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Tangible Capital Assets Alberta Regional GFOA Workshops Series Two January 2008.

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Presentation on theme: "Tangible Capital Assets Alberta Regional GFOA Workshops Series Two January 2008."— Presentation transcript:

1 Tangible Capital Assets Alberta Regional GFOA Workshops Series Two January 2008

2 2 Workshop Overview Provincial and local updates Capital policy Impact on budgets and financial reports Transition Examples 2007 Note Q & A/small groups

3 3 TCA Project Update – Provincial Infrastructure valuation manual Bridge inventory & valuation Balanced budget legislation Financial reporting & budgets Position papers

4 4 Bridge Inventory & Valuation Access AIT bridge information Bridge files  Inventory  Data  Value  Accumulated amortization Audit trail

5 5 Guideline Amendments Capitalization thresholds Valuation date for counties Policy guideline - Amortization start and end date

6 6 Position Papers – Priority One Government partnerships Undeveloped road allowances and rights of way Networks/components – materiality, valuation Biological assets Grouping and pooling Contributed assets

7 7 Position Papers – Priority Two Multiple topics  Gravel pits  Infrastructure with excess capacity and partial retirements  Land leases  Provincial $1 transfers  Fully depreciated assets still in use  Municipal reserves

8 8 Position Papers – Priority Two (cont) Multiple topics  Treatment of ‘sweat’ equity  Tax sale properties acquired by municipality  ‘Construction in progress’  Useful life and liability relationship  Link to full cost recovery requirement by Environment

9 9 Position Papers – Priority Three Implementation accounting entries

10 10 TCA Project Update - Locally What is your project status?

11 11 Policy ScopePrinciplesThresholdsAggregationSegmentationAmortizationDisposalsWrite-downsAccountingPresentation Capital Policy Framework

12 12 Capital Policy Authority, purpose and scope Definition & classification of assets Recording and valuing assets Amortization methods and rates

13 13 Capital Policy (cont) Reviews and write-downs Maintaining records Asset disposal Financial system, asset recording system & asset management system Financial reporting and budgets

14 14 TCA Impact on Financial Statements & Budgets Focus on TCA impact Financial reporting changes

15 15 General Impact of Recording TCA Brings a non-cash dimension to financial reporting and budgeting Full Accrual Accounting This change does not require a change in behaviour but it may cause you to change because there will be more information available.

16 16 Impacts at Transition and Ongoing Amount of TCA will probably increase. Total TCA will be reduced by ‘accumulated amortization’. Higher emphasis on Statement of Cash Flow.

17 17 Impacts at Transition and Ongoing Statement of Operations TCA purchases not included Capital grants included Non-cash annual amortization expense Gain/loss on disposal of TCA included Write-downs expensed

18 18 What Will be the Impact to our Municipality? Each municipality will be different; some factors determining impact are: Age of TCA  Net value of unrecorded TCA  Accumulated amortization of recorded TCA Write-down of recorded TCA Assets funded by senior government and donated assets.

19 19 Should the budget mirror the financial statements? Recommend that amortization expense be included in the budget. If not, PSAB requires a link between the budget and financial statements be provided.

20 20 Statement of Financial Position – Current View As at December 31 Financial Assets Cash and investments$ 480,000 Accounts receivable104,000 Inventory for resale155, ,000 Physical Assets Inventory for consumption5,000 Capital assets14,003,000 14,008,000 Total Assets14,747,000 Liabilities Accounts payable264,000 Deferred revenue56,000 Long term debt2,900,000 3,220,000 Municipal Equity Operating fund372,000 Capital fund42,000 Equity in capital assets11,113,000 11,527,000 Total Liabilities & Municipal Equity $ 14,747,000

21 21 Statement of Financial Position – New View As at December 31 Financial Assets Cash and investments$ 480,000 Accounts receivable104,000 Inventory for resale155, ,000 Liabilities Accounts payable264,000 Deferred revenue56,000 Long term debt2,900,000 3,220,000 Net Debt(2,481,000) Non-financial Assets Inventory for consumption5,000 Tangible capital assets14,003,000 14,008,000 Accumulated Surplus$ 11,527,000

22 22 Statement of Financial Activities/Operations As at December 31 BudgetCurrentNew Revenue Net municipal taxes$ 1,430,000 Capital grants200,000 Capital debt issued300,000 Other revenue1,014,000 2,944,0002,644,000 Expenditures Operating2,151,000 Capital purchases693,000 Capital debt repayment100,000 Amortization of TCA 225,000 2,944,0002,844,0002,376,000 Excess (Deficiency)0(200,000)268,000 Capital debt issued300,000 Capital debt repaid (100,000) Change in Fund Balances$ 0 $ 268,000

23 23 Current Balanced Budget Legislation Cannot budget more expenditures than anticipated revenues On a 3 year cumulative basis, actual revenue = or be > than expenditures (Sec 244) Revenue includes transfers from accumulated surplus Cash basis approach Operating and capital funds referenced

24 24 Impact of Accounting Standard Changes TCA Requirement (PS 3150) TCA to be amortized over useful life. Annual amortization (non-cash) to be expensed; may result in annual deficiencies. CICA requirement does not mandate funding amortization.

25 25 Impact of Accounting Standard Changes Financial Reporting (PS 1000, 1100, 1200) One single statement of operations Annual budget replaces operating & capital budgets Capital purchases/proceeds & debt proceeds/retirements are not included in ‘Statement of Operations’ ‘Accumulated surplus’ is one amount including ‘Equity in TCA’ Focus on financial position (net assets/net debt)

26 26 Proposed Amendments to Legislation and Future Review Transitional Amendment  Back out amortization expense to comply with Section 244 Future Amendments  Replace references to operating & capital funds/budgets with ‘annual budget’  Consider redefining ‘deficiency’ Further Review  Measures of municipal financial performance including debt limits

27 27 Recording an Existing Asset Example An Arena built in 1940 has a 2006 appraisal cost of $10M and a land value of $5M. Component breakdown is as follows: Description% of costUseful Life Remaining Useful Life Building Envelope 50% 60 years0 years Roof 10% 20 years2 years Mechanical 10% 10 years8 years Interior Fit – outs 20% 10 years2 years (includes ice sheet) Exterior Fit – outs 10% 25 years20 years There is no salvage value.

28 28 Discount Factor and Deflated Cost Discount Factor Index for in-service year/index for current year Deflated Cost Current cost * Discount Factor Example 1989 Discount Factor: 70.9/112.3 = Roof deflated cost: $1M * = $631,000

29 29 Discount Factors Discount Factors for Example (8.0/112.3) (70.9/112.3) (91.4/112.3) (100.0/112.3) (108.1/112.3) (112.3/112.3)

30 30 Inventory/Valuation Item Number Item Description Replacement Reproduction or Appraisal Const Year Useful Life in Years Discount Factor Salvage Value Calculated Historical Cost 1Land$5M $0.36M 2Building Envelope $5M $0$0.36M 3Roof$1M $0$0.63M 4Mechanical$1M $0$0.96M 5Interior Fit – outs $2M $0$1.63M 6Exterior Fit – outs $1M $0$0.89M

31 31 Amortization Item Number Item Description Historical Cost Age (Yrs) Useful Life in Years Amortization Rate (S/L) Amortization 1Land$0.36M67 2Building Envelope $0.36M6760* 60/60$0.36M 3Roof$0.63M1820* 18/20$0.57M 4Mechanical$0.96M210* 2/10$0.19M 5Interior Fit – outs $1.63M810* 8/10$1.30M 6Exterior Fit – outs $0.89M525* 5/25$0.18M

32 32 Qualitative Considerations What threshold(s) to use  Thresholds in ‘Toolkit’  Cumulative? Useful life considerations  Asset age exceeds useful life

33 33 Qualitative Considerations (cont) Discount Factor Used  CPI  Other Supporting Information  Methodology  Valuation  Useful Life

34 34 Audit Support Third Party Evidence  Invoice  Qualified Estimator Industry Standards  CPI  Published lists  Internally developed

35 35 Audit Support (cont) Documented Methodology  Consistent with methodology used by qualified third party  Sound industry practice Reasonableness test

36 36 Transition Process Develop TCA inventory and register information Record information in TCA register Document audit trail Determine accumulated amortization prior to implementation year Adjust General Ledger to implementation year opening balances Link TCA register to GL in implementation year (when all TCA are recorded) Record 2009 TCA transactions under new TCA rules and report in new reporting format

37 37 Transitional Impact Significant amendment to the financial statements in the first year of reporting due to: Adding existing unrecorded TCA Deducting the recorded amount for TCA which no longer exist. Deducting the recorded amount for TCA having an historical cost below the capitalization threshold. Reporting the net value of the TCA total cost; deduct accumulated amortization.

38 38 Accumulated Amortization Identified by asset class in notes to financial statements. Amount prior to first year of reporting treated as a prior years’ adjustment. Annual amortization on the revised TCA expensed in year of implementation for that specific year.

39 39 Transition Accounting Entries Note: Journal entries are always balanced. Adjust Opening Balances of GL a. Reduce the existing TCA account balances to zero CR: Tangible capital assets DR: Capital debt DR: Equity in TCA – Prior period adjustment b. Record the updated TCA values DR: Tangible capital assets (historical cost) CR: Accumulated amortization CR: Capital debt CR: Equity in TCA – Prior period adjustment

40 40 Transition Accounting Entry Example Assumptions & Data Implement in 2009 GL accounts December 31, 2008: TCA$10,000 Capital debt$2,000 Equity in TCA$8,000 TCA data at implementation TCA historical cost$50,000 Accumulated amortization$30,000

41 41 Transition Accounting Entry Example (cont) a. Reduce existing TCA account balances to zero: Dr Cr TCA$10,000 Capital debt$2,000 Equity in TCA$8,000

42 42 Transition Accounting Entry Example (cont) b. Record updated TCA inventory values: Dr Cr TCA$50,000 Accumulated amortization$30,000 Capital debt $2,000 Equity in TCA$18,000

43 43 Transition Accounting Entry Example (cont) The change in equity will be treated as a ‘prior period restatement/adjustment’ and referenced in the notes to the financial statements. If possible, record 2008 amortization in expense accounts for comparative statement purposes. Retroactive application – expected but not mandatory (CICA guide, pages 34 & 35)

44 44 ‘Municipal Equity’ Terminology Current Terms (Sampleford) Fund Balances  Operating Fund  Capital Fund  Reserve Fund Equity in Capital Assets New Term (used in examples) Accumulated Surplus

45 45 Purchase to Retirement Equipment – Fire truck (pumper) Information or Decisions Required Actual cost$300,000 Useful life12 years Amortization methodStraight line Salvage value$60,000 Annual amortization$20,000 (assume ½ year rule for purchase and disposal years) 1st year$10,000 (50%) TCA asset registerMajor class Machinery & Equipment Minor class Fire Equipment Sub class Pumper truck

46 46 Purchase Entries Assume that there are links between General Ledger/Accounts Payable/TCA. DRTCA asset$300,000 CRCash/debt$300,000 No impact on Accumulated Surplus; there may be internal transfers between Equity in TCA and Reserves. No record in Statement of Operations Affects Statement of Financial Position

47 47 Amortization Expense Annual entry: DRFire department – equipment amortization expense CRAccumulated amortization – Machinery & Equipment (1st year - $10,000, remaining years - $20,000, disposal year if year 13 - $10,000) Annual closing entry DRAccumulated Surplus CRFire department – equipment amortization expense Note: These entries demonstrate what will normally be done automatically by your financial system.

48 48 Impact on Fire Department Budget If funds are normally collected annually for future purchases, i.e. transfer to capital: amortization would be funded in the Statement of Operations; move budget from ‘transfer to capital’ to amortization internal financial records would need to identify these funds the department bottom line would be breakeven if the amount annually put away equalled the amortization.

49 49 Impact on Fire Department Budget If debt is normally used: the fire department budget would incur an annual deficit of $20,000 cash would still need to be available in the organization to pay the debt which would be budgeted with no expense.  If debt retirement allocated to the fire department, then offset the deficit resulting from the amortization expense.

50 50 Pumper Fire Truck Information at the end of Year 12 Cost$300,000 Accumulated amortization$230,000 Net book value$ 70,000 Assume sold in year 13 Amortization entry in year 13 (50/50 rule) DRFire Dept – Equipment amortization expense$10,000 CRAccum. Amortization – M & E$10,000

51 51 Sale & Disposal Entries in Year 13 Sold for $75,000. DRCash$ 75,000 DRAccumulated amortization$240,000 CRTCA asset$300,000 CRProfit on disposal of TCA$ 15,000 Annual Surplus and Accumulated Surplus will increase $15,000. (TCA ($300,000) less Accum. Amortization ($240,000) less Cash ($75,000) results in a credit of $15,000 to Accumulated Surplus.

52 52 Example - Replacement of a Component Building Situation Information Building originally recorded at $5 M with a useful life of 40 years. Roof needs to be replaced in 2009: The roof is fully amortized. The life of the roof was 20 years. Replacement cost is $1.1 M. Roof is 14% of the total building cost.

53 53 Replacement Entries DRAccumulated amortization$ 350,000 DRLoss on disposal of roof$ 350,000 CRTCA – Building $ 700,000 DRTCA – Building – Roof$1,100,000 CRCash/Debt$1,100,000 Loss on Statement of Operations Decrease in Accumulated Surplus

54 Amortization Entries using 50% rule Old roof: $700,000/40 * 50%$ 8,750 New roof: $1,100,000/20*50%$27,500 Total 2009 amortization expense$36, Accumulated amortization$27,500

55 55 Impact of Amortization on Accumulated Surplus Decrease if amortization expense is greater than roof related revenues Remain unchanged if amortization is funded. Increase if funds greater than annual amortization are put away for future roof replacement. Statement of Operations will reflect the changes in Accumulated Surplus in the annual deficit/surplus.

56 56 Issues to Consider What are the audit issues if the roof is expensed? Is this cost material so that it will need to be capitalized? Is it better to record the cost of the major components at the time of initially recording the asset?

57 57 How Are Networks Determined? Are the TCA in the proposed network similar? How is age determined? How will the value be established? Should the networks be determined by geographic location?

58 58 Example – Network to Segment Engineered Structure – Road System Situation Information The municipality has 20 km of paved roads. They have been recorded as networks; a separate network each for the asphalt, subsurface and right of way. The municipality plans to gradually segment each network when rehabilitation work is done.

59 59 Paved Road Information Historical CostUsefulAnnualReplaceAverageAccumulated DescriptionTotalper kmLifeAmort.CostAgeAmortization Yearsper kmTotalper km Asphalt4 M200, ,333250,000102,666,667133,333 Subsurface2.5 M125,000403,125850,000352,187,500109,375 Right of way1 M50,000000

60 60 Replace 2 km of Asphalt Replacement cost is $250,000/km Assume component is fully amortized when replaced. Will set up a separate asset or multiple assets for the two km of asphalt.

61 61 Replacement Entries Remove asphalt component from TCA records DRAccumulated amortization$400,000 (Asphalt – 2 km * 200,000 historical cost) CRTCA – Engineered Structures – Roads - Asphalt$400,000

62 62 New TCA Records Create new TCA records in TCA register to provide more detailed information Segments – geographical location and distance established by policy (for example, by block or km)

63 63 Impact on TCA Network Records Since the asphalt network is the only network affected, the other networks will not be affected. The other networks may be segmented in the same manner as the asphalt network. If the asphalt, subsurface and right of way were one network, a new asset should be created for the subsurface portion for this specific segment with TCA and accumulated amortization adjustments made to the subsurface network.

64 64 Discussion Questions When networks are used, what methods can be used to determine the average life of the network and the accumulated amortization? What criteria should be used to determine the best method? What is the best method?

65 65 Reporting Requirements Prior to Implementation (PS ) Report according to PSG-7 during the period of transition. PSG-7 TCA of Local Governments (Toolkit, page 55)  Disclose information required for asset classes for which municipality has information.  Effective January 1, 2007

66 (PS ) Disclose for each major category of TCA and in total: Beginning and end of period Cost, accumulated amortization, net carrying amount For the period Additions, disposals, write-downs, amortization Amortization method, period/rate

67 (PS ) (cont) Net book value of TCA not amortized (not in service, under construction) Nature & amount of contributed TCA received during period Nature & use of TCA recognized at nominal value Nature of works of art & historical treasures Amount of interest capitalized in the period

68 Financial Statement Note Section 6, TCA Implementation Toolkit Subsection of ‘Significant Accounting Policies’ note Narrative provides authority, background and progress report Table provides the revised TCA information by major class Note: This table will not link to the TCA amount in Statement of Financial Position. TCA GL accounts are not revised until implementation.

69 Financial Statement Note Example i. Narrative  Assets already amortized noting amortization method.  Assets not amortized if some are amortized.  Assets classes completely updated.  Asset classes still requiring to be completed by December 31, 2008 (2009)  Assets disclosed at nominal value  Statement regarding capitalizing interest (municipality policy)

70 Financial Statement Note Example (cont) ii. List of TCA Classes  State that amortization expense not recorded and project the date when it will be recorded.  List major classes and minor Engineered Structure classes.  Provide range of useful life in years for each class reported.  State method of amortization

71 Financial Statement Note Example (cont) iii. Table of Financial Information  Table for current year  Table for previous year only if TCA project was started in previous year.  Beginning year amount to be zero in year respective TCA class is completed.  Amount of amortization in financial statements in situations where there has been amortization already in place.  Value of assets not amortized because removed from service

72 Financial Statement Note Example (cont) Cost - Beginning of YearAdditions Disposal s Write- down s Cost - End of Year Amortization in Year Accumulated AmortizationNBV Land0250, Land Improvements Buildings Engineered Structures Machinery & Equipment Vehicles0125, ,750 31,250 Sub-total and Total0375, , ,250

73 73 Discussion Question How will accumulated amortization be tracked for asset classes completed prior to implementation?

74 74 Note for Prior Period Adjustments Restated to comply with PS 3150 Adjustments to TCA and Accumulated Surplus  Adjust opening 2008 if retroactive  If not retroactive, adjust opening 2009

75 75 Note for Prior Period Adjustments Add the net amount for  Assets capitalized but previously expensed  Contributed assets not recorded  Disposal of assets  Write-down of assets  Assets capitalized but below threshold Less  Increase in amortization expense

76 76 It’s Your Turn!


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