county of riverside office of the auditor-controller capital assets fy 2004-05 gasb 42 october 27,...
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COUNTY OF RIVERSIDECOUNTY OF RIVERSIDE OFFICE OF THE AUDITOR-CONTROLLER OFFICE OF THE AUDITOR-CONTROLLER
CAPITAL ASSETS FY 2004-05
GASB 42
October 27, 2004
CAPITAL ASSETS FY 2003-04CAPITAL ASSETS FY 2003-04
• Capital Asset tracking process is entering Phase III (Refining)
• We Are Doing a Great Job.
CAPITAL ASSET PRIORITIES CAPITAL ASSET PRIORITIES FY 2004-05FY 2004-05
• Inter-fund Transactions – FY 2004-05 Budget Adjustments– Current Year Actuals
• Capital Leases ( handout)• Physical Inventory Testing
– Land, Buildings, Equipment
• Infrastructure Additions
In Addition to TAG NUMBERS,In Addition to TAG NUMBERS,
• We Are Now Looking For INTER-FUND Transactions
Inter-Fund Capital Asset Inter-Fund Capital Asset Transactions- (Lisa Brandl)Transactions- (Lisa Brandl)
GOAL:– Properly classify expenditures in County
financial statements
HISTORY:– Capital assets, projects, and other similar
expenditures were budgeted and recorded as Appropriation 4 (Fixed Assets)
Inter-fund Capital Asset Inter-fund Capital Asset Transactions- (Lisa Brandl)Transactions- (Lisa Brandl)
Issue: Assets were not recorded in the Asset Management Module
Conclusion: Need to reclassify CY expenditures for proper presentation in the financial statements as Inter-fund and Contributions
Examples:– $1,350,000 funding source for Gov. Dept. XYZ - capital
project– $1,941,000 funding source for Gov. Dept. Q - land acquisitions– $500,00 for city YMCA Playground - (Contr.?)
Inter-Fund Capital Asset Inter-Fund Capital Asset Transactions- (Lisa Brandl)Transactions- (Lisa Brandl)
Need to adjust current fiscal budget to properly classify expenditures:
• Current FY 04-05 Expense Budget – 525440 Professional Services 2,500,000– 540040 Land 6,000,000– 548200 Infrastructure 20,000,000
• Proposed Change to FY 04-05 Expense Budget– 536200 Contributions to Other Non-Co Agency 2,000,000– 536780 Inter-fund Expense-Capital Projects 24,000,000– 537080 Inter-fund Expense-Misc. 2,000,000
The Inter-Fund PuzzleThe Inter-Fund Puzzle
We will be looking at two parts:– Appropriation 4 Fixed Assets– Appropriation 3 Inter-fund Transactions
Mark Your Calendars for the Mark Your Calendars for the Upcoming Training…Upcoming Training…
• TOPIC: Usage of Interfund Accounts, Operating Transfer in/out and Contribution to/from
• DATE: Mid-January thru February - the dates of the sessions will be communicated at a later time
• PLACE: Auditor-Controller’s Office conference room, 11th Floor, C.A.C. (4080 Lemon St., Riverside)
• TRAINING SIZE: 1-2 departments OR 10-20 attendees per session
• TRAINING COORDINATOR: Frankie Ezzat, Principle Accountant
• WHO SHOULD ATTEND: Training Invitations will be sent to various departments based on their usage of interfund accounts. Other users are welcome to attend by contacting Frankie Ezzat at (951) 955-3851 or via email [email protected].
GASB 42:GASB 42: Released Released November 2003November 2003
• Accounting and Financial Reporting for Impairments of Capital Assets and for Insurance Recoveries
I Know What You Are Going to I Know What You Are Going to Say!Say!
“Here we go with some more accounting
YADA
YADA
YADA”
GASB 42 Basis:GASB 42 Basis:
• HISTORY:– The presumption has been that a capital
asset’s historical cost (or its fair value at the date of donation) should be allocated over its estimated useful life on a systematic and rational basis (e.g. depreciation expense) in order to “match” the cost of the capital asset with the related revenues generated by its use.
GASB 42 Basis Cont’d.GASB 42 Basis Cont’d.
Traditional accounting had to be modified:• Capital assets were actually taken out of
service• Capital assets have lost a portion of their
service value, but remained in service.
Traditional Accounting for Traditional Accounting for Capital Asset ImpairmentsCapital Asset Impairments
Out of Service Still in Service
Same Shorter
Permanently Temporarily Useful Life Useful Life
Lower of
Statement carrying value Carrying value Carrying value Carrying value
of Position or fair value
Write -down Suspend Accelerated
Statement to fair value depreciation No effect depreciation
of Activities if necessary until service over
resumes remaining
life
Permanently Taken Out of Permanently Taken Out of Service (Example):Service (Example):
Historical Cost $10,000
Accumulated Depreciation (8,000)
Carrying Value $ 2,000
Fair value (salvage) (500) Operating Statement Loss $ 1,500
Less Capacity -Shorter Life Less Capacity -Shorter Life (Example):(Example):
• Historical Cost $100,000• Estimated life (years 1-3) 10 years• Estimated life (year 4+) 8 years • Depreciation (years 1-3):
– $100,000/10= $ 10,000/year
• Depreciation (years 4-8):– $70,000/5 = $ 14,000/year
Traditional Accounting Traditional Accounting Summary:Summary:
Impairments only recognized in TWO situations:
1. Capital asset permanently removed from service
IMMEDIATE EFFECT
2. Capital Asset’s life shortened EFFECT OVER TIME
Changes in Private SectorChanges in Private Sector
Recognize All Impairments Other Than Temporary:– Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, takes the position that a capital asset is impaired for accounting and financial reporting purposes if future directly related cash inflows are estimated to be less than the asset’s carrying value.
FASB ApproachFASB Approach • Identify circumstances indicative of a
potential asset’s impairment.
• Apply “Recoverability” test– Do new related undiscounted future cash
inflows equal or exceed carrying value? (Example to follow)
• Write down assets to fair value if failure to meet the “Recoverability” tests.
FASB Indicators - Potential FASB Indicators - Potential Impairment:Impairment:
• Significant decrease in market price• Significant change in manner of use or in physical
condition• Significant change in legal factors or business climate• Costs to-date significantly in excess of expected for
acquisition or construction• Current period operating or cash flow loss and history
or projected operating or cash flow losses• Expectation that a sale or disposition will occur earlier
than expected
Example of “Recoverability” TestExample of “Recoverability” Test
• Carrying Value $50,000• Estimated future cash flows:
Use of Asset $27,000
Salvage Value 10,000• Total Estimated Future Inflows 37,000• Carrying Value over Inflows $13,000
• RESULT: WRITE DOWN TO FAIR VALUE
GASB View - Usefulness of GASB View - Usefulness of FASB Approach:FASB Approach:
• Better to have a single approach to capital asset impairment applicable to all capital assets
• GASB 42 : Decrease in service potential rather than cash flows
Overview of GASB Overview of GASB TreatmentTreatment
Out of Service Still in Service
Same Shorter
Permanently Temporarily Useful Life Useful Life
Impairment Impairment
Lower of loss loss
Statement carrying value Carrying value subtracted subtracted
of Position or fair value from from
carrying carrying
value value
Write -down Suspend Impairment Impairment
Statement to fair value depreciation loss net of loss net of
of Activities if necessary until service insurance insurance
resumes recoveries recoveries
GASB 42: Indicators of GASB 42: Indicators of Potential Impairment:Potential Impairment:
Write-down required ONLY if a specific, easily recognized indicator is present:
• Evidence of Physical Damage– Mold or wind damage
• Changes in Legal or Environmental Factors– Underground storage tanks whose useful life was significantly
curtailed w/ new environmental regulations• Technological Changes or Obsolescence
– Old enclosed MRI replaced by popular open style• Changes in Manner or Duration of Use
– School building now used as a warehouse– Baseball Park now used for concerts – team moved
• Construction Stoppage– Permanent stoppage e.g. following discovery of the endangered species
“green-eyed wooly rat” at construction site
Calculate and Report an Calculate and Report an Impairment Loss Only if Impairment Loss Only if
Both are YES:Both are YES:
1. Is decline in service value significant?
2. Is the event or change outside the normal life cycle?
Temporary v. Permanent Temporary v. Permanent ImpairmentsImpairments
• Temporary Impairments are not recognized
• Permanent Impairments must be recognized
Impairments are presumed to be permanent.Impairments are presumed to be permanent.
Temporary Impairment Temporary Impairment (Example):(Example):
• Middle School is not being used due to declining enrollment.
• Should the Middle School impairment be recognized?
• If evidence of future enrollment, based on residential development, birth rates, or current elementary school enrollments, demonstrates that the closing is temporary, the impairment should not be recognized.
Calculations of Impairment-Calculations of Impairment-Four MethodsFour Methods
The method used depends on the reason for impairment:
1. Restoration Cost Approach
2. Service Units Approach
3. Deflated depreciation replacement cost approach
4. Lower of carrying value or fair value
RELATIONSHIPSRELATIONSHIPSImpairment Type Calculation Method
Evidence of Physical Damage
Restoration Cost Approach
Changes in Legal or Environmental
Service Units Approach
Technological Changes or Obsolescence
Service Units Approach
Change in Manner or Duration of use
Service Units or Deflated Depreciation
Construction Stoppage Lower of Carrying Value or Fair Value
Classification of Impairment Classification of Impairment Losses:Losses:
• Other Financing Use – if impairment is extraordinary or subject to management control (e.g. duration of use)
• Otherwise – – Component of Net Program Cost in
appropriate functional category
Disclosures & RecoveriesDisclosures & Recoveries
• Note Disclosures:– If impairments are not visible in financial
statements– If impairments cause assets to be idle: temp.
or perm.
• Insurance Recoveries:– In governmental funds, recoveries should be
classified As Other Financing Sources
GASB 42 Effective DateGASB 42 Effective Date
• For fiscal periods beginning after Dec. 15, 2004
• FOR COUNTY, effective July 1, 2005
Checklist of Significant Slides Checklist of Significant Slides and Handouts:and Handouts:
• Traditional Accounting for Capital Asset Impairments-Table
• Traditional Accounting Summary• FASB Approach• Overview of GASB Treatment – Table• GASB 42 – Indicators of Potential Impairment• Calculate and Report an Impairment if…..• GASB 42 Effective Date• GAAFR REVIEW