PLANNING FOR CAPITAL ASSETS – ACCOUNTING AND IMPAIRMENT Christopher Telli, CPA, Partner Anna L. Thigpen, CPA, Manager CGFOA Annual Conference - November 19, 2014

AGENDA       

Basics Intangible Assets Donated Capital Assets Capitalization of Interest Internal Controls over Capital Assets Financial Reporting for Capital Assets Impairment of Capital Assets

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WHAT IS A CAPITAL ASSET?  GASB Statement No. 34 • Capital assets are tangible or intangible assets (land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures and infrastructure) that are used in operations and that have initial useful lives extending beyond a single reporting period • Assets acquired for the purpose of sale or investment do not qualify as capital assets because they are not used in operations • Should only be reported once proper ownership has been determined 2

WHAT IS A CAPITAL ASSET?  Land improvements consist of betterments, other than buildings, that ready land for its intended use. Examples include: • Site improvements  Excavation  Fill  Grading  Utility installation • Removal, relocation, or reconstruction of property of others  Railroads and telephone and power lines • Retaining walls • Parking lots • Fencing • Landscaping 3

WHAT IS A CAPITAL ASSET?  Library books considered to have a useful life of greater than one year are capital assets and should be depreciated • Group or composite depreciation methods may be appropriate due to the large volume of library collections and relatively low dollar value of each item (generally) • Situations do exist where library books may be considered works of art or historical treasures and they should be reported accordingly

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DETERMINE OWNERSHIP  Generally, holding title to an asset equates to ownership, and the entity that holds title to an asset should report the asset in its financial statements  Facts and circumstances of the situation should be considered • There may be instances in which title is held by one entity, yet some rights of ownership are held by another entity. For example, the lessee reports assets under a capital lease although the lessor holds title.

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EXPENSE OR CAPITALIZE?  Increased capacity? • Adding square footage, adding new lanes to existing road

 Extended useful life? • Beyond original useful life expectation

 Purchase price in relation to capitalization policy

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EXPENSE  Repair and maintenance expense • Outlays that allow assets to continue to be used during their originally established useful life  Building – Paint, roof replacement, upgrade of electrical/HVAC  Roads – Re-stripe, re-surface considered repair – Street overlay likely extends the service life of a roadway and therefore would be capitalized

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CAPITALIZE  Only expenditures that exceed a predetermined amount (capitalization threshold) are normally capitalized  Government Finance Officers Association (GFOA) recommends a minimum capitalization threshold of $5,000 • Have seen organizations increase threshold; still needs to remain at $5,000 for federally funded assets • Effective December 26, 2014, under the OMNI Circular, a computing device is a supply if the acquisition cost is less than the lesser of the capitalization level of the entity or $5,000  Typically involves considerable change in structure as well as useful life of asset 8

CAPITALIZE  In addition to the cost to purchase or construct the asset • Capitalize interest (discussed later), in certain situations, and ancillary charges necessary to place the asset into its intended location and condition for use • Ancillary charges include costs that are directly attributable to asset acquisition, such as freight and transportation charges, site preparation costs and professional fees

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CAPITALIZATION POLICIES  GASB Statement No. 34 does not specify a minimum level for capitalization  Consider separate thresholds for different types of assets • Assets whose individual acquisition costs are less than the threshold for an individual asset (computers, library books, classroom furniture)

 Different agencies within an entity can have distinct capitalization thresholds

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DEPRECIATION  Depreciation expense should occur over the estimated useful life of asset  Depreciation of individual assets is not required; can be calculated based on: • Asset class • Network of assets

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DEPRECIATION  Depreciation on land improvements • Permanent benefit – non depreciable  Grading  Fill dirt  Certain landscaping

• Considered part of structure or deteriorates – depreciate  Parking lots  Fencing  Retaining walls

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MODIFIED APPROACH  Infrastructure assets that are part of a network or subsystem of a network are not required to be depreciated if the modified approach is used Requirements for use are: • Government manages the eligible infrastructure assets using an asset management system having certain specified characteristics • Government documents that the eligible infrastructure assets are being preserved approximately at (or above) a condition level established and disclosed by the government 13

SENSITIVE ASSETS  Inexpensive but important/sensitive assets such as: • Police, fire, public works  Radios, breathing apparatus, computers, communication devices

• Don’t overlook them due to asset value • Assets purchased with federal funds require specific inventory management procedures

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USEFUL LIVES  Should be based on entity’s experience as well as plans for the use of asset  Useful life is an estimate that can change • Review in later period, after asset has been placed in service • Components of an asset may have different useful lives • A change in estimated lives is a change in accounting estimate under GASB 62 and is reported prospectively in accordance with paragraphs 83-85 of GASB 62

 Review useful lives assigned within the system to ensure they correspond with policy 15

INVENTORY  Annual or semiannual inventory should be performed to ensure accurate reporting of capital assets • Required under C.R.S. 29-1-506

 Data regarding retirements may be difficult to acquire • Departments may be unwilling or unable to determine retirements • Can lead to overstated balances if proper attention is not applied

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CAPITAL ASSETS ASSOCIATED WITH MORE THAN ONE GOVERNMENT  Ownership is the decisive factor  Government that has ultimate control over its “use and enjoyment” should report the capital asset in its financial statements • Legal title is typically sufficient

 If entity that holds title does not exercise ultimate control – entity who exercises ultimate control reports the asset

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CAPITAL ASSETS ASSOCIATED WITH MORE THAN ONE GOVERNMENT  What if ownership cannot be determined? • Which entity is responsible for managing the asset?  The entity responsible for maintaining the asset would be

responsible for reporting capital assets

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STATEMENT OF CASH FLOWS  Report under “Noncash Investing, Capital, and Financing Activities” the following: •

• • •

Capital assets acquired by assuming directly related liabilities (e.g. purchasing a building by incurring a mortgage or purchasing on credit and taking delivery of a vehicle in the current period and paying for it in subsequent periods) Note – accounts payable at year-end need to be analyzed for payables related to capital asset acquisitions and reported here Obtaining a capital asset by entering into a capital lease Receiving donated capital assets Transfers of capital assets between funds

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INTANGIBLE ASSETS – GASB 51  Lack of physical substance  Nonfinancial nature • Represents neither a claim nor right to assets in monetary form

 Initial useful life extending beyond a single reporting period  If assets are acquired or created primarily for the purpose of obtaining income or completing a project, they do not meet criteria of intangible assets 20

INTANGIBLE ASSETS  Intangible must be identifiable • Asset is capable of being separated or divided from the government and sold, transferred, licensed, rented or exchanged either individually or together with a related contract, asset or liability • Asset arises from contractual or other legal rights, regardless of whether those rights are transferrable or separable from entity or from other rights or obligations

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INTERNALLY GENERATED  Created or produced by the government or entity contracted by the government  Capitalize outlays incurred related to development of intangible asset if there is: • Specific objective of project and nature of service

capacity that is expected to be provided by intangible asset • Demonstration that asset will provide its expected service capacity • Demonstration of intention, ability and presence of effort to complete development of intangible asset 22

INTERNALLY GENERATED    

Computer software Patents Trademarks Copyrights

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INDEFINITE USEFUL LIFE  Criteria of indefinite useful life • No legal, contractual, regulatory, technological or other factors that limit useful life  Do not amortize

• Permanent right-of-way easement

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AMORTIZATION OVER USEFUL LIFE  Intangible asset that arises from contractual or other legal rights should be amortized over the service capacity  Renewal periods may be considered if the government intends and will be able to achieve renewal

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DONATED CAPITAL ASSETS  Should be reported at estimated fair value at the time of acquisition  Estimated fair value may be calculated from: • Manufacturers’ catalogs or price quotes in periodicals • Recent sales of comparable assets

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CAPITALIZATION OF INTEREST

CAPITALIZABLE INTEREST – GASB 62  In accordance with GASB 62, interest capitalization is limited to capital assets reported in enterprise funds (GASB 37 eliminated capitalization of construction-period interest requirement on capital assets used in governmental activities)  Capitalize the amount of interest that could have been avoided had the asset not been acquired — thus a government that has debt, but no debt directly related to construction projects, still capitalizes interest, if applicable  The total amount of interest cost capitalized in an accounting period should not exceed the total of interest cost incurred by the government in that period 28

ASSETS QUALIFYING FOR INTEREST CAPITALIZATION  Assets that are constructed or otherwise produced for a government’s own use  Assets intended for sale or lease that are constructed or otherwise produced as discrete projects • Real estate developments

 Donated assets  Investments accounted for by the equity method

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NONQUALIFYING ASSETS  Inventory  Assets that are in use or ready for intended use  Assets not undergoing the activities necessary to get them ready for use  Assets not included in financial statements  Assets acquired with gifts and grants that are restricted by donor or grantor

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CAPITALIZATION PERIOD  Capitalization period should begin when following conditions are present: • Outlays for asset have been made • Activities necessary to get the asset ready for its intended use are in progress • Interest cost is being incurred

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AMOUNT OF INTEREST TO CAPITALIZE Average cumulative expenditures since inception multiplied by Borrowing rate (weighted average or specific to borrowing) equal

Capitalizable Interest  Capitalization period should begin when conditions shown on previous slide are present

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AMOUNT OF INTEREST TO CAPITALIZE  Tax-exempt debt

Interest expense on tax-exempt debt less Interest revenue on reinvested proceeds equal

Capitalizable Interest  Amount of interest capitalized should include interest from the date of borrowing until assets are ready for their intended use

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CAPITALIZED INTEREST  Netting of expense and related interest revenue applies to tax-exempt debt that is externally restricted to finance specific qualifying assets  If using a grant to construct assets, interest is not capitalized if the grant is externally restricted to the acquisition of specified assets  Capitalized interest is not removed from the cost of capital assets transferred from an enterprise fund to be used in governmental activities

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CAPITALIZED INTEREST  Interest payments that are capitalized should be reported as cash payments to lenders and other creditors under capital and related financing activities as an outflow for interest and not as a capital asset acquisition on the statement of cash flows

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CAPITAL INTEREST EXAMPLE – TAX-EXEMPT DEBT  Govt issues tax-exempt debt, externally restricted to construction of specified qualifying asset  Invest proceeds in interest paying account  Earnings from proceeds: $250,000, interest incurred $750,000  As tax-exempt debt, must net interest revenue and interest expense to calculate capitalized interest

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CAPITALIZED INTEREST EXAMPLE Interest expense on tax-exempt debt less Interest revenue on reinvested proceeds equal

Capitalizable Interest Interest expense

$750,000

Less: revenue on invested proceeds

$(250,000)

Capitalized interest

$500,000

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CAPITALIZED INTEREST EXAMPLE – TAX-EXEMPT DEBT  Entries: DR Construction in progress

$500,000

Accrued interest receivable

$250,000

Accrued interest payable

CR

$750,000

To capitalize interest on project XYZ and accrue interest receivable and payable

 Interest expense is netted with revenue – remainder is capitalized

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CAPITALIZED INTEREST EXAMPLE  If debt not tax-exempt or isn’t externally restricted to specified qualifying assets: • Use formula: Average cumulative expenditures since inception

X Borrowing rate (weighted average or specific to borrowing)

= Capitalized Interest

• Weighted average borrowing rate computed using all outstanding interest bearing liabilities in enterprise funds • NO netting of interest revenue and expense

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MULTIPLE FUNDING SOURCES  Use combination of methods when multiple funding sources • Formula in example #1 for tax-exempt debt externally restricted, specified for qualifying assets • Formula in example #2:  Taxable debt  Tax-exempt debt not meeting above criteria  Available resources  “Opportunity costs” (debt unrelated to the capital construction)

• No capitalization of interest on portion or project financed from grant proceeds (no netting of revenue) 40

CAPITALIZED INTEREST  Build America Bonds • Taxable bonds • Use formula for non tax-exempt bonds

 Note disclosure: • No capitalized interest: disclose total interest costs incurred and charged to expense during the period • Capitalized interest: amount of interest incurred and capitalized

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INTERNAL CONTROLS OVER CAPITAL ASSETS

ACQUISITION AND DISPOSAL  Approval of property and equipment  Difference in approval process for assets acquired via general purchases cycle vs. capital expenditures  Policies and procedures to identify and record disposals

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ACQUISITION AND DISPOSAL  Ensure acquisitions and disposals are recorded on a timely basis • Is subsidiary ledger updated monthly, quarterly, annually? • Accumulation of construction costs, including interest and retainage

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DEPRECIATION  Documented policies for useful life determination and how is this information communicated to the accounting department if not determined by accounting personnel?  How is depreciation calculated and recorded in general ledger?

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DEPRECIATION  If depreciation is an automated calculation • How does the organization ensure calculations are complete and accurate?

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PHYSICAL INVENTORY  Is a physical inventory performed annually or every other year? • Keep in mind inventory requirements for assets purchased with federal funds

 Are results of inventory reconciled to detail fixed asset records?  Physical safeguards

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PROPERTY RECORDS  Property tags are placed on equipment  Property records contain all pertinent information, including • • • • •

Description Serial number or identification number Source Who holds title Acquisition date and cost

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REPORTING AND DISCLOSURE  Process to reconcile all components of property and equipment in subsidiary ledger to general ledger  Process to identify all project-related expenditures for assets under construction

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FINANCIAL REPORTING FOR CAPITAL ASSETS  What is required? • • • •

MD&A Government-wide statement of net position Proprietary fund financial statements Disclosures

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MANAGEMENT’S DISCUSSION AND ANALYSIS  Condensed data should include • Total assets  Distinguish capital assets from other assets

• Total net position  Distinguish net investment in capital assets from restricted net

position and unrestricted net position

 Should refer readers interested in more detailed information to the notes to financial statements

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GOVERNMENT-WIDE STATEMENT OF NET POSITION  Information on capital assets by major asset class may be shown either on the face of financial statements or in notes  Capital assets not being depreciated – land, construction in progress or infrastructure • If significant, report separately from depreciable capital assets • Land or easements associated with infrastructure (e.g. right-of-way easements for highways) should not be reported as infrastructure

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GOVERNMENT-WIDE STATEMENT OF NET POSITION  Transfers of capital assets or financial assets within financial reporting entity • Report at their carrying value at the time of transfer

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GOVERNMENT-WIDE STATEMENT OF NET POSITION AND PROPRIETARY FUND F/S  Net Investment in Capital Assets Capital assets (including intangibles) plus Capital-related deferred outflows of resources less Accumulated depreciation less Outstanding principal of capital-related debt (including A/P) less Capital-related deferred inflows of resources equal

Net investment in capital assets 54

NET INVESTMENT IN CAPITAL ASSETS  Should not be included in calculation • • • •

Interfund loans Noncapital accrued liabilities Unspent proceeds from debt Interest payable and accrued interest on deep discount debt

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NET INVESTMENT IN CAPITAL ASSETS Capital assets, net $ 10,000,000 Note payable (current and noncurrent) (500,000) Bonds payable (current and noncurrent) (1,000,000) Accounts/retainage payable for capital assets (75,000) Bond premium (100,000) Bond discount 25,000 Deferred loss on refunding 65,000 Unspent proceeds (200,000) Net investment in capital assets $ 8,215,000

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DISCLOSURES  Summary of significant accounting policies • • • •

Should address accounting policies for capital assets Capitalization thresholds Method(s) used to calculate depreciation expense Estimated useful lives of capital assets

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DISCLOSURES  Footnotes should report capital assets associated with governmental activities separately from capital assets associated with business-type activities  Nondepreciable capital assets reported separately from depreciable capital assets  Accumulated depreciation should be shown as a separate item

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DISCLOSURES  Disclose changes in capital asset balances, including depreciation/amortization during the period  Depreciation/amortization charged to each governmental function and business-type activity

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DEPRECIATION BY FUNCTION Depreciation expense was charged to governmental activities functions as follows: General Government $ 1,250,000 Public Safety 2,000,000 Culture and Recreation 575,000 Human Services 260,000 Parks and Recreation 800,000 $ 4,885,000 60

DISCLOSURES  Capitalized interest • If interest is capitalized on qualifying assets for businesstype activities and/or enterprise funds, disclosures should include:  Total amount of interest cost incurred and amount thereof that

has been capitalized

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IMPAIRMENT OF CAPITAL ASSETS  GASB 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, issued in November 2003, provides guidance to governments for the process of determining impairment of capital assets and the reporting requirements related thereto  Prior to GASB 42, GASB had not previously established requirements for asset impairments  GASB concluded that a capital asset is considered impaired when its service utility has declined significantly and unexpectedly

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IMPAIRMENT  Definition – A significant, unexpected decline in the service utility of a capital asset. Service utility of a capital asset is the usable capacity that, at acquisition, was expected to be used to provide service, as distinguished from the level of utilization, which is the portion of the usable capacity currently being used. Examples of impairment include: • Building with mold contamination – physical damage • Office building damaged by earthquake – physical damage • Underground storage tanks not meeting current environmental standards – change in legal or environmental factors • Underutilized piece of medical equipment – technological development or evidence of obsolescence • School used for storage – change in manner or duration of use

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ASSESSMENT OF IMPAIRMENT 

Two-step process—Step 1 1) Identifying potential impairments • Identified through events or changes in circumstances that are prominent and that denote the presence of indicators of impairment  Events or circumstances that may indicate impairment generally are expected to have prompted discussion by the governing board, management or the media – if event is not conspicuous or known to management, then the government is not required to perform additional procedures to identify potential impairments  Indicators of impairment  Evidence of physical damage – e.g. by fire or flood  Enactment or approval of laws or regulations or other changes in environmental factors – e.g. new water quality standards that cannot be met  Technological development or evidence of obsolescence – e.g. newer equipment renders existing equipment obsolete  A change in the manner or expected duration of use of a capital asset – e.g. closure of a school prior to the end of its useful live  Construction stoppage – e.g. due to a lack of funding  A change in demand for the services of a capital asset is not considered a separate indicator of impairment

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ASSESSMENT OF IMPAIRMENT  Two-step process – Step 2 2) Test for impairment – if a capital asset is identified under step 1 as potentially being impaired, then the government must determine whether both of the following two factors are present: i. The magnitude of the decline in service utility is significant – measured by the significance of expenses associated with continued operation and maintenance or costs of restoration in relationship to the current service utility – other than physical damage, if management takes action to address the situation, then deemed significant ii. The decline in service utility is unexpected – costs associated with restoration or other impairment circumstance is not part of the normal life cycle of a capital asset

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MEASUREMENT OF IMPAIRMENT  

GASB 42 differentiates between capital assets that will continue to be used by the government and those that won’t For capital assets that will continue to be used by the government – use one of the following approaches to determine what amount of the historical cost that should be written off:  Restoration cost approach – uses a methodology to determine the estimated costs to restore the utility of the capital asset – typically used for impairment resulting from physical damage  Service units approach – uses a methodology to isolate the historical cost of the service utility of the capital asset that cannot be used due to the impairment event – use for impairments resulting from enactment or approval of laws or regulations or other changes in environmental factors or from technological development or obsolescence  Deflated depreciated replacement cost approach – uses a methodology that replicates the historical cost of the service produced – use for impairments caused by a change in manner or duration of use of the capital asset

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MEASUREMENT/REPORTING OF IMPAIRMENT  For capital assets that will no longer be used by the government and construction stoppage – report at the lower of carrying value or fair value – e.g., a hospital closes its operations before the estimated useful life of the building is reached and begins efforts to sell the facility  Unless the impairment is considered temporary, report loss in the statement of activities and statement of revenues, expenses and changes in fund net position(program, operating expense, special item, or extraordinary item) – if program expense, then report as a direct expense of the program that uses the capital asset  If impairment is temporary – don’t write-down the capital asset – typically the impairment is permanent  Do not reverse impairment losses recognized in accordance with this statement in future years even if the events or circumstances causing the impairment have changed 67

INSURANCE RECOVERIES 



In governmental fund financial statements, any insurance recovery is reported as an other financing source or extraordinary item – restoration or replacement cost should be reported separately as an expenditure In governmental and business-type activities in government-wide financial statements: • Restoration or replacement costs should be reported as a separate transaction from the impairment loss and associated insurance recovery • The impairment loss should be reported net of the associated insurance recovery when the recovery and the loss occur in the same year (Note: Calculations may actually result in a gain, depending on the extent of insurance recoveries) • Insurance recoveries reported in subsequent years should be reported as program revenue, nonoperating revenue or extraordinary item, as appropriate

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EXAMPLE 1 – PHYSICAL DAMAGE – BUILDING WITH STRUCTURAL DAMAGE 

Office building damaged by earthquake • Considered infrequent and unusual in nature • Original cost: $28 million – 30 year life – in service 7 years • Building closed – structural repairs cost of $3.5 million (all capitalizable under government’s capitalization policy) • Insurance proceeds of $2.5 million • Physical damage indicates impairment, magnitude significant • $3.5 million repair cost significant vs. $0 asset service provided (not in use) • Replacement cost not available – construction costs increasing 3% annually • Restoration cost approach to be used • Impairment loss $2,181,872, netted against insurance recoveries = gain of $318,128

SOURCE: GASB 42 Illustration 2

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EXAMPLE 1 – PHYSICAL DAMAGE – BUILDING WITH STRUCTURAL DAMAGE  Evaluation of impairment aHistorical cost

Accumulated depreciation (after 7 years) bCarrying amount Restoration cost Deflation factor cDeflated restoration cost dRestoration cost ratio (c/a)

Impairment loss (b x d) Insurance recovery net gain

SOURCE: GASB 42 Illustration 2

$28,000,000 6,533,333 $21,466,667 $3,500,000 0.81309 $2,845,815 10.164% $2,181,872 $2,500,000 $318,128

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EXAMPLE 1 – PHYSICAL DAMAGE – BUILDING WITH STRUCTURAL DAMAGE  Reporting •

Government-wide statements   

•

Gain reported as an extraordinary item ($318,214) Restoration costs ($3,500,000) capitalized, thus increasing capital assets Impairment loss ($2,181,786) reduces capital assets, for a net increase in capital assets of $1,318,214.

Governmental fund financial statements   

Insurance recovery ($2,500,000) reported as an other financing source Restoration costs ($3,500,000) as expenditures Offsets to cash in each case – net cash decrease of $1,000,000

SOURCE: GASB 42 Illustration 2

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EXAMPLE 2 – PHYSICAL DAMAGE – SCHOOL WITH MOLD CONTAMINATION 

School with mold contamination • • • • • • • •

•

Considers event unusual in nature, not infrequent in occurrence Original cost: $1.3 million included land $100,000, 60 year life Improvements made during life: $135,000 classroom addition, $1.1 million for AC and addition Total remediation costs of $4 million: $1.6 million demolition and mold removal – $2.4 million rebuilding the walls (capitalizable) Estimated replacement cost of school: $6.2 million No insurance recovery Impairment loss of $586,452 using restoration cost approach In the government-wide statements – loss reported as a program expense ($586,452), remediation costs ($2,400,000) capitalized, thus increasing capital assets, remediation costs reported as program expense ($1,600,000) and capital assets reduced for impairment loss ($586,452), thus capital assets increase by $1,813,548 and cash decreases by $4,000,000 In the governmental fund financial – restoration costs ($4,000,000) recorded as expenditures – with the offset to cash of $4,000,000 SOURCE: GASB 42 Illustration 1

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EXAMPLE 2 – PHYSICAL DAMAGE – SCHOOL WITH MOLD CONTAMINATION  Evaluation of impairment Historical Cost Land

Accumulated

Carrying

Estimated Useful Life

Depreciation,

Amount,

60 45 40

$600,000 45,000 275,000 $920,000

$600,000 90,000 825,000 $1,515,000

$100,000

Building acquisition-YR1 Renovation, YR 15 Addition/air conditioning-Yr 20 Total buildings Total mold remediation cost Percentage rebuilding cost Restoration cost Restoration cost (current dollars)

$1,200,000 135,000 1,100,000 $2,435,000

$4,000,000 60% $2,400,000

$2,400,000

Replacement cost (current dollars)

6,200,000

Restoration cost ratio Carrying amount (historical cost) Impairment loss

38.71% 1,515,000 $586,452

SOURCE: GASB 42 Illustration 1

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EXAMPLE 2 – PHYSICAL DAMAGE – SCHOOL WITH MOLD CONTAMINATION  Reporting •

Government-wide statements –    

• •

Loss reported as a program expense ($586,452), Remediation costs ($2,400,000) capitalized, thus increasing capital assets Remediation costs reported as program expense ($1,600,000) Capital assets reduced for impairment loss ($586,452), thus capital assets increase by $1,813,548 and cash decreases by $4,000,000

Governmental fund financial Restoration costs ($4,000,000) recorded as expenditures with the offset to cash of $4,000,000

SOURCE: GASB 42 Illustration 1

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EXAMPLE 3 – CHANGE IN MANNER OR DURATION OF USE     

School used as storage (not education) Unexpected closure due to drop in enrollments Not unusual or infrequent Original cost: $10 million, 50 year life Current replacement cost: $4.2 million (warehouse space)  Commercial construction index at closure – 150  Impairment indicated – change in manner or use  Passes magnitude test SOURCE: GASB 42 Illustration 5

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EXAMPLE 3 – CHANGE IN MANNER OR DURATION OF USE  Evaluation of Impairment a

Historical cost Accumulated depreciation (12 / 50 years) Carrying amount

$10,000,000 2,400,000 $7,600,000

b

Replacement cost of warehouse Accumulated depreciation (12 / 50 years) Depreciated replacement cost

$4,200,000 1,008,000 $3,192,000

c d e

Commercial construction index Commercial construction index Deflation factor (c / d)

f

Deflated depreciated replacement cost (b × e)

$2,128,000

Impairment loss (a – f)

$5,472,000

SOURCE: GASB 42 Illustration 5

100 150 66.67%

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EXAMPLE 3 – CHANGE IN MANNER OR DURATION OF USE  Reporting • Impairment loss reported as program expense in statement of activities and allocated accordingly

 Disclosure • “Program expense includes an impairment loss of $5,472,000 due to the change in the use of an elementary school from education to storage. The impairment loss is allocated to program expense as follows:” Impairment Loss Regular instruction Special education instruction Pupil support services Instructional staff services School administration services SOURCE: GASB 42 Illustration 5

$

$

3,009,600 820,800 547,200 547,200 547,200 5,472,000 77

A SAMPLE OF RESOURCES  GASB Statement No. 34, Basic Financial Statements-and Management’s Discussion and Analysis-for State and Local Governments  GASB Statement No. 37, Basic Financial Statements-and Management’s Discussion and Analysis-for State and Local Governments: Omnibus  GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries  GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets

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A SAMPLE OF RESOURCES  GASB Statement No. 62, Codification of Accounting and Financial Report Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements  2013-14 GASB Comprehensive Implementation Guide, Chapter 7, et al.  GFOA Governmental Accounting, Auditing and Financial Reporting (GAAFR) – “Blue Book”  Accounting for Capital Assets: A Guide for State and Local Governments (GFOA publication)  Others

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THANK YOU! Christopher J. Telli, CPA | Partner | 303.861.4545| [email protected] Anna L. Thigpen, CPA| Manager | 303.861.4545| [email protected]

The information in BKD seminars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these seminars.

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Planning for Capital Assets: Budgeting CGFOA 2014 Annual Conference November 19, 2014 Peggy Bunzli, Budget Officer City of Boulder

August 13, 2013

Agenda  The Need for Capital Budgeting

and Planning  Best Practices and Steps  Financing Options

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Capital Budgeting - Why?  Capital projects are expensive

 Don’t fit into to short-term budget cycle  Require special financing  Notorious for budget overrun

 Capital projects have long-term implications  Project can extend over multiple fiscal years  Decisions extend into future

 Capital projects can be politically charged  May require public input

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Capital Planning - Why? Capital Improvement Plan (CIP)  The CIP is a guide to public investment in

infrastructure and the community  Community priorities and values  Coordination  Cost control  Long-term implications  Ongoing budgetary implications

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Planning and Budgeting - example

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Capital Planning and Budgeting  Financial/budget policies

 Identify capital needs  Prioritize needs and projects

 Develop projects and estimate costs  Develop financing strategies  Identify operating costs/impact  Execute and manage projects (project

managers) 87

Financial and Budget Policies  Revenue

 Debt  Maintenance

 Replacement  CIP  Other public policy

(see handout for example) 88

Capital Needs  Infrastructure development and

enhancement– e.g.  Facilities, fleet, land, space, streets,

equipment, utilities, waste management  Maintenance and replacement – e.g.  Buildings, fleet, equipment

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Capital Needs  Strategic planning  Economic and community development  Comprehensive planning

 Community priorities  Public safety  Service level

 Elected officials  Boards and Commissions

 Response to emergencies/disasters 90

Prioritizing Capital Needs  Relationship of capital projects to:  Policies/guiding principles  Strategic/master plans  Studies

 Major stakeholder and public input  Legal requirements/mandates

 Operating budget impact  Develop review process (see handout for guiding principles example) 91

Estimated Project Costs  Scope

 Timeline  Phases – e.g.  Studies/planning  Acquisition  Design

 Implementation  Construction  Completion/close out 92

Key Capital Project Cost Drivers  Consulting/planning studies

 Staff time  Land acquisition

 Design and engineering  Construction/materials  Environmental remediation  Scope creep  Timing and coordination 93

Developing Financing Strategies  Project revenue and expenditure trends

 Prepare cashflow projections  Adhere to financial policies

 Consider funding alternatives  Consider risk  Evaluate affordability of financing strategy  Impact on debt ratios  Impact on taxpayer  Impact on ratepayers 94

Capital Financing Options Pay-as-you-go

Debt Financing

 Annual revenues

 Bonds  General Obligation (G.O.) bonds  Revenue bonds  Capital leases  Privately placed for equipment or small projects  Certificates of participation for larger projects

 Capital reserves  Grants

 Partnering  Regional  Public-private  Charges  Special assessments  short-term taxes  impact fees 95

Capital Financing Options Pay As You Go  Fiscal Responsibility  Uses existing funds  No burden on future funding

 Flexibility  To address economic adversity

 Enhanced Credit Rating  Does not negatively impact debt ratio  Track record of paying for needs

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Capital Financing Options Debt Financing  Fiscal practicality  Adequate fund balance may not exist  May be difficult to raise additional funds

 Funding security  Dedicated, steady funding

 Reduced pressure on operating funds  Spreads cost over period of time

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Questions?

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