Chapter 7 1

Chapter 7

Capital Assets and Investments in Marketable Securities

Chapter 7 2

Learning Objectives

Accounting for capital assets-Fund Statements

-Government-wide Statements

Accounting for -- Donated Assets

-- Trade-Ins

-- Collectibles GASB’s controversy on Infrastructure Assets Asset Impairments Investments in Marketable Securities

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Associated with the government as a whole They are non financial in character. Distinguished from other capital assets that are

specifically associated with activities reported in proprietary and fiduciary funds.

Cost of capital assets: reported as expenditures

General Capital Assets

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Land Buildings Improvements other than Buildings Machinery and Equipment Construction in Progress Infrastructure (e.g., roads, streets, bridges)

Common Classifications of General Capital Assets

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General capital assets are: Capitalized in the governmental activities

column at the government-wide level Depreciated at the government-wide level Debited to Expenditures in the appropriate

governmental fund—when the assets are acquired.

Accounting for General Capital Assets

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Placing a value (assigning costs) on capital assets

For Purchased Assets Follow Cost Principle (subject to materiality threshold)

Invoice cost or historical cost

All other necessary and reasonable costs incurred to put an asset into use (less cash or other discounts and financing charges)

For constructed assets: Direct labor and materials + overhead + architect fees +

insurance premiums Capitalize interest on constructed assets per GASB Std.

# 34

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Placing Value (assigning costs) on capital assets(cont’d)

Donated assets: reported at estimated fair market value. Exhaustible assets are depreciated over the remaining useful lives in their government-wide statements.

Use estimated cost if the assets weren’t recorded when initially acquired ("discovered" assets or a new inventory of assets)

Record foreclosures—at aggregate of accumulated taxes, interest, penalties, legal costs, or FMV whichever is lower

Record Trade-Ins at FMV of the new asset

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Tax-supported bonds Grants from other governmental units (e.g.,

Federal or state grants ) Transfers from other funds Gifts from individuals or organizations Special assessment bonds or taxes Capital leases Note: If funds received from governmental units,

individuals, or organizations is restricted for the purchase or construction of specified capital assets – it is recommended that a Capital Projects Fund be used.

Common Financing Sourcesfor General Fixed Assets

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Accounting for Acquisition of Capital Assets

Example: The Sample city purchased office equipment for the Mayor’s office and paid $50,000 cash from the General Fund.

General Fund: Dr. Cr. Expenditures $50,000

Cash 50,000

Governmental Activities: Equipment $50,000 Cash 50,000

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Accounting for Collectibles GASB No. 34 does not require capitalization of

artworks if they are:-held for public exhibition or research-protected and preserved-the proceeds from sale of the collectibles are

used to acquire other collectibles. Art and collectibles that do not meet these

conditions must be capitalized. If capitalized, revenue upon receipt of gifts should

be recognized. If not, both a revenue and an offsetting expense

should be recognized.

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Infrastructure Infrastructure is:

– Government’s capital assets – Immovable – Preserved for a longer period. Ex: roads, sidewalks, bridges etc.

GASB 34: requires that infrastructure be accounted in the same manner as the capital assets.

Exception: They need not be depreciated if the government can demonstrate that they are being maintained/preserved at a specified condition level.

To avoid recording depreciation, governments must-perform condition assessments at least every three years;- have an up-to-date inventory of eligible assets -estimate the amount to maintain and preserve the eligible assets.

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Infrastructure (cont’d)

Modified approach: All expenditures incurred to maintain and preserve

those assets should be expensed. Additions and improvements should be

capitalized. Assessed condition of the assets and the basis of

that assessment must be disclosed.

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Criticisms of Statement No. 34's Approach to Infrastructure

No indication that data on the historical cost of infrastructure would be used.

No need to capitalize those assets because they cannot be stolen or misused.

Comparison between measure of output (performance) and monetary value assigned to the assets is not meaningful.

Infrastructure assets seldom have alternative uses.

Past construction costs are of no significance.

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Transition -- Infrastructure Prospective reporting is required at effective statement date Retroactive reporting is required as follows:

-Phase 1 governments: June 15, 2005-Phase 2 governments: June 15, 2006-Phase 3 governments: Never

Retroactive reporting is required only for assets acquired after June 30, 1980.

Illustration: For example, in 2005 the replacement cost of a road constructed in 1991 was $10 million. A road construction price level index was .90 for 1991 and 120 for 2005. The road would be recorded at an initial cost of $7.5 million ($10 million times 90/120).If the road had a useful life of 30 years, then at the end of 2005 (after 15 years, it would be 50% depreciated. Hence it would have a book value of 50% of $7.5 million -- $3.75 million.

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Accounting for Impaired Assets

GAAP: GASB Std. # 42 Assets that have declined in their service utility

significantly and unexpectedly are considered impaired.

If impaired: a portion of the asset’s historical cost representing the impairment must be written off.

Impairment amount measured by 3 methods:-Restoration cost approach

-Service Units approach

-Deflated depreciated replacement cost approach.

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Investments in Marketable Securities Reason to invest: to earn a return on resources.

Governments either directly invest in stocks or bonds or small governments may participate in investment pools maintained by other governments.

Repurchase agreement (Repo): short-term investment in which investor transfers cash in exchange for securities and the cash + plus interest is repaid in exchange for the same securities.

Reverse Repurchase agreement (Reverse Repo):Here, government is the borrower rather than the investor.

Derivatives: Governments typically engage in derivative

transactions not to speculate but, rather, to reduce theoverall investment risk.

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Disclosure requirements

Governments should organize disclosures by investment type and additional disclosures as to specific types of risks:

Credit risks-Concentration of credit risks

-Interest rate risks

-Foreign currency risks

Governments must explain the nature of derivative transactions

Reasons to enter Disclose significant terms of the transactions

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Summary Governments report general capital assets as expenditures when they

construct or acquire them in their governmental fund statements which are accounted for on a modified accrual basis. Thus governments maintain the “off the balance sheet” record of these assets.

GASB Std. # 34 requires that in Government-wide statements, governments capitalize capital assets and depreciate them over their economic lives.

GASB Std. # 34 mandates that governments account for their infrastructure assets just as they do other capital assets. However governments are not required to depreciate infrastructure assets if they preserve them at a specified “condition level.”

Investments made by governments are of concern because of the substantial risk that investors can incur through default, declines in value and even fraud.

GASB through its standards requires disclosure of a wide range of investment information.

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