SU 9: Government Capital Assets Flashcards
GASB statement covering leases
Statement no 87 (June 2017)
Required for fiscal years ending Dec 31, 2020 and following
What aspects of a lease must be considered to determine a short term from a long term lease?
For what period the lessee has a non-cancellable right to use the asset.
If there are options to extend the lease that are reasonably certain to be exercised
If there is a fiscal funding clause (government can cancel the lease if can’t get appropriations for payments) that is reasonably certain to be exercised
Short term leases
Maximum possible term of 12 months or less including options expecting to exercise
(Operating lease?)
Recording short term lease
Dr expenditure account
CR cash
For rental payments
Long term lease
Lease that is not short term
Provides lessee intangible right to use a capital asset
Creates lease liability for lessee (pv of payments expected to be made)
Government account for long term lease (capital lease)
Dr expenditures - capital outlay
CR other financing source
(As if lease is actually a purchase via long term borrowing )
Initial entry has no effect on fund balance
modified accrual Payments on capital lease obligation
Dr expenditures - lease principal
Dr expenditures - lease interest
CR cash or vouchers payable
(1st payment will not have lease interest as is made before interest accrues. Later payments will all be part principal part interest)
Where to report government capital assets and long term debt
Government wide financial statements
CIAG
Capital investment account group
A memorandum set of records that records all events affecting capital assets (including ones that might not flow through fund financial statements like write offs or theft)
Infrastructure assets
Long-lived capital assets that normally:
- are stationary in nature
- can be preserved for a greater number of years than most capital assets
How do proprietary funds account for infrastructure assets under the modified approach
- depreciation expense not reported
- costs to maintain ARE reported (allowable because governments expected to continue indefinitely)
Proprietary fund JE for lease inception
Dr intangible asset - lease
CR lease payable
Recorded at present value of lease payments
Proprietary fund JE for lease payments
Dr lease payable
Dr interest expense (second payment forward)
Dr cash
Proprietary fund JE for lease amortization
Dr Amortization expense
CR accumulated amortization - intangible leased asset
Amortization period for proprietary fund leased asset
Shorter of lease term or useful life of leased asset
GASB standard for asset impairment
For physically damaged assets: cost to restore service utility
For assets impaired due to changes in tech or law; written down based on service units expected to be provided before impairment vs after
When to use capital assets fund
if funds provided by government, individuals or organizations are restricted for the purchase and/or construction of capital assets
Common capital asset classifications
- Land
- Buildings
- Improvements (other than Buildings)
- Machinery and Equipment
- Construction in Progress
- Infrastructure (e.g., Roads, Streets, Bridges)
- Intangible Assets
Capital asset sources: acquisition
- Purchase
- Construction
- Contributed/Donated (DCA)
- Annexed
- Capital Leases
- Foreclosure
- Eminent Domain
- Escheat
Capital asset sources: Financing
- Tax supported bonds
- Grants from other governmental units
- Transfers from other funds
- Special assessment bonds or taxes
- Capital leases
Fund accounting for capital assets
(Modified Accrual)
ONLY expenditures are booked when asset is acquired
no depreciation
asset then recorded in schedule of long-term assets
Government-wide accounting for capital assets
Normal accrual accounting
assets capitalized and depreciated
General capital assets definition
- Important assets
- Belongs to the government
- Benefit everyone as a whole
- Not part of any particular funds
- Could be dollar value or useful life that makes it a capital asset – depends on the government (can include intangibles)
Year end gov-wide notes must include what information about capital assets?
List of major capital assets including:
- beginning and ending book value
- acquisitions
- sales and retirements
-current period depreciation
Modified accrual JE for purchase of capital asset
DR Expenditure - capital asset (capital outlay)
CR Cash or A/P
report in period when acquired with current financial resources
Accounting for asset purchase with trade in loss or gain Modified accrual vs government-wide
Modified accrual:
DR Expenditure- Asset purchase
Cr cash
no gain or loss recognized only movement of capital
Gov-wide:
remove old asset, accumulated depreciation, and cash paid from books, add new asset, recognize gain (CR) or Loss (DR) on trade in
Purchase of capital asset under modified accrual
No matter how financed
DR Expenditure- Capital Asset
CR Other financing source - list source
purchase of capital asset financed with installment note: government-wide journal entry
DR capital asset
CR Installment note payable (LT liability)
Purchase of capital asset financed with bond: government-wide JE
DR Capital asset
DR Bond Discount or CR Bond premium
CR Bond Payable (LT liability)
Recording operating lease
ST leases only - Consumption method
DR prepaid operating lease
CR cash or A/P
(no AJE for gov-wide)
then as expires:
DR expenditure
CR prepaid
Accounting for capital leases: Modified accrual
DR Expenditure - capital asset
CR other financing source - capital lease
convert to capitalized capital asset & liability for capital lease payable in government wide
Government-wide adjustment for capital lease payment
DR LT Note Payable (reduction of principal)
DR Interest Expense
CR cash
Capital asset - donation journal entries
Modified Accrual:
DR Expenditure - capital asset donation offset
CR Revenue- asset donation
Gov-wide if capitalized:
DR Capital asset (FMV)
CR Revenue - asset donation
If not capitalized just adjust fund expenditure to expense
Net investment in capital assets
= (capital assets - accumulated depreciation) - related debt + related deferred inflows - related deferred outflows
Valuation of purchased asset
= historical cost + transportation + installation (aka necessary and reasonable costs to put into use)
valuation of constructed asset
= Direct labor + overhead + architect fees + insurance premiums
(cannot capitalized interest on self-constructed assets)
Valuation of initially unrecorded assets
aka discovered assets
= estimated cost
Valuation of foreclosures
at cost which = lower of:
- all taxes, interest, penalties and legal costs OR
- FMV
Valuation of Trade-ins
at FMV of new asset (with loss or gain recognized based on book value of old asset)
Valuation of donated/ escheat assets
at estimated FMV value of date ownership realized
Escheat
when something belongs to the government because owner abandoned it
Valuation of assets acquired by eminent domain
value of compensation paid to owner
when is capitalization not required for artworks
when:
- held for public exhibition or research
- protected and preserved
- proceeds from sale used acquire other collectables
otherwise must be capitalized
Capitalizing government owned collectables
Fund accounting: recognize expenditure and revenue or cash paid on receipt
Government-wide capitalize. (Depreciate only if value declines over time)
Exhaustible asset
One whose value declines over time and therefor must be depreciated
Accounting for donation of collectibles
Fund accounting: Expenditure offsets revenue (DR expenditure collectable donation offset, CR Revenue -collectable donation)
Gov-wide: asset capitalized and revenue recognized
When is it not required to depreciate an infrastructure asset
If can demonstrate that it is being maintained/ preserved in a specified condition
What is required if infrastructure asset is not being depreciated
Government must:
- perform condition assessments at least every three years
- have an up-to-date-inventory of eligible assets
- estimate amount needed to maintain and preserve
Approaches for accounting for infrastructure assets
traditional approach (capitalize and depreciate)
Modified approach
- preservation costs expensed as incurred
- additions and improvements capitalized
- no depreciation recorded even in government-wide accounting
Disclosures required if use modified approach
- assessed condition of infrastructure asset
- basis of assessment
- actual vs estimated costs to maintain approved condition
Recognition Rules for government intangible assets
Recognize if separable (able to be separated from the government, can be sold, transferred, licensed etc…)
Recognize if arise from contractual or other legal rights
internally generated intangibles
capitalize if technologically feasible AND expected to provide future services (technology rules)
if cannot be capitalized expensed as expenses occur (no additional capitalization after complete)
accounting for intangible assets in fund accounting
intangibles not recognized
Accounting for intangible assets in government-wide accounting
recognized and amortized over economic life
impairment methods for government intangibles
- restoration of cost approach
- service units approach
- deflated depreciation replacement cost approach
impairment of intangible
must be a significant and unexpected decline in service utility
Impairment of intangibles: Restoration cost approach
- Estimate costs to restore the asset
- Convert restoration cost to historical cost (2 methods):
a. Restate restoration cost using an historical price index
b. Multiply BV x (Restoration Cost/Replacement Cost) - Best for impairment due to physical damage
Impairment of intangibles: Service units approach
- Estimate historical cost of lost service capacity of the asset
- Determine service units before and after change in asset
a. Max. estimated service units before & after
b. Total estimated lifetime service units before & after - Best for impairment due to laws/regulations or Δ technology
Impairment of intangibles: Deflated depreciation replacement cost approach
- Estimate historical cost of lost service capacity of the asset
- Depreciated replacement cost deflated to historical equivalent
- Impairment = BV vs. deflated depreciated replacement cost
- Best for impairment due to Δ manner or duration of use
