Section: FS Financial Services. Department: Finance. FS-03 Tangible Capital Asset Policy. Policy Statement LEDUC COUNTY MUNICIPAL POLICY

Transcription

1 FS-03 Tangible Capital Asset Policy Policy Statement Any object purchased for use by the County whose individual cost is less than the threshold and with a life span of less than one year shall not be entered into the fixed asset directory. This object will be expensed directly to the appropriate GL code. If it is over the threshold and has a life span greater than one year, it should be entered into the fixed asset module and amortized in the appropriate category. Communication Regarding Acquisition and Disposal of Assets It will be the responsibility of each department to inform finance (TCA Coordinator) of all acquisitions, disposals, donated assets and impairments of all assets including, but not limited to land, buildings, roads, bridges, underground infrastructure, equipment and vehicles. Note: Some tangible capital assets are harder to define when it comes to betterments versus dispositions than others. For example, when a road is being resurfaced, widened or any other betterment is being done to the existing GIS ID, the cost of that project will need to be allocated to each GIS and/or NIP ID number the betterment relates to and will then be added to the original cost of that road segment. If, on the other hand, a road has been destroyed, realigned, or moved to a new right of way and the old road segments are no longer in use, the old road ID s need to be disposed of and the new roads will be set up as new assets with a new GIS or NIP ID. This is two separate transactions for asset management purposes and finance will need to be advised of both. Tracking of Asset Inventory will be responsible for tracking assets purchased in accordance with the Tangible Capital Asset Policy. Individual departments may track assets whose value is under the capital threshold at their own discretion. Example: IT may want to track individual CPU s and laptops. Pooling Assets are capitalized on an individual asset basis. As such computers, radios, equipment, etc. will be entered separately and only if they are above the capitalization threshold. The exception to this is if an asset has its own identification number but is a continuation of another asset and cannot operate on its own, it will be capitalized even if as an individual segment it is below the threshold. Examples: A server is purchased for $25,000 and is entered into the fixed asset directory and amortized over its useful life. Five laptops worth $2,500 each, $12,500 in total are not entered into the fixed asset system, therefore, are expensed in the operating fund. The County owns a waterline worth a total value of $5M. This line has been split into 30 GIS ID segments, one may be worth $70,000 and another may be worth $5,000 depending on the length of the segment. Although the capitalization threshold for engineered structures is $50,000, the entire waterline will be capitalized by adding each segment to the fixed asset module even though March 11, of 6

2 some segments are worth less than $50,000 because one segment cannot stand on its own as a functioning asset. Capitalization Assets exceeding the following thresholds will be capitalized by Leduc County: Asset Description Threshold Land ALL Land Improvements $5,000 Buildings $50,000 Engineered Structures $50,000 Machinery & Equipment $5,000 Vehicles $5,000 Cultural & Historical Assets ALL Assets whose value falls below these thresholds shall be expensed in the year of acquisition. These items may be tracked in a separate inventory listing by departments if they so choose. Definitions of major asset classifications: Land - includes land purchased or acquired for a value for parks and recreation, building sites, infrastructure (highways, dams, bridges, tunnels, etc.) and other program use but not land held for resale. Land also includes land under roads and surveyed road allowances that, although may not be owned by the County, are controlled and managed by the County. Land Improvements - all improvements of a permanent nature to land such as parking lots, landscaping, lighting, pathways and fences. Buildings - permanent, temporary or portable building structures, such as offices, garages, warehouses and recreation facilities intended to shelter persons and/or goods, machinery, equipment and working space. Engineered Structures - permanent and structural works such as roads, bridges, canals, dams, water and sewer, utility distribution and transmission systems including plants and substations. Machinery & Equipment - equipment that is heavy equipment for constructing infrastructure, smaller equipment in buildings and offices, furnishings, computer hardware, off-road vehicles, etc. This class does not include stationary equipment used in the engineered structured class. Vehicles - rolling stock that is used primarily for transportation purposes and licensed for on-road use, including trailers. Cultural & Historical - works of art and historical treasures that have cultural, aesthetic or historical value that is worth preserving perpetually. These assets are not recognized as tangible capital assets in the financial statements, but the existence of such property should be disclosed. Policy Intent March 11, of 6

3 The intent of this policy is to prescribe the accounting treatment for tangible capital assets (TCA s) in compliance with Public Sector Accounting Board (PSAB) Handbook Section It is designed 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, amortizations charges, the tracking of dispositions and the related determination of any gains and losses 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; and 3. gather and maintain information needed to prepare financial statements Scope This policy applies to all County Departments, boards and commissions, agencies and other organizations falling within the reporting entity of the County Definitions Tangible Capital Assets - are assets having physical substance that: 1. are used on a continuing basis in the County s operations; 2. have useful lives extending beyond one year; and 3. are not held for re-sale in the ordinary course of operations. Betterments are subsequent expenditures on tangible capital assets that: 1. increase previously assessed physical output or service capacity; 2. lower associated operating costs; 3. extend the useful life of the asset; or 4. improve the quality of the output. Any other expenditure would be considered a repair or maintenance and expenses in the period. Capital Lease is a lease with contractual terms that transfer substantially all of the benefits and risks inherent in ownership of property to the County. For substantially all of the benefits and risks of ownership to be transferred to the lessee, one or more of the following conditions must be met: 1. there is reasonable assurance that the County will obtain ownership of the leased property by the end of the lease term, or the contract includes a bargain purchase option; 2. the lease term is greater than or equal to 75% of the assets useful life; or 3. the net present value of the minimum lease payments are greater than or equal to 90% of the fair market value of the asset being leased. The cost of a leased tangible capital asset is determined in accordance with PUBLIC SECTOR GUIDELINES PSG-2, Leased Tangible Capital Assets. March 11, of 6

4 Cost is the gross amount of consideration given up to acquire, construct, develop or better a tangible capital asset, and includes all costs directly attributable to acquisition, construction, development or betterment of the tangible capital asset, including installing the asset at the location and in the condition necessary for its intended use. The cost of a contributed tangible capital asset, including a tangible capital asset in lieu of a developer charge, is considered to be equal to its fair value at the date of contribution. Capital grants would not be netted against the cost of the related tangible capital asset. Fair Value is the amount of consideration that would be agreed upon in an arm s length transaction between knowledgeable, willing parties who are under no compulsion to act. Net Book Value is the estimated net realizable value of a tangible capital asset at the end of its useful life to Leduc County. Service Potential is the output or service capacity of a tangible capital asset, and is normally determined by reference to attributes such as physical output capacity, quality of output, associated operating costs and useful life. Useful Life is the estimate of either the period over which a tangible capital asset is expected to be used by Leduc County, or the number of production or similar units that can be obtained from the tangible capital asset by Leduc County. The life of a tangible capital asset may extend beyond the useful life of that asset to Leduc County. The life of a tangible capital asset, other than land, is finite, and is normally the shortest of the physical, technological, commercial and legal life Valuation Tangible capital assets should be recorded at cost plus all ancillary charges necessary to place the asset in its intended location and condition for use. 1. Purchased Assets Cost is the gross amount of consideration paid to acquire the asset. It includes all non-refundable taxes and duties, freight and delivery charges, installation and site preparation costs, etc. It is net of any discounts or rebates. The cost is not reduced by any grant received to help fund the purchase. The grant revenue is recorded separately. Cost of land includes purchase price plus legal fees, land registration fees, transfer taxes, etc. Costs would include any costs to make the land suitable for its 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. 2. 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. Capitalization of general administrative overheads is not permitted. March 11, of 6

5 Capitalization of carrying costs ceases when no construction or development is taking place or when the tangible capital asset is ready for use. 3. Capitalization of Interest Costs Borrowing costs incurred by the acquisition, construction and production of an asset that takes a substantial period of time to get ready for its intended use should be capitalized as part of the cost of that asset. Capitalization of interest costs should commence when expenditures are incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use are in progress. Capitalization should be suspended during periods in which active development is interrupted. Capitalization should cease when substantially all of the activities necessary to prepare the asset for its intended use are complete. If only minor modifications are outstanding, this indicates that substantially all of the activities are complete. 4. Donated or Contributed Assets The cost of donated or contributed assets that meet the criteria for recognition is equal to the fair value at the date of contribution. Fair value may be determined using market or appraisal values. Cost may be determined by an estimate of replacement cost. Ancillary costs should be capitalized Work in Progress (WIP) Assets whose construction is not complete at year end should be capitalized to a work-inprogress (WIP) account. In addition, assets that may be in use, but whose value does not deteriorate or the original value will be reinstated due to a subsequent final asset addition, will be capitalized as work-in-progress. These assets will not be amortized until they are either ready for use, the County has taken over care and control, or the final asset addition has been completed Componentization Leduc County will not use Componentization on any assets at this time, but the following has been provided for information and possible future accounting policy changes. Tangible capital assets may be accounted for using either the single asset or component approach. 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: 1. Major components have significantly different useful lives and consumption patterns than the related tangible capital asset; and 2. the value of components in relation to the related tangible capital asset. Example: The County may purchase a fire truck that as a complete unit costs $100,000. On the fire truck is a ladder and this ladder will not be sold with the fire truck when it is disposed of in 5 years, but is removed and added to the next new fire truck because these ladders are good for 20 years. If the cost of the ladder is $20,000 we may break this truck into two components and March 11, of 6

6 capitalize the truck for $80,000 and amortize it over 5 years and then capitalize the ladder separately for $20,000 and amortize it over 20 years Amortization The cost, less any residual value, of a tangible capital asset with a limited life should be amortized over its useful life in a rational and systematic manner appropriate to its nature and use. The half year rule in year of acquisition and disposal will be used. The half year rule is defined as taking 50% of the annual amortization in both the year of acquisition and the year of disposal. This is an averaging technique as assets are purchased in all months throughout the year. Example: If a truck was purchased for $50,000 and is considered to have a useful life of 10 years, $5, will be amortized each year, except only $2, will be amortized in the year of acquisition and $2, in the year it is disposed of or in year 10 if Leduc County still owns the truck. Useful life is normally the shortest of the asset s physical, technological, commercial or legal life. The County uses a straight-line method for calculating the annual amortization. A comprehensive list of maximum and recommended useful lives of assets is attached (see Appendix A). County departments, boards and commissions, agencies and other organizations are responsible for establishing, utilizing and maintaining an appropriate amortization methodology and rate for assets acquired. It is the responsibility of each Department to specify the useful life of each newly acquired asset or the recommended useful life in Appendix A will be used by default Reviews & Write Downs The amortization method and estimate of useful life of the remaining unamortized portion should be reviewed for impairment and remaining useful life on a regular basis and revised when the appropriateness of a change can be clearly demonstrated. A write down should only be considered when there is a permanent reduction in the future useful life of the asset. Once a write down has been recorded it will not be reversed in the future. All write downs are subject to the following authorization limits: Senior Managers up to $100,000 County Manager greater than $100, Disposal Disposal of a tangible capital asset will be in accordance with Leduc County Disposal of Assets Policy and finance must be notified. March 11, of 6