TOWN OF LINCOLN COUNCIL POLICY
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1 Page 1 of 10 PURPOSE The purpose of this policy is to prescribe the accounting treatment for tangible capital assets so that users of the financial report can discern information about the investment in property, plant and equipment and the changes in such investment. The principal issues in accounting for tangible capital assets are the recognition of the assets, the determination of their carrying amounts and amortization charges and the recognition of any related impairment losses. In addition, the policy covers procedures to: 1) Protect and control the use of all tangible capital assets. 2) Provide accountability over tangible capital assets. 3) Gather and maintain information needed to prepare financial statements. APPLICATION OF THE POLICY This policy applies to all Town departments, boards and commissions, agencies and other organizations falling within the reporting entity of the Town. POLICY STATEMENT This policy shall be applied in a manner consistent with the provisions of Section PS 3150 of the Public Sector Accounting Handbook and any other applicable legislation. DEFINITIONS Amortization is the accounting process of allocating the cost less the residual value of a tangible capital asset to operating periods as an expense over its useful life in a rational and systematic manner appropriate to its nature and use. Betterment is a cost incurred to enhance the service potential of a tangible capital asset. Betterments increase service potential and may or may not increase the remaining useful life of the tangible capital asset. Such expenditures would be included in the tangible capital asset s cost.
2 Page 2 of 10 Capitalization threshold is the value above which assets are capitalized and reported in the financial statements. Generally, the threshold amount for each category is the minimum cost an individual asset must have before it is treated as a tangible capital asset and added to the proper asset class balance. The threshold amount is to be used as a guide in addition to professional judgment. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm s length transaction who are under no compulsion to act. Leased tangible capital asset (capital lease) is a non-financial asset that has physical substance and a useful life extending beyond an accounting period, and is held under lease by a municipality for use, on an ongoing basis, in the production or supply of goods and services. Under the terms and conditions of the lease, substantially all of the benefits and risks incident to ownership are, in substance, transferred to the municipality without necessarily transferring legal ownership. Maintenance and repairs maintain the predetermined service potential of a tangible capital asset for a given useful life. Such expenditures are charged in the accounting period in which they are made. Net book value of a tangible capital asset is its cost, less accumulated amortization and the amount of any write-downs. Nominal value should be assigned to an asset when no asset valuation method is relevant, or where the accuracy of any estimate could not be supported in an audit. Nominal value in this context is to be one Canadian dollar ($1.00). Residual value is the estimated net realizable value of a tangible capital asset at the end of its useful life. Tangible capital assets are non-financial assets having physical substance that: a) are held for use in the production or supply of goods and services, for rental to others, for administrative purposes or for the development, construction, maintenance or repair of other tangible capital assets;
3 Page 3 of 10 b) have useful economic lives extending beyond an accounting period; c) are to be used on a continuing basis; d) are not for sale in the ordinary course of operations. Useful life is the estimate of either the period over which the local government expects to use a tangible capital asset, or the number of production or similar units that it can obtain from the tangible capital asset. POLICY GUIDELINES Tangible Capital Assets For the purpose of this policy, tangible capital assets include: land for providing municipal services; general purpose buildings; equipment and vehicles; water and wastewater plants; water and wastewater networks; storm water drainage networks; road networks; information technology software and hardware; and furniture and fixtures. This policy applies to all assets where a municipality has control over the future benefits of the asset, whether or not the municipality actually owns those assets. This policy does not apply to intangible assets, such as goodwill, copyrights or trademarks; natural resources; Crown Lands; items held for resale; or cost of studies, such as Official Plans or zoning updates. Capital assets such as works of art and historical treasures are not subject to capitalization and amortization, since it is not possible to make a reasonable estimate of the future benefits of such property. Nevertheless, existence of such property must be disclosed in the financial statements.
4 Page 4 of 10 Capitalization Thresholds Tangible capital assets will be capitalized and recorded in the fixed asset sub-ledger according to the thresholds outlined below. Otherwise the expenditure will be charged against the operating budget of the department acquiring the asset. All land Buildings and building improvements - $25,000 Vehicles - $5,000 Equipment - $5,000 Infrastructure assets (roads, water, wastewater) - $50,000 Different thresholds may be used for group assets. Betterments to existing assets will be capitalized when unit costs exceed the threshold. Pooling of Assets Assets that have a unit value below the capitalization threshold but have a material value as a group should be recorded as a single asset with one combined value. Although these assets are recorded in the financial system as a single asset, each unit may be recorded in the asset sub-ledger for monitoring and control of its use and maintenance. If adding assets with a total value greater than 10% of the pooled group, these additions will be capitalized. Valuation Tangible capital assets should be recorded at cost plus all additional charges necessary to place the asset in its intended location and condition for use. a) Purchased assets Cost is the gross amount of consideration paid to acquire the asset. It includes all nonrefundable taxes and duties, freight and delivery charges, installation and site preparation costs, etc. It is net of any trade discounts or rebates.
5 Page 5 of 10 Cost of land includes the purchase price plus legal fees, land registration fees, transfer taxes, etc. Costs would include any costs to make the land suitable for intended use, such as pollution mitigation, demolition and site improvements that become part of the land. When two or more assets are acquired for a single purchase price, it is necessary to allocate the purchase price to the various assets acquired. Allocation should be based on the fair value of each asset at the time of acquisition or some other reasonable basis if fair value is not readily determinable. b) Acquired, Constructed or Developed Assets Cost includes all costs directly attributable (e.g., construction, architectural and other professional fees) to the acquisition, construction or development of the asset. Carrying costs such as internal design, inspection, administrative and other similar costs may be capitalized as long as they are directly attributable to the construction or development of the asset. Interest cost attributable to the acquisition, construction and production of an asset shall be excluded from capitalization. Capitalization of general administrative overhead is not allowed. Capitalization of carrying costs ceases when no construction or development is taking place or when the tangible capital asset is ready for use. c) Donated or Contributed Assets The cost of assets donated, contributed or transferred to the municipality is equal to the fair value at the time of transfer. Fair value may be determined using market or appraisal values. If a fair value cannot be determined, the asset is to be recognized as having a nominal value. d) Grants and Donations Capital grants and donations received are not to be netted against the cost of the tangible capital asset.
6 Page 6 of 10 Classification of Assets To facilitate financial statement note disclosure, each asset will be assigned to a category as part of its unique inventory record. The primary asset category consists of two tiers the first identifies whether the asset is infrastructure or simply a general asset. A second sub-tier identifies more specifically whether it is part of one of the following: land, land improvements, buildings, leasehold improvements, machinery and equipment, vehicles, linear assets and capital work-in-progress. Each asset should also be classified as to its functional category, which identifies the functional service area in which the asset is used. The most rational functional categorization would be the existing functional categories used in the annual Financial Information Return prescribed by the Province of Ontario. Amortization Generally, the Town uses a straight-line method for calculating the annual amortization. Straight-line amortization is calculated by dividing an asset s original cost by its estimated life in years. This method provides a constant annual amortization amount each year. Amortization expense will be charged annually at the end of the year. All acquisitions and dispositions will be deemed to occur on July 1. Thus, amortization will be calculated at 50% of the normal rate for assets for their first or last year of service. The Finance Department is responsible for establishing and utilizing an appropriate amortization methodology and rate for assets acquired. The department acquiring the asset is responsible for establishing and utilizing an appropriate estimated useful life. Useful life is normally the shortest of the asset s physical, technological, commercial or legal life. The useful life of a tangible capital asset depends on its expected use by the government. Factors to be considered in estimating the useful life of a tangible capital asset include: expected future usage; effects of technological obsolescence;
7 Page 7 of 10 expected wear and tear from use or the passage of time; the maintenance program; studies of similar items retired; and the condition of existing comparable items. The amortization method and estimate of useful life of the remaining unamortized portion should be reviewed on a regular basis and revised when the appropriateness of a change can be clearly demonstrated. Significant events that may indicate a need to revise the amortization method for a tangible capital asset include: a change in the extent to which the tangible capital asset is used; a change in the manner in which the tangible capital asset is used; removal of the tangible capital asset from service for an extended period of time; physical damage; significant technological developments; a change in the demand for the services provided through use of the tangible capital asset; and a change in the law or environment affecting the period of time over which the tangible capital asset can be used. Betterments Capital improvements that should be capitalized are referred to as betterments. For purposes of determining capitalization of these expenditures, an improvement must enhance the service potential of the asset. There are four basic criteria for determining whether service potential has been enhanced: a) where there is an increase in the previously assessed physical output or service capacity; b) where associated operating costs are lowered; c) the useful life of the property is extended; or d) the quality of the output is improved.
8 Page 8 of 10 Expenditures which maintain the predetermined service potential of a tangible capital asset for a given useful life are considered as maintenance and repairs and are charged in the accounting period in which they are made. Componentization Tangible capital assets may be accounted for using either the single asset or component approach. Under the single asset approach, the entire complex asset is accounted for as one asset. As its components are replaced, they are simply expensed as repair and maintenance. Estimates of expected life and amortization are averaged for the entire asset. The major advantage to the single asset approach is that it is less expensive and simpler since it does not require detailed records and estimates of expected useful lives of each of the components. Under the component approach, the complex asset is broken down into major components. The major components are accounted for as separate assets. Whether the component approach is to be used will be determined by the usefulness of the information versus the cost of collecting and maintaining information at the component level. Factors to consider when determining whether to use a component approach include: a) Major components of the asset have significantly different useful lives and consumption patterns. b) Value of components in relation to capitalization thresholds. Major components should be grouped when the assets have similar characteristics and estimated useful lives or consumption rates. Although the municipality may wish to adopt a component approach to accounting for certain complex capital assets, there may be concerns about trying to allocate historical costs of existing assets to their components. The municipality may have two different asset classes within an asset category: one for its pre-adoption assets and one for its post-adoption assets. Component accounting would be used for post-adoption assets acquired, constructed or developed.
9 Page 9 of 10 Disposal of Assets Disposals of tangible capital assets may occur by sale, trade-in, destruction, loss or abandonment. When a tangible capital asset is disposed of, the cost and accumulated amortization are removed from the accounts. Any difference between the net proceeds and the net book value of the asset should be accounted for as a revenue or expense in the accounting period in which the disposal occurred. Disposal of tangible capital assets that are moveable personal property is the responsibility of the department having control of the asset unless delegated to another department. Department heads should notify the Finance Department when assets become surplus to operations and are disposed. Disposal of real property will be the responsibility of the Director of Corporate Services. When other constructed tangible capital assets are taken out of service, destroyed or replaced due to obsolescence, scrapping or dismantling, the department head or designate must notify the Finance Department of the asset description and effective date. The Finance Department is responsible for adjusting the asset registers and accounting records recording a loss/gain on disposal. Work-in-Progress Capital projects tracking work-in-progress costs must be closed as soon as the asset is put into service in order to begin amortization. In cases where the capital project must be kept open, the project will be deemed to be complete and will begin amortization when the certificate of substantial completion is received. For projects that do not receive a certificate of substantial completion, amortization will begin when the asset is available for use. In some cases, the acquisition or construction of a tangible capital asset is comprised of distinct, multiple and self-contained phases that will be put into service at different points in time. Capitalization of overhead costs must cease and amortization must begin for individual distinct phases as they are completed.
10 Page 10 of 10 If construction of the tangible capital asset is terminated or deferred indefinitely before completion, the costs capitalized to date must be expensed, unless there is an alternative use for the tangible capital asset or there is no intention to use the asset in its current capacity. Residual Value For the purpose of this policy, the residual value on the disposal of a municipal tangible capital asset will be deemed to be zero. Capital Leases Property that meets the definition of a leased tangible capital asset is accounted for as both a tangible capital asset and a liability. The value of the leased asset and the amount of the lease liability would be the present value of the minimum lease payments, excluding the portion related to executory costs. Account for a capital lease as acquiring a capital asset and incurring a liability. Account for any lease as an operating lease when the net present value of the future minimum lease payments or fair value, which ever is less, is less than $10,000. EFFECTIVE DATE OF POLICY This policy shall take effect on the date of approval by the Council of the Town of Lincoln.
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