital Needs

91

Relationship of capital projects to:

Policies/guiding principles

Strategic/master plans

Studies

Major stakeholder and public input

Legal requirements/mandates

Operating budget impact

Develop review process

(see handout for guiding principles example)

Estimated Project Costs

92

Scope

Timeline

Phases – e.g.

Studies/planning

Acquisition

Design

Implementation

Construction

Completion/close out

Key Capital Project Cost Drivers

93

Consulting/planning studies

Staff time

Land acquisition

Design and engineering

Construction/materials

Environmental remediation

Scope creep

Timing and coordination

Developing Financing Strategies

94

Project revenue and expenditure trends

Prepare cashflow projections

Adhere to financial policies

Consider funding alternatives

Consider risk

Evaluate affordability of financing strategy

Impact on debt ratios

Impact on taxpayer

Impact on ratepayers

Capital Financing Options

95

Pay-as-you-go

Annual revenues

Capital reserves

Grants

Partnering Regional

Public-private

Charges Special assessments

short-term taxes

impact fees

Debt Financing

Bonds General Obligation (G.O.)

bonds

Revenue bonds

Capital leases Privately placed for

equipment or small projects

Certificates of participation for larger projects

Capital Financing Options Pay As You Go

96

Fiscal Responsibility

Uses existing funds

No burden on future funding

Flexibility

To address economic adversity

Enhanced Credit Rating

Does not negatively impact debt ratio

Track record of paying for needs

Capital Financing Options Debt Financing

97

Fiscal practicality

Adequate fund balance may not exist

May be difficult to raise additional funds

Funding security

Dedicated, steady funding

Reduced pressure on operating funds

Spreads cost over period of time

Questions?

98

Documents

PLANNING FOR CAPITAL ASSETS ACCOUNTING AND IMPAIRMENT Assets.pdf · PLANNING FOR CAPITAL ASSETS – ACCOUNTING AND IMPAIRMENT ... • Group or composite depreciation methods may be