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

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

3. Capital Assets Defined

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

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

6. Basic Accounting

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

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

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

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

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

12. Basic Accounting • Capital Asset Reporting Requirements:

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

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

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

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

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

18. Major Asset Classes

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

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

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

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

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

24. Capitalizable Costs

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

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

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

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

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

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

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

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

33. Capitalizable Costs • Interest incurred during acquisition

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

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

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

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

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

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

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

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

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

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

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

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

46. Valuation of Capital Assetsfor FinancialReporting Purposes

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

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

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

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