Accounting for Capital Assets Including General Infrastructure

1. Accounting for Capital Assets Including General Infrastructure Indiana LTAP Road School 2011 Purdue University West Lafayette, Indiana March 9, 2011

2. Accounting for Capital Assets Including General Infrastructure Michael M. Nielsen Government Fixed Asset Services, Inc. Chicago, Illinois 60655-1728 nielsen@fixedassetservices.com 773 298 0289

3. Accounting for Capital Assets Including General Infrastructure Jon C. Peterson Government Fixed Asset Services, Inc. Chicago, Illinois 60655-1728 peterson@fixedassetservices.com 708 482 3668

4. Accounting for Capital Assets Including General Infrastructure Charlie Pride Supervisor Indiana State Board of Accounts Indianapolis, Indiana 46204-2765 cpride@SBOA.In.Gov 317 232 2521

5. Accounting for Capital Assets Including General Infrastructure Duane Alverson, P.E. Engineer Lake County Highway Department Crown Point, Indiana 46307 alverda@lakecountyin.org 219 663 0525

6. Today’s Presentation Part I • Introduction • Designing capital asset information (worksheets) • Monitoring capital asset information • Maintaining capital asset information

7. Today’s Presentation Part II • Problems and challenges • Miscellaneous issues and practical considerations • Conclusion

8. Today’s Presentation Part III • Annual Fixed Asset Financial Reporting Cycle

9. Today’s Presentation Introduction • …Overriding concept today is that many governments continue to have issues with capital asset accounting and reporting – and that these issues can be resolved

10. Task at Hand… • Designing, monitoring, and maintaining an effective, economical, and efficient plan and process for the accounting and reporting of capital assets

11. Task at Hand… • Designing capital asset information • Process includes ‘defining’ capital vs. expense; repairs vs. improvements; and additions and retirements • Includes consideration of final format of capital asset information and seeks to be user-friendly

12. Task at Hand… • Designing capital asset information • Information to include generic asset description, location, department, etc. • For accounting purposes needs to be auditable • Information frequency is part of design • Prospective reporting is part of design • Database may be in Excel or some other database system • Reporting mechanism can be on-line input form

13. Inventory example Inventory columns A, B, C, D, E, G

14. Task at Hand… • Monitoring capital asset information • Plan to periodically check integrity of entire database for both property accounting and property control • An ‘iterative process’ • Large assets (buildings, general infrastructure) may need to verify existence only

15. Task at Hand… • Maintaining capital asset information • Annual update of information to subsequent fiscal year ends taking into account additions and retirements and adjusting information accordingly • Decision to be made is choosing the logical person to maintain the integrity at the database – both centrally (point person responsible for annual updates) and departmentally (person in charge of additions and retirements for both the property accounting information and the property control information)

16. Task at Hand… • Maintaining capital asset information • Centrally (comments) • Departmentally (comments) • Responsible person (comments) • ‘Clout’ – reference large county that utilizes affidavit that must be signed by Elected Official or Department Head

17. Today’s Presentation Part II …a government needs a record of its capital assets for financial reporting purposes and this record must bemaintained annually as of the fiscal year end to reflect changes (additions and retirements).

18. …in the interest of time …let’s get right to actual examples • Struggle • Creation of a roadmap • Defining capital v. expense • Defining additions • Defining ‘improvement’ • Defining repair and maintenance • Defining retirements • Reporting construction-in-progress • Delineating procedures • Misc. (elements of historical cost, capitalization threshold, extend life v improve, contributed assets)

19. Example – struggle with annual task of prospective reporting of capital assets • There is often no specific commitment to maintaining the property record • There is no effective coordination in getting the right information from the right people • No ‘point person’ at departments i.e., Highway Department or Buildings and Grounds Department to gather and report information as to additions and retirements • Process equates to ‘reinventing wheel’ annually

20. Example – creation of a prospective reporting roadmap for capital assets • Policies and procedures • Responsible person • Centrally • Departmentally • Information required • Information sources • Timeframe for completion

21. Example – defining capital v. expense • Capital defined • Expense defined • Specific written examples of each can help (in procedures documentation) • Capital to be considered in light of increased capacity or efficiency • Repairs and maintenance usually restore an asset to original service potential and does not necessarily comprise an improvement • Potential checklist

22. Example – Capital v. Expense • Reference capitalization threshold(s) of, say, $5,000 (or a higher amount) for furnishings and equipment, $100,000 for building improvements, and $250,000 for general infrastructure improvements • Concept of improvements vs. maintenance of current service potential (maintain = maintenance)

23. Example – Capital v. Expense • Common expense items for buildings: • Painting • Roof re-surfacing • Replace HVAC • Re-carpet • Plumbing repair and replacement • Upgrade electrical service • Landscaping

24. Example – Capital v. Expense • Common expense items for Roads • Re-stripe • Replace culvert • Replace signage • Replace guardrail • Re-surface existing road • Bridge joint repair • Replace streetlight

25. Example – defining asset additions • Only assets at or above capitalization threshold (a separate and increased amount for building and general infrastructure improvements) • Assets must meet written definition and criteria of an improvement • Newly constructed assets • Level of detail with a view to future maintaining information for reporting future additions and retirements

26. Example – defining capital asset ‘improvement’ • ‘New’ asset defined • Increased capacity defined • Increased efficiency defined • Example from GFOA Capital Asset Seminar • An improvement generally extends an asset’s estimated useful life beyond the original expectation • An extended estimated useful life usually involves a significant alteration or structural change

27. Example – Repair and Maintenance • Buildings and $100,000 capitalization threshold on improvements – does not mean capitalization of $112,000 in painting cost • Roads with a $250,000 capitalization threshold on improvements – does not mean capitalization of re-surfacing because road is still same length and width etc.

28. Example – Retirements • Full retirements are easy • Partial retirement means to isolate retired portion and retired percentage of the total asset and retired percentage of the asset’s historical cost • Partial retirement may take current cost of the replacement asset and index to its estimated historical cost and retire that amount

29. Example – construction-in-progress • Building – starts at planning and continues on to include design, architectural fees, site preparation, construction costs, etc. • Bridge – starts at planning and continues on to include design, engineering, environmental, and construction costs, etc.

30. Example – delineating capital asset prospective procedures (wwwwhw) • Specifics: • Who – assignment of responsible person • What – information to be gathered and maintained • Where – information source • When – timing of information reporting • How – procedures as to reporting of additions and retirements • Why – financial reporting and property control and separation of both issues

31. Issues to remember… • Capitalization thresholds relating to buildings and building improvements and general infrastructure and infrastructure improvements • Elements of historical cost to capture • Improving an asset’s capacity and efficiency • Extending an asset life v. meeting the estimated useful life expectation • Contributed assets and the determination of Fair Value

32. Issues to remember… • Report ‘all’ retirements • Construction-in-progress can be significant • Be honest in assessment of what you can and cannot do now and in the future • Don’t let the perfect get in the way of the good

33. Issues to remember… • Define capital vs. expense – should not have to reinvent the wheel every year • Focus on the money (greatest percentage of capital asset balance is in general infrastructure, buildings, and the fleet of vehicles – perhaps 90% or more)

34. Issues to remember… • Process does not have to be difficult or overly time consuming – planning is key • Policy is where you can make life easier (don’t forget auditor concurrence) • Get others involved • Capitalize on people, information, and resources within your government • Get in touch with the departments (they purchase, use, and retire the assets)

35. Today’s Presentation Part III • Annual Fixed Asset Financial Reporting Cycle

36. Annual Fixed Asset Financial Reporting Process I. The Mandate II. Planning Activities • Defining the Reporting Entity (-ies) • Determining Assets for Inclusion • Determining Requisite Data Elements • Identifying Sources of Information • Financial Reporting • Determining Critical Timelines and Completion Milestones III. Execution of the Annual Update IV. Development of the Annual Fixed Asset Report • Financial Report Summary • Supporting Detailed Schedules • Small-But-Sensitive Asset Control Log

37. Annual Fixed Asset Financial Reporting Process I. The Mandate Why: Calls for Greater Transparency and Accountability in Stewardship of Taxpayer Assets, Including Infrastructure and Other Tangible Assets When: Annually, Unless Other Requirements are Specified How: Typically Reported as Line-Item Amounts Within the Annual Financial Report – Supported via the Fixed Asset Summary Schedules and Detailed Fixed Asset Records By Whom: The Tax-Paying Public, Municipal Bondholders, Local & Federal Funding Agencies and Other Interested Public and Private Parties 37

38. Annual Fixed Asset Financial Reporting Process II. Planning Activities - Defining the Reporting Entity (-ies) Typically Separate Reporting for Government vs. Business-Type Activities: Government-Type Activities/General & Restricted Funds Service Departments (Police, Parks, Public Works, etc) Infrastructure (Streetlights, Roads, Sewers, Sidewalks, etc.) Business-Type Activities/Enterprise Funds Parking Garages Convention Centers Golf Courses Airports Specific Reporting Entity (-ies) is/are Frequently Mandated by External Requirements (i.e., Bond or Other Financier Requirements to Separately Break-Out / Account for Specific Debt-Financed Assets, etc.) 38

39. Annual Fixed Asset Financial Reporting Process II. Planning Activities - Determining Assets for Inclusion Evaluating New Expenditures - Capitalize vs. Expense Establishing & Maintaining Interim Construction in Progress (CIP) Accounts – What to Record Transferring Completed CIP into Use Determining Appropriate Capitalization Thresholds Assessing when is it Appropriate to Componentize / Break-Out of Single Large Expenditures into Multiple Asset Components? 39

40. Annual Fixed Asset Financial Reporting Process II. Planning Activities - Determining Assets for Inclusion (Cont’d) Assessing When is it Appropriate to Consolidate / Wrap-Up Multi-Expense Projects or Multi-Phased Construction Projects into Single Asset lines How to Account for Fully Depreciated Assets Still In Use? How to Account for Retired, Lost or Stolen Property? 40

41. Annual Fixed Asset Financial Reporting Process II. Planning Activities - Determining Requisite Data Elements Asset Description * Specific Asset ID # / VIN / etc. * Acquisition Date * Asset Cost * Useful Life * Salvage Value (Generally $0) * Depreciation Method (Typically Straight-Line) * Asset Location / Custodian Funding Source (i.e., Specific Funds, Grants, Bonds, etc) Other Helpful Data Fields (Planned Retirement Date, Vendor, Related Maintenance Contracts etc.) * Minimally required data elements for stewardship and computational purposes 41

42. Annual Fixed Asset Financial Reporting Process II. Planning Activities - Identifying Sources of Information Central Purchasing Authority or Agency (i.e., State Financing Authority or its Designates) Internal Governmental Purchasing Departments Governmental Departments Having Explicit Purchasing Authority 42

43. Annual Fixed Asset Financial Reporting Process II. Planning Activities - Determining Critical Timelines and Completion Milestones Planning is Key / Early and Frequent Communication With Stakeholders is Essential Leave Plenty of Room Delays / Fixed Asset Accounting is not Always a Departmental Priority Anticipate Extensive Time for Reconciliation of Beginning Asset Balances and Asset Acquisitions and Disposals Recognized that Source documents From Other Departments (i.e., Central Purchasing, Third-Party Agencies, etc.) Can be Very Slow in Coming Expect Lots of Late Additions and Deletions/Disposals 43

44. Annual Fixed Asset Financial Reporting Process III. Execution of the Annual Update Once complete and accurate information is obtained, execution is usually a somewhat tedious process of: Correctly entering data into fixed asset model, assuring the integrity of fixed asset model computations, Reviewing the resulting computations for correctness and reasonableness Reconciling the current year model beginning balances to the prior year’s ending balances (IMPORTANT) Developing a logical and user-friendly Fixed Asset Summary schedule Re-Assuring subsidiary computational schedules support each and every number on the Fixed Asset Summary Forward to other stakeholders for review and comment Incorporating review comments and Finalization! 44

45. Annual Fixed Asset Financial Reporting Process IV. Development and Finalization of the Annual Fixed Asset Report - Financial Reporting Summary Typically Includes: Identification of Reporting Entity (-ies) Historical Cost, by Major Asset Category, at End of Reporting Period Summary of Asset Additions and Retirements During the Reporting Period Summary of Annual Depreciation Expense Through End of the Reporting Period Ending Accumulated Depreciation Beginning Accumulated Depreciation (Optional) 45

46. Annual Fixed Asset Financial Reporting Process IV. Development of the Annual Fixed Asset Report - Supporting Detailed Schedules These Schedules will Typically Show Detailed Asset Information, Including Asset Balances and Related Depreciation Computations May also Contain Additional Information that is Useful to Various Departmental and Other Users, i.e., Asset Location / Custodian Funding Source (i.e., specific funds, grants, bonds, etc) Other Helpful Data Fields (Planned Retirement Date, Vendor, Related Maintenance Contract Info, etc.) 46

47. Simple Local City Financial Reporting Detailed Schedules 47

48. Annual Fixed Asset Financial Reporting Process IV. Development of the Annual Fixed Asset Report - Small-But-Sensitive Asset Control Log GFOA Recommended Practice: “Ensuring Control Over Non-Capitalized Items” - 2005 developed by the STANDING COMMITTEE ON ACCOUNTING, AUDITING AND FINANCIAL REPORTING Recommends Assigning “Control” Responsibilities to Appropriate Departmental Personnel, with Accountability to Finance Department Suggests Record Keeping for SBS Items Can be More Abbreviated but Must Center on Stewardship / Oversight of At-Risk Assets Implies Finance Department May Exercise Accountability Though Simple Annual Affidavits from Department Heads Responsible for Control to Actual Internal Audits or Oversight Reviews 48

49. Annual Fixed Asset Financial Reporting Process IV. Development of the Annual Fixed Asset Report - Small-But-Sensitive Asset Control Log (Cont’d) Should Reflect Those Assets Needing Special Oversight Due to Their Inherent Risky or Theft-Prone Nature. Some Examples Include: Laptop Computers Police Weapons and Communication Gear Dangerous Tools or Other Devices Where Liability Could Result if Lost, Stolen or Left in Open Controlled Assets Usually, But Not Always, Have Below-Threshold Unit Cost Value Record Keeping can be Less Detailed Than That Required for Financial Reporting. Could be as Simple as Unit Description With a Serial or Tag Number Most Departments Heads are Held Responsible for Assets Under their Control. Many Have highly Useful Tracking Schedules (Logs) That They’ve Developed for Their Own Use General Criteria: If It is Important to the Controlling Manager, It is “Important” and Should be Controlled 49

50. Annual Fixed Asset Financial Reporting Process Small-But-Sensitive Asset Control Log (Example 1) Possible SBS Log Formats – Minimal Data Tracked Departmental Needs and Control Objectives Should Drive Log Design 50