Tangible Capital Assets ProjectAlberta Regional GFOA Workshops

June 2007

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Presentation Overview

Review PS 3150 Policies and Guidelines Implementation Plan Resources Required Implementation Budget Other “work in progress”

information

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Why Capitalize TCA?

The principal reason for governments recording capital assets is to get a better appreciation of the stock & the cost of using these assets, which should lead to an improved decision-making process regarding their management.

Reporting this capital asset information also provides accountability to taxpayers regarding the capital resources acquired, used & managed by governments.

Public Sector Accounting Board

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What problems are going to be

encountered in complying?

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Current TCA practices

Some capitalize all assets except roads

Some only capitalize debt financed assets

Contributed capital is not capitalized No asset inventory listing Balance Sheet number is a ‘number

only’

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Implications for municipalities

Process – implementation & on-going

Resources required Financial reporting Budget processes Financial statement analysis

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What will be gained?

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Impacts (stated by PSAB)

Better asset management More transparent to you, the public &

others Increased awareness of a ‘national’

issue Data supports funding needs Explains level of tax & user fees Promotes better capital planning

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Better asset management More transparent to you, the public &

others Increased awareness of a ‘national’

issue Data supports funding needs Explains level of tax & user fees Promotes better capital planning

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Asset Management Rationale Life cycle asset management minimizes total costs Poorly maintained assets increase liability concerns Provides better and more consistent levels of

service Assets in good condition provide better and more

efficient services Increased expectations for accountability and good

stewardship Improve compliance with full cost recovery

regulations

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‘Better asset management’ only if:

Meeting the TCA requirement is taken seriously

A good inventory of assets is developed

Replacement cost information is added

There is dedicated sincere analysis of the information

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GFOA TCA Task Force Group One: Asset Classes, Useful

Life, Thresholds Carol Engelking, City of Edmonton Don Knutson, City of Medicine Hat Carmela Krebes, City of Edmonton Joanne Parkins, City of Red Deer Dean Screpnek, Parkland County Debbie Turner, Town of Gibbons

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GFOA TCA Task Force

Group Two: 2007 F/S Note Glen Jarbeau, City of Spruce Grove Susan Koch, City of Calgary

(previously)

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GFOA TCA Task Force

Group Three: Financial Reporting, Balanced Budget Legislation Glen Jarbeau, City of Spruce Grove Chris Parkins, Alberta Municipal

Affairs & Housing Kim Ordway, City of Lethbridge Barry Sawada, City of Lethbridge Rick Wojtkiw, Sturgeon County

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PS 3150 Overview

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TCA Definition

A significant economic resource managed by governments & a key component in the delivery of many government programs.

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TCA Definition cont’d

Includes such diverse items as roads, buildings, vehicles, equipment, land, water & other utility systems, aircraft, computer hardware & software, dams, canals, & bridges. (.02)

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Who Owns the Roads?

Key words in TCA definitionManage and Control; not ownership

Sections 16, 18 and 22 (MGA)

All roads, excluding provincial highways, are to be recorded as a TCA by the local municipality.

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And What About Bridges?

“….bridge structures on municipal roads are under the control and

management of the Municipality,”

Rural Transportation Funding Option Report, Q & AAAMD&C

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TCA are non-financial assets that

are held for use in the production and supply of goods and services

useful lives extend beyond accounting period

used on a continuing basis and not for sale. (.05)

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TCA should be:

reported as assets on statement of financial position (.07)

recorded at cost (.09)

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Why Historical Cost?

Reliable – agrees to actual transaction

Capable of independent verification Reasonably free from error or bias Provides consistent, verifiable

foundation Consistent basis for stating the

financial position

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Amortization amortized over its useful life in a

rational and systematic manner appropriate to nature and use (.22)

should be expensed in statement of operations (.23)

method and useful life should be regularly reviewed and revised when appropriate. (.29)

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Write-downs

TCA no longer contributes to government services or value of future economic benefits decreased (.31)

Expensed (.32) Should not be reversed (.33)

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Disposals

Difference between net proceeds on disposal and net book value to be recorded as revenue or expense in statement of operations. (.38)

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Presentation & Disclosure (Notes)

For each major category of TCA: (.40)

Beginning and end of period Cost, accumulated amortization, net

book value For the period

Additions, disposals, write-downs, amortization

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Other information: (.42) Amortization method Net book value of TCA not being

amortized Nature and amount of TCA received

during period Nature and use of TCA at nominal

value Nature of works of art and historical

treasures Amount of interest capitalized

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Transitional Provisions

Effective in 2009 (.43) Progress report required in notes

of 2007 financial statements (.45)

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Existing Asset Valuation

In the absence of historical cost, other valuation methods may be used. (.47)

Fully amortized assets still in use need to be recorded. (.48)

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What are the recommended

guidelines?

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Asset Classes

Major classifications for TCA and minor classifications under ‘Engineered Structures’ should be consistently used by all Alberta municipalities for financial reporting.

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Major Asset Classes

Land Land Improvements Buildings Engineered Structures Machinery & Equipment Vehicles Cultural & Historical

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Engineered Structures – Minor Classes Roadway system LRT system Water system Wastewater system Storm system Fibre optics Electricity system Gas distribution system

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Engineered Structures

Classification exception: Buildings and Machinery & Equipment

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Useful Life and Amortization Methods Not greater than recommended

maximum useful life ‘Straight line’ method most

common ‘Unit of use or output’ and

‘declining balance’ also used 50% of annual amortization in

year of acquisition/disposal

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Capitalization Thresholds

DefinitionThe minimum value of an expenditure which meets the criteria of a tangible capital asset and will be recorded as a tangible capital asset.

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PS 3150 TCA Definition

Non-financial assets having physical substance that:

are held for use in the production or supply of goods & services, for rental to others, for administrative purposes or for the development, construction, maintenance or repair of other tangible capital assets;

have useful economic lives extending beyond an accounting period;

are to be used on a continuing basis; & are not for sale in the ordinary course of

operations

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Capitalization Thresholds (cont)

Each municipality determine thresholds

No threshold for ‘Land’ Value per item not by group

purchased Same threshold for each major

asset class

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Capitalization Threshold Factors

Materiality Record Keeping Asset management Rate setting

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Capitalization Threshold Principles

Asset management a key driver Accounting policy not the driver Manageable Good judgment Review with your auditor

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Suggested Minimum Capitalization Thresholds

Asset Description

Cities Towns Villages Rural Municipalities

Land - - - -Land Improvements 10,000 5,000 2,000 5,000

Buildings 100,000

25,000 10,000 50,000

Engineered Structures

100,000

25,000 10,000 50,000

Machinery & Equipment

10,000 5,000 2,000 5,000

Vehicles 10,000 5,000 2,000 5,000

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TCA Progress Report CICA Accounting Guideline PSG-7 Information on some but not all TCA

categories (5) Indicate categories excluded Similar information as PS 3150 For fiscal years 2007 until TCA

implementation Sample note approved by AICA;

provided in June, 2007

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TCA Implementation Plan Absolutely Essential!!! Good sample plans available on web

www.amcto.com/db/assetmgmt.asp Complex project Important first step to an asset

management plan Multi-year plan

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Getting Started

What is the status of our financial records?

Where are other sources of information?

What do we own and where are they? How will we gather the data? What priority is this project? How will it be staged?

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Initial Departments Meeting PSAB requirements overview Stress importance and magnitude 2007/2008 report cards and 2009

completion Must meet audit requirements Determine types of TCA Establish project team – manager

and departmental team leaders

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Project Schedule

Multi-year Consider staging Set target dates

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Capital Policies

Asset definition, single asset vs component, valuation methods, amortization methods, capitalization thresholds, useful life, maintenance or betterment, additions/disposals

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Other Purposes for Recording TCA

Risk management Maintenance Security Safety

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Taking the Inventory Identify data sources Locations Data required Develop unique inventory forms Future identification Data transfer Test the process Inventory instructions and training Verify the data

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Value Existing Assets

All assets must be valued in some manner.

Value can be estimated when historical cost is not known.

Level of precision is less for existing assets.

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Valuation Method Sequence

Historical cost Reproduction cost discounted Replacement cost discounted Appraised cost discounted Residual value when fully amortized Nominal value; i.e. conservative

estimate of cost

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Discounting Process

Determine year of construction or purchase.

A pre-determined earliest year may be established provincially; for example, 1949.

Apply a consistent Consumer Price Index to current replacement cost.

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Steps Taken to Simplify Valuation Process

Bridge Files Alberta Infrastructure and

Transportation has determined the historical cost for most bridge files.

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Steps Taken to Simplify Valuation Process

Engineered Structures Municipal Affairs is researching the

potential of developing a manual of replacement costs for most engineered structures which municipalities can use for consistent valuations.

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Recording Engineered Structures & Systems – Network or Components?

Network – one unit Less detail, easier to manage More difficult to value

replacements

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Recording Engineered Structures & Systems – Network or Components?

Component – major components as separate assets More accurate, better

information Better basis for asset

management More time in maintaining records

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Another Consideration - Segmentation

Division of linear systems into geographical sections More accurate Easier to identify replacement costs Better information Increased recording time

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Betterment or Maintenance?

Network or component approach impacts the answer. See PS 3150:19-21

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Further Information

MEnet Website with links towww.ombi.cawww.psab-ccsp.ca

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TCA Software Financial software provider is key

stakeholder Determine current and future TCA

software capabilities Determine general ledger and

subsidiary ledger interfaces What are the reporting capabilities? Software vendor’s development

schedule

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Include Your Auditor

Your auditor needs to review your plan.

Determine audit requirements – audit trail, verification, valuation, asset life

Auditor should include TCA in 2007 audit

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Budgets and Financial Reporting

‘Full accrual’ budgets – non cash items

Revised financial reporting in 2009 Plan for educating/training elected

and appointed municipal officials

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And After 2009

Processes for additions and disposals

Policies for regular TCA review

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Resources Required & Training

Resource Responsibility

Personnel Project planningPolicy developmentSoftware implementationRecording of assetsInventory and valuationDocumentationAudit requirements

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Resources Required & Training

Resource Responsibility

Consultants/Specialists

Assist staff with additional workInventory and valuationEngineeringIT requirements/upgradesTraining

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Resources Required & Training

Resource Responsibility

Auditors Review project planReview capital policiesAudit inventory & valuationsReview financial processes/softwareAudit new reporting requirements

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Implementation Budget Factors

Size and complexity of asset base Condition of historical records In-house expertise

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Implementation Budget Components

Planning and policy development Human resources Asset inventory Software needs Engineering assistance Audit requirements

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Other ‘Work-in-Progress’ Information

Capital policy guidelines Inventory data Valuations Software Financial reporting and budgets Balanced budget legislation

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Future Information

Quarterly newsletters Toolkit June/07 Financial statement note, June/07 Additional

guidelines/recommendations Western GFOA Conference,

Calgary, Sept, 2007

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This will be an ongoing ‘work-in-progress’ project.

We are interested in your comments, questions,

experiences and suggestions.

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Thank you for attending.

We wish you success in your TCA project!