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1. Tangible Capital Assets: Evaluation and Depreciation Bob Scott, B. Comm., CMA 542 Christopher Lane Saskatoon SK S7J 3S5 (306) 222-9098.

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Presentation on theme: "1. Tangible Capital Assets: Evaluation and Depreciation Bob Scott, B. Comm., CMA 542 Christopher Lane Saskatoon SK S7J 3S5 (306) 222-9098."— Presentation transcript:

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2 Tangible Capital Assets: Evaluation and Depreciation Bob Scott, B. Comm., CMA 542 Christopher Lane Saskatoon SK S7J 3S5 (306) 222-9098

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4 Sample Balance Sheet The following Sample Balance Sheet is a Detailed Balance Sheet A Board Member might expect to see this level of information for use in decision making The objective is to provide a clear and transparent statement Assets and Liabilities to Board Members Accounts might be grouped for financial statement presentation especially fixed assets 4

5 5 ASSET Current Assets Credit Union Share5.00 Equity Account #0033,761.88 Boat Pass Revenue Account16,678.78 Special Savings Account2,253.65 Chequing Bank Account69,329.89 Total Cash92,029.20 Due From Capital Account0.00 Visa Receivable0.00 MasterCard Receivable0.00 Debit Card Receivable0.00 Total Credit Card Receivables0.00 Investments0.00 Accounts Receivable0.00 Payroll Advances0.00 Total Receivable0.00 Prepaid Expense & Deposits0.00 Total Current Assets92,029.20

6 6 Fixed Assets 1,289,706.14 Improvements - Campground Office9,788.00 Improvement - Washroom Sports Area38,941.95 Improvements - Gate System10,406.93 Improvements - Waterfront Beach45,493.04 Software - Reservation System2,110.50 Improvements - Campground165,739.99 Improvements - Maintenance6,529.96 Improvements - Cabin Area15,617.34 Improvements - Playground20,459.05 Improvements - Sportsground17,773.99

7 7 Office Furniture & Equipment9,065.24 Accum. Amort. -Furn. & Equip.0.00 Net - Furniture & Equipment9,065.24 Vehicle10,775.00 Accum. Amort. -Vehicle0.00 Net - Vehicle10,775.00 Building4,024.71 Accum. Amort. -Building0.00 Net - Building4,024.71 Land0.00 Equipment442,995.80 Accum Deprec - Equipment0.00 Net - Equipment442,995.80 Total Fixed Assets2,089,427.64 TOTAL ASSET2,181,456.84

8 8 LIABILITY Current Liabilities Accounts Payable0.00 Customer Deposits500.00 Due to Maintenance Fund0.00 Current Portion of Long Term Debt62,777.38 Total Current Liabilities63,277.38 Long Term Liabilities Equipment Loan0.00 Loan One19,609.43 Loan Two49,471.77 Total Long Term Liabilities69,081.20 TOTAL LIABILITY132,358.58

9 9 EQUITY Owners Equity Maintenance Fund Surplus801,091.63 Capital Fund Surplus427,892.54 Retained Earnings - Previous Year687,840.26 Current Earnings132,273.83 Total Owners Equity2,049,098.26 TOTAL EQUITY2,049,098.26 TOTAL EQUITY2,049,098.26 LIABILITIES AND EQUITY2,181,456.84

10 Summary of Statements Current Assets contain regular items we would expect to see are well defined and easily identifiable Current Liabilities Minimal accounts payable Current portion of long term debt Are well defined and easily identifiable Long Term Liabilities Long term debt less current portion are well defined and easily identifiable 10

11 Questionable Items Fixed Assets are pooled and not easily identifiable Net Income appears to be overstated Equity / Surplus appears to be overstated I understand a number of Regional Parks have these issues 11

12 The Issue The Balance Sheet does not give the reader confidence that the true financial and operating position of the Regional Park is shown. There is no indication of the condition of the assets There is no indication of the remaining useful life of the assets Assets are recorded at cost with no depreciation The reduction in the value / remaining life of fixed assets is not being charged against current income 12

13 The Solution Analyze your Fixed Asset Account(s) Determine the Depreciated Value of the Fixed Assets Original Cost Less Depreciation and Write Downs Remove the value of any assets that have been disposed of (if any) Create an Asset Management Information Listing Expensing the depreciation of fixed assets annually 13

14 What is in it for me? Have better information for decision making Have a list of assets for Insurance Purposes Have detailed information about the stock, condition and costs of assets – replacement / major repairs? Have the information needed to make informed decisions Be prepared for Funding Opportunities – Grants – Donations – Volunteer work. 14

15 What is a Tangible Capital Asset? roads, buildings, vehicles, equipment, computer hardware and software, water and other utility systems, land, dams, canals, and bridges Tangible capital assets include such diverse items as 15

16 Asset Identification Network approach Views an asset as one unit even if the respective asset is comprised of a number of significant components E.g. a well is composed of the pump, the liner, electrical connections, etc. Component approach Identifies major, significant components of asset. E.g. a water treatment system includes separate assets - settling pools, filters, chlorine pump, distribution pumps, etc. Segments Linear systems may be divided into segment or sections E.g. water distribution divided by subdivision 16

17 Betterments / Improvements or Maintenance Definition of a Betterment: increase the capacity reduce the operating cost or extend the useful life of a TCA. Considered to be an addition to the related asset. Recorded as separate asset - amortized over useful life. Definition of Repairs and Maintenance: maintain the asset over its given useful life. Expensed in the period and are not capitalized. 17

18 Betterment or Maintenance - Examples Replace old windows with energy efficient windows Betterment Replace old air conditioner with same model unit Maintenance Paved gravel road Betterment Extended Water System to New Subdivision Betterment Replaced broken water main with more durable material Betterment 18

19 Definitions Cost Fair Value - also know as Fair Market Value Net Book Value Residual Value Service Potential Useful Life 19

20 Cost Includes the purchase price of the asset and acquisition costs such as: installation – design – engineering legal – survey site preparation – freight transportation insurance Includes portion funded by grants or donations Grants / Donations are recorded as transfers / donations 20

21 A Practical Approach to Cost Historical Cost is the most appropriate method Because Historical cost information may be incomplete there are three alternative methods Each of the three methods attempts to estimate the historical cost Nominal Value for Fully Amortized Network Assets E.g. roads Now for a more practical approach 21

22 General Ledger / General Journal You may have sufficient information in your records to determine the Historical Cost You might be able to determine the cost of larger projects from the annual statements After determining the cost, you may want to confirm that the assets found still exist My experience is assets which have served there purpose are disposed of without much concern for the bookkeeping 22

23 Walk about I am a firm believer that the best way a Park Manager or Board Member can understand the condition of their park is to go for a walk The walk is good exercise, relaxing and can be very informative if you look closely Take somebody with you and take a notebook or pad of paper Even better do the walk about as a Board with the Park Manager 23

24 Condition For that concession building, what are the shingles like, how is the paint holding up For the roadway, are there pot holes, is gravel required Are the park vehicles new or old, in good condition or need work? How many buildings do you really have How are the playgrounds and recreational facilities Take notes, sometimes memory is not reliable 24

25 Talk to local trades Local Trades can be very helpful in determining the estimated cost of assets, the condition of assets and the cost / timing of required maintenance Trades people can also help you identify assets When looking around the park, I noticed a large number of trades are represented in the cabin owners and seasonal campers ( volunteers maybe) Remember this is an estimate of cost / condition / required maintenance, not an exact reconstruction 25

26 The Hard Part You have accumulated all the information you can, now what do you do? The information collected needs to be accumulated and organized to allow for future use The information can be put in a written list, a simple spread sheet or a computerized asset tracking system for parks with more assets Each park will find the approach that works for them 26

27 Capitalization Thresholds Materiality Record Keeping Asset Management Rate Setting Examples of capitalization thresholds Buildings – $10,000 Machinery & Equipment - $2,000 Vehicles - $2,000 27

28 A Sample Spread Sheet 28 Asset List Asset ID Asset Description Asset Class General Ledger In Service Year Useful Life Historical Cost Residual Value Building 1OfficeBuilding1976402500005000 Building 2QuonsetBuilding1985401000000 Tractor 1Green OneEquip200015250003000

29 Identify the data set required for each asset; for example: Asset description Location Department responsible for asset Other unique identifiers Date of purchase Manufacturer and/or supplier Historical cost – actual or estimated Residual value Useful and remaining life 29

30 The Concepts Historical Cost Less Depreciation Less Write Downs Equals Net Book Value Less Residual Values Equals Remaining Cost to be Depreciated 30

31 Straight Line Depreciation Based on useful life Cost $10,000 Useful Life 10 years Residual Value $2,000 Amount to be Depreciated - $8,000 Depreciation - $800 per year Equal depreciation each year 31

32 Maximum Recommended Useful Life Parking Lot Gravel – 15 years Asphalt – 25 years Fences – 20 years Playground Structures – 15 years Outdoor Lighting – 20 years Buildings - Frame – 50 years Light Duty Vehicles – 10 years Food Services – 10 years Roads – ACP hot mix – 30 years Gravel – 15 years Street Lights – 30 years Water System Distribution Mains – 75 years Plant Structures – 45 years Treatment Equip. – 45 years Office Equipment – 20 Years Computers Hardware – 5 years Software – 10 years 32

33 Declining Balance Depreciation Based on percentage e.g. 30% Cost $10,000 Depreciation in first year $3,000 Net Book Value at end of first year - $7,000 Depreciation in second year - $2,100 Net Book Value at end of second year - $4,900 More depreciation early vs. later 33

34 The Result You have a list of significant assets that actually exist in your park You have reasonable historical costs for each asset You have an idea of how long each of those assets will be useful You have an estimate of when major assets will require major repairs or replacement You can make good decisions based on accurate information 34

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