Capital Assets - Fixed Assets

7/30/2019 Capital Assets - Fixed Assets

1/31

Fixed Assets

Presented by: Zac Morris, CPA


2/31


3/31

Audit Implications

Capital assets most common area for auditadjustments

Incomplete additions or disposals

Exclusion of architect/engineering services from constructionprojects

Leased assets capitalized at incorrect amount or notcapitalized at all

Vehicles recorded net of trade-inConstruction in progress issues


4/31


5/31

Capital Assets vs. Inventory

Inventory

Assets that are consumed in operations and do not extendbeyond a single reporting period

Examples: office supplies, bus maintenance items, bus fuelCan also include items held for resale

Examples: food service inventory, school supplies held for resale

Cost per item typically does not exceed capitalization

threshold


6/31

Major Classes of Assets

Land

Buildings & Building Improvements

Improvements Other than Buildings

Also called Land Improvements

Examples: fences, retaining walls, parking lots, landscaping

Furniture and equipment

Infrastructure

Example: water and sewer lines

Other

Example: software


7/31

Capitalization Threshold

Accounting standards do not need to be applied to itemsthat are of only minimal interest to financial statementusers

Materiality only need to report capital assets if they exceed

a predetermined amount, commonly known as a capitalizationthreshold

GFOA recommends a minimum of $5,000

Governments are required by Ohio Administrative Code(OAC) to report at least 80% of their capital assets

Keep this rule in mind if you ever increase your threshold (i.e.increasing your threshold cannot remove more than 20% of amountpreviously reported)


8/31


9/31

Identifying Capital Asset Additions

Review BUDLED for 6** object codes

610 Land

620 Buildings

630 Improvements other than buildings

640 Equipment

650 Vehicles

660 School buses 670 Library books (not capitalized by most)

690 Other capital outlay


10/31

Identifying Capital Asset Additions(Continued)

Review BUDLED for 418 object codes (professionalservices) for architect and engineering costs

Just because construction has not started, does not meanyou do not have any construction in progress (CIP)

All architect, engineering services should be capitalized,including design services, construction manager fees, etc.

Also be sure to include all OSFC Construction Manager fees These should be recorded into USAS via memo journal entries


11/31


Review any new debt agreements entered into duringthe year

Most debt has capital assets associated with it

Exception: HB264 Energy Conservation Loans many times theseexpenditures are deemed maintenance items

Capital leases

Must review lease agreement to determine if it is capital lease

or operating lease Any 1 of 4 criteria makes a lease capital (most common are transfer

of ownership to the School District at the end of the lease and abargain purchase option (typically $1)


12/31


Capital leases (Continued)

If the lease is a capital lease, you must capitalize the related assetsin the same amount

Assets should be capitalized at the total principal amount of the

capital lease Common issue the lease meets the definition of a capital lease,

but the leased items are under the Districts capitalization threshold

Examples: computers, copiers

You must treat both the lease and assets the same way (i.e. record thecapital lease liability and the capital assets, or record neither)

Recommend discussing this issue with your GAAP preparer and/orauditors


13/31


Review Board of Education minutes for the following:

Approval of large contracts - ORC requires Board approval formost contracts > $25,000

Donations of capital assets (since no cash is involved in thesetransactions, they will not show up in USAS)

Example: Booster clubs donating athletic facilities or equipment


14/31


15/31

Determining Cost of Assets

Tracking Construction in Progress

Can be difficult due to extending over multiple fiscal years

Do not recommend just recording all expenditures in a construction fund

Recommend utilized an excel spreadsheet by vendor (example in

handouts)

Certain project costs may be related to items that should not becapitalized

Particularly furniture & fixtures (student desks, chairs, smaller kitchen equipment,etc)

Once the project is complete, each component will have to be added tothe appropriate class of assets (building, furniture, equipment, etc)

This can be a monumental task if not tracked during the course of the project!


16/31

Determining Cost of Assets (Continued)

Shipping and freight charges are included in cost

Installation fees are included in cost

Two exceptions:

Feasibility studies are not capitalizable (because the cost was

incurred prior to a determination of feasibility) Training employees to operate an asset is not capitalizable

Interest expense incurred during construction

Cannot be capitalized in governmental activities, only enterprisefunds

Assets acquired where credit was given for trade-ins

Cash paid for new asset plus remaining undepreciated value ofasset traded in, if any


17/31


General and administrative costs should never be capitalized

Examples: overhead (use of office facilities, executive management,accounting, human resources)

These items should always be expensed

Costs directly related to the acquisition of a specific assetshould always be capitalized

Example: salaries and wages of employees who worked on aconstruction project

Costs directly related to the acquisition of capital assets, butnot to specific projects, should still be capitalized

Example: multiple projects going on (allocate to each project)

Construction administration, legal fees, design fees


18/31


Internally developed software has very specific guidanceon what can and cannot be capitalized.

Consult with GAAP preparer or auditor if you need guidancein this area.

Donated capital assets are reported at FMV at the dateof donation

Best option is appraisal

Also applies to assets purchased for $1 (these are considereddonations)


19/31

Improvements vs. Repairs & Maintenance

Improvements (betterments)

Provides additional value, which is achieved by one of thefollowing:

Lengthening the capital assets estimated useful life

Increasing the capital assets ability to provide service

Example 1: adding an additional lane to a road (increasescapacity for traffic)

Example 2: reconstructing an asphalt road with concrete

(would extend the original useful life of the asset)

Repairs and maintenance

Retain value rather than provide additional value


20/31

Improvements vs. Repairs & Maintenance

New Roofs

Assume building has useful live of 80 years, but will need roofreplaced in half that time.

Assume the original roof is included in the cost of the buildingRoof replacement does not lengthen the original useful life of

the building, but avoids cutting it in half

Should be treated as a repair rather than as a replacement

These types of items should be addressed in your capitalasset policy.


21/31

Identifying Capital Asset Disposals

Request disposals from departments

This could include providing a current listing to eachdepartment to review, update and return to Treasurers office

Review REVLED for 193* receipt codes

1931 Sale of Fixed Assets

1932 Compensation for Loss of Assets

1933 Sale of Personal Property

1934 Insurance ProceedsInsurance proceeds could also be indicator of animpairment of a capital asset (discussed later)


22/31

Identifying Capital Asset Disposals(Continued)

Review lease agreements for maturity

If a lease has matured, do you still have the assets?

Did the assets get traded in on new ones?

Review vehicle and school bus purchases made duringthe year for trade-Ins


23/31

Impairments of Capital Assets

Definition: a significant and unexpected decrease in theservice utility of a capital asset that will continue to be used inoperation

Indicators of a potential impairment

Physical damage requiring restoration of asset

Examples: fire, flood damage

Changes in technology that negatively impact assets effectivenessor result in the asset becoming obsolete

Change in the manner an asset is being used

An instructional building being used for storage (often when a newbuilding is constructed)

Construction stopped on a project

Development of internal software stopped


24/31

Impairments of Capital Assets (Continued)

Impairment must be permanent, cannot be temporary

Decline in demand alone does not qualify as animpairment

It may not be permanent

The use of the asset has not changed

Example: enrollment declines and an elementary schoolbuilding is not being used

Outsourcing the operating of a capital asset does notqualify as an impairment

The use of the asset has not changed (the same services arebeing provided)


25/31


26/31

Capital Asset Policies (Continued)

How should control be maintained over items not capitalized(under threshold)?

Best done at the department level

Which items should be tagged?

How should disposals be addressed? Who can authorize a disposal?

How to ensure it gets reported to the accounting department?

How to ensure the government receives maximum benefit from thedisposal?

How often should a physical inventory of capital assets beperformed? Who will be responsible for performing them?

GFOA recommends once every 5 years


27/31

Capital Asset Policies (Continued)

Depreciation items

Depreciation method (typically straight line)

Including method of depreciating for partial years (year of acquisitionand disposal)

Examples: half year, monthly, full year in year of acquisition and none inyear of disposal

Useful lives for each class of assets

Can be a range

Salvage value of assets

Definition: estimated proceeds from the eventual disposal of anasset

Typically zero to ten percent of cost


28/31

Periodic Physical Inventories

Can be done by a valuation company

If done internally, necessary components:

Data in the accounting records is compared with the actual

physical assetsAn exception report is generated

The exception report is used to make any necessaryadjustments to the accounting records


29/31

Resources Blue Book


30/31

Resources Accounting For Capital Assets


31/31

Capital Assets - Fixed Assets

Documents