Maximize Your Capital Asset Reporting

Transcription

1 Whitepaper Maximize Your Capital Asset Reporting Mindee Johnson, CPA Rea & Associates, Inc. is a regional CPA and consulting firm with offices throughout Ohio. Since 1938, Rea has offered a brighter way to its clients in the government, construction, healthcare, manufacturing, oil & gas and not-for-profit industries as well as family businesses through innovative audit, tax, consulting and accounting services. Learn more at

2 Maximize Your Capital Asset Reporting Mindee Johnson, CPA February 2016 Table of Contents 3 Introduction 4 Are Your Ledgers Telling You Something? 5 How Much Does That Asset Really Cost? 5 Improvements vs. Repairs & Maintenance 6 Identifying Capital Asset Disposals 6 Prepare for a Brighter Tomorrow 7 About the Author Learn more at

3 Introduction >> DDo you have assets that continue to be used well beyond a single reporting period, such as land, land improvements, buildings, furniture and equipment, infrastructure (including roads, water and sewer lines), and construction in progress? Then you have capital assets, which means there are special reporting requirements you should be aware of. According to generally accepted accounting principles (GAAP), you are only required to report items when their original cost exceeds your capitalization threshold. The Government Finance Officers Association recommends a minimum threshold of $5,000 per item. However, the Ohio Administrative Code says that governmental entities are required to report at least 80 percent of their capital assets, which is a rule you will need to remember if your threshold ever increases. According to the requirements, increasing your threshold cannot remove more than 20 percent of the amount previously reported. Keep reading to learn how you can avoid reporting issues related to your capital assets down the road. 3 Maximize Your Capital Asset Reporting

4 Are your ledgers telling you something? >> When it comes to identifying your capital assets, start by reviewing your expense ledgers particularly the funds and accounts you typically use to make capital asset purchases. Here are some tips: Don t overlook professional service expenses Just because your construction project hasn t started, doesn t mean you have no construction in progress to report. All architect and engineering services should be capitalized, including design services, construction manager fees, etc. Watch out for direct vendor payments Instead of issuing your own checks, another entity may be paying the vendor on your behalf (the Ohio Public Works Commission, the Ohio Water Development Authority or the Ohio Facilities Construction Commission, for example. If this is the case, remember to record the payment in your ledgers as memo journal entries. They will be reported as an equal amount of revenue and expense and are typically capitalized for GAAP reporting. Account for all your debt Don t forget to review all new debt agreements over the last year, as most debt is associated with capital assets. Review all new lease agreements to determine whether they are a capital or operating lease. Your financial advisor can help you determine the classification. If your lease pertains to a capital asset, you will need to capitalize the asset at the total principal amount of the lease. Mind the minutes Did your governing board approve any large contracts or donations of capital assets over the last year? Review your meeting minutes to make sure you didn t miss anything. Since cash doesn t change hands in these types of transactions, they will not show up in your ledgers, but they still must be reported. 4 Maximize Your Capital Asset Reporting

5 How much does that asset really cost? >> Generally speaking, the cost of your assets includes any charges that were necessary for having the asset placed in its intended location and conditioned for use. This means that your shipping and installation costs should be capitalized. Here are three other common costing concerns you may run into: Capitalizing Trade: In trade situations, you will report the cash paid for the new asset plus the remaining undepreciated value of the asset that was traded. Capitalizing Donations: The cost of donated capital assets is determined by the fair market value of the asset on the date the donation was made. An appraisal may be necessary. Capitalizing Land: Your land cost will include costs associated with land preparation (i.e. excavation, fill, grading, and demolition of existing buildings), as they are considered to have an indefinite useful life. TIP: For large construction projects, I recommend tracking all contracts, change orders and payments on a spreadsheet to help ensure proper capitalization while preventing overpayment to contractors. Improvements & maintenance >> Identifying whether a capital asset is an improvement or a repair makes a huge difference when it comes to determining which asset needs to be reported, but sometimes settling on a category can be difficult. Here s how I remember: Improvements Improvements provide additional value and should be capitalized because the additional value you invest in the asset will increase its estimated useful life and/or increase the asset s ability to perform. Repairs & Maintenance Rather than provide additional value, repairs and maintenance help to retain the value of an existing asset and therefore should not be capitalized. For example, imagine that you just installed a new roof on one of your buildings over the last year and are now trying to figure out whether to capitalize the asset or expense it. To do this, you will need to consider the estimated useful life of the building and determine if the new roof will extend the building s lifespan. The estimated useful life of a building is 80 years, which is longer than a new roof. Oftentimes, the building will need its roof replaced after about 40 years. In this scenario, replacing the roof does not lengthen the original useful life of the building. It does, however, ensure that the building will realize its estimated 80-year lifespan. Therefore, you should treat the new roof as a repair, not an improvement. If you haven t already, draw up a capital asset policy to address these types of issues to ensure that they receive consistent treatment. 5 Maximize Your Capital Asset Reporting

6 Identifying capital asset disposals >> Managing your capital asset disposals doesn t have to be a chore. These four tips will help you stay on top of the responsibility. 1 As a starting point, request that all departments provide you with their disposals. You might consider providing a current disposal listing to each department head to review, update and return to expedite the process. 2 Review your revenue ledgers. Focus on the accounts where you would record your sale or insurance proceeds. 3 Evaluate all existing leases to determine if your assets were returned once the lease matured. Pay special attention to vehicles, being sure to review the invoices for your current year purchases to determine if a trade-in was made. 4 Finally, examine your governing board s meeting minutes for any authorization of sales, donations or disposals of capital assets that didn t get reported. Sometimes a detail or two slips through the cracks. Prepare for a brighter tomorrow >> The strongest agencies are those that establish and maintain strong policies, internal controls and financial reporting practices. Doing so not only reinforces your credibility as a community leader, it promotes trust and goodwill among the men, women and children you serve every day. Rea & Associates helps government entities throughout Ohio identify solutions to their unique challenges. From boards of education to city councils and beyond, our firm has the experience and expertise you need to establish top-notch internal controls while helping you promote your mission of executing sound financial practices for the good of the community. Visit the article library at article-library for more free tools, or me at mindee.johnson@reacpa.com to take your reporting practices to the next level. 6 Maximize Your Capital Asset Reporting

7 About the author >> For more information about Rea & Associates: ^ call mindee.johnson@reacpa.com visit connect bit.ly/rea_linkedin (LinkedIn) plus.google.com/+reacpa (blog) Rea & Associates, Inc. is a regional CPA and consulting firm with more than 200 bright professionals in 11 offices throughout Ohio. Since 1938, Rea has provided a wide range of accounting services to businesses, individuals with means and those with dreams. Today, the firm is the go-to resource for thousands of businesses and individuals nationwide. Rea offers a brighter way to its clients in the government, construction, healthcare, manufacturing, oil & gas and not-for-profit industries as well as family businesses through innovative audit, tax, consulting and accounting services. Mindee Johnson, CPA senior manager As a senior manager on Rea & Associates government team, Mindee is responsible for managing the firm s government compilation department and GAAP conversions. She assists clients state-wide. Mindee earned her bachelor s degree in accounting from the Franciscan University of Stubenville. Since beginning her career with Rea in 1998, she has appeared as a featured presenter for several government functions. She is a member of the American Institute of CPAs and the Ohio Society of CPAs. Mindee regularly contributes content on the firm s website, Learn more at