1.2.4 Capital Assets. Full Counts Taken at Fiscal Year End. Full Counts Taken at Times Other Than Fiscal Year End

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1 82 Financial Accounting and Reporting Full Counts Taken at Fiscal Year End Many school districts conduct an entire physical inventory of their warehouse at fiscal year end This method of inventory procedure allows the school district to reconcile the physical inventory to the general ledger as of the last day of the fiscal year Full Counts Taken at Times Other Than Fiscal Year End School districts often take their physical inventory on a date which does not match its fiscal year end Many times the dates selected for physical inventories are made to minimize the disruptions that such inventories have on the school district s operations The date selected for the physical inventory should be sufficiently close to year end to allow for the reconciliation of inventory to the year end general ledger 124 Capital Assets School districts are responsible for accounting for both current and noncurrent assets Included within noncurrent assets are capital and intangible assets Capital assets have certain properties that distinguish them from other types of noncurrent assets Capital assets are: Tangible in nature Long-lived (have a life of longer than one year) Of a significant value at purchase or acquisition time Reasonably identified and controlled through a physical inventory system They may include land, improvements to land, easements, buildings, building improvements, vehicles, machinery, works of art and historical treasures, furniture and other equipment which are intended to be held or used over a long period of time Fixed denotes probability or intent to continue use of an asset and does not indicate immobility of an asset Texas Education Agency - Resource Guide January 2010

2 Financial Accounting and Reporting 83 The emphasis in governmental accounting for capital assets is on control and accountability Accordingly, a variety of data relating to a school district s capital assets must be accumulated to maintain control and accountability over them These data include: Quantity Location Condition Life expectancy Capital asset records are necessary to designate accountability for the custody and maintenance of individual items, and to assist in approximating future requirements All capital transactions for the acquisition of capital assets should be controlled through a welldefined authorization procedure If the budget does not authorize the purchase of specific items, approval power, subject to specific monetary limits, should be assigned to the chief administrator or to a person designated by the chief administrator The school district should adopt policies to govern this situation even if it has not been an issue in the past Note: Separate accountability for capital assets is a legal requirement of many Special Revenue Funds receiving monies from the federal government 1241 Capital Asset Recording Two methods of recording capital assets for governmental entities are used The method used depends on the fund type used to purchase the capital asset Capital assets purchased by: Governmental fund types and expendable trust funds are recorded as expenditures of the fund and the asset is recorded in the locally defined fund code 9XX Proprietary fund types and similar fiduciary funds are recorded in the purchasing fund Assets recorded in the general capital asset fund may not be used exclusively in the operations of any one fund, nor do they, under certain circumstances, belong to any one fund When these assets are purchased from current appropriations, such acquisitions must January 2010 Texas Education Agency - Resource Guide

3 84 Financial Accounting and Reporting be anticipated in the preparation of or amendments to the budget Purchase requisitions and requests for appropriations should be reviewed to assure that piecemeal acquisitions are not made to avoid the approval or review functions built into the system (Additional guidance on purchasing is included in the Purchasing module of the Resource Guide) The general capital asset fund is a self-balancing set of accounts Accordingly a credit entry of one or more "Investment Accounts" is established to offset the debit entry established in any of the four asset categories These equity accounts indicate the source of monies with which the assets were acquired and as such must be indicative of the fund Investment in general capital asset accounts in the Account Codes section of this module are included in the 3100 series of accounts For capital assets acquired by the Capital Projects Fund, the necessary entry in the general capital asset fund is usually made at the end of a fiscal period or upon completion of a construction project In the case of a construction project not finished at the end of a fiscal year, this entry would be a debit to Construction Work in Progress for the costs capitalized to date and a credit to Investment in Capital Assets When the project is completed in a later fiscal period, the Construction Work in Progress account is credited and the specific asset account (Land, Buildings, etc) debited In addition, costs capitalized by the Capital Projects Fund in the terminal year of construction or acquisition would be recorded in this group of accounts by recording a debit to the proper asset account (Land, Buildings, etc) and a credit to an appropriate Investment in Capital Assets account In the case of asset acquisition by General and Special Revenue Funds, recording of the asset in the Capital Asset Group of Accounts may be made at the time the expenditure is recorded in the fund or cumulatively at the end of an accounting period or fiscal year Thus, if a piece of equipment were purchased by the General Fund and recorded in that fund as a debit to Expenditures and a credit to Accounts Payable, an entry would also be made for an identical amount in the General Capital Asset Group by a debit to Equipment and a credit to Investment in Capital Assets - General Fund Two or more funds might contribute to the total cost of a capital asset The credit entry in this case would be broken down to reflect the portion of the cost contributed by each source At year-end, to convert to the government-wide financial statements, a debit would be made to Investment in Capital Assets General Fund and a credit would be made to Expenditures Texas Education Agency - Resource Guide January 2010

4 Financial Accounting and Reporting Basis of Capital Assets Capital assets are included in the financial records at historical cost The cost should include ancillary charges necessary to place the asset into its intended location and condition for use Ancillary costs include costs that are directly attributable to asset acquisition such as freight and transportation charges, site preparation costs, and professional fees In some situations when the conversion was made for GASB 34, the purchase or acquisition documents may not have been available for general capital assets already on hand If reliable historical records were not available, an estimate or appraisal of the original cost of such assets on the basis of such documentary evidence as may be available (such as price index levels at time of acquisition) may have been used The goal of such valuation was to record a fair market value at the date of acquisition The intent was not to expend an excessive amount of monies in ascertaining exact costs If capital assets are acquired by gift, then the appraised value on the date received is the appropriate amount to include in the capital asset records of the district Capital assets may be acquired by several methods: Purchase Lease-Purchase Construction Tax Foreclosures Gifts All capital assets acquired in some manner other than gift are recorded at the cost to the school district to place the asset in service Capital assets arising from gifts or donations are recorded at their estimated fair market value at the time of receipt The determination as to whether an expenditure from governmental funds should be classified as an operating expense or recorded in the general capital asset account is often difficult If the unit cost of equipment and/or furniture is $5,000 or more and the useful life criteria is estimated at more than one year, the purchase is considered an expenditure for general capital assets, regardless of whether it is a replacement item or purchase of January 2010 Texas Education Agency - Resource Guide

5 86 Financial Accounting and Reporting additional equipment Furthermore, if the nature and/or quantity of the item(s) allows economical control and if the one year useful life criteria are met, even though the unit cost may be less than $5,000, the expenditure may be recorded under expenditure code 6649 or 6641 Purchase of items not meeting the controllability or useful life criteria are properly charged to current operating expense as supplies and materials The preceding guidelines are the maximum capitalization limits ($5,000) prescribed by TEA However, school districts may wish to establish accounting policies with a lower capitalization limit for items recorded as capital assets In addition, a school district may wish to maintain accountability for certain capital assets even if they do not meet the school district s capitalization policy For example, certain audiovisual or computer equipment may not be capitalized (ie not recorded as capital asset); however a listing of such assets and their location may be maintained for control and accountability purposes This is common for items with a higher risk of theft (easily transportable or marketable or diverted to personal use) Instead of charging certain transactions under supplies and materials, a school district may decide to group purchases of items costing less than $5,000 per unit under a major replacement or equipping program using expenditure object code 6649 or 6641 This grouping may be preferable because these transactions would not be regularly recurring operating expenditures (a significantly increased expenditure level under supplies and materials of a non-recurring expenditure may indicate noncompliance under maintenance of effort requirements for federal programs) Additionally, use of this object code for grouping of equipment items will isolate this optional expenditure treatment for the purpose of comparing costs among school districts on a consistent basis Computers, classroom furniture, and library books are assets that may not meet the capitalization policy on an individual basis, but might be considered material collectively If these items are purchased with long-term debt, it would be preferable to have a corresponding asset for which the debt was issued For a diagram regarding coding for capital assets, refer to the Capital Assets Decision Tree Note: The definition for equipment in the Resource Guide is consistent with the federal definition for equipment - $5,000 or more per unit and useful life of more than one year (2 CFR Part 225, OMB A-87) 1243 Property Accounts for Capital Assets Accounting for capital assets requires the proper classification of individual assets within recommended asset classes Appropriate associated costs and charges are capitalized with Texas Education Agency - Resource Guide January 2010

6 Financial Accounting and Reporting 87 the assets within each class The recommended classes for accounting and statement presentation purposes are: Land recorded asset cost should include, in addition to the purchase price, such ancillary costs as legal and title fees, surveying fees, appraisal and negotiation fees, damage payments, site preparation costs (clearing, filling, and leveling) and demolition of unwanted structures Land improvements consist of betterments, other than buildings, that prepare land for its intended use Examples include site improvements such as excavation, fill grading and utility installation; removal, relocation or reconstruction of property of others, such as railroads and telephone and power lines, retaining walls, parking lots, fencing and landscaping Costs of building and improvements include purchase price, contract price, professional fees of architects, attorneys, appraisers, financial advisors, etc; damage claims; cost of fixtures attached to a building or other structure; construction insurance premiums, interest, and related costs incurred during the period of construction; and any other expenditures necessary to put a building or structure into its intended state of operation Construction work in progress represents a temporary capitalization of labor, materials, equipment, and overhead costs of a construction project Upon completion such costs should be cleared or moved by transfer of the capitalized costs to one or more of the other classes of assets Furniture and equipment should include the total purchase price, before any trade-in allowance, and minus any discounts Other costs which should be capitalized as equipment include transportation charges, installation costs, taxes or any other expenditure required to place the asset in its intended state of operation If library books are considered to have a useful life of greater than one year, they are capital assets and are depreciable Because most library collections consist of a large number of books with modest values, group or composite depreciation methods may be appropriate Infrastructure assets are defined as long lived capital assets that are normally stationary in nature and which can normally be maintained for a significantly greater number of years than most capital assets Infrastructure assets include: Roads Bridges Tunnels Water and sewer systems Dams Lighting systems January 2010 Texas Education Agency - Resource Guide

7 88 Financial Accounting and Reporting Drainage systems Note: Parking lots and lighting systems may be defined by the district as part of the associated building, rather than as infrastructure Wiring for networks in buildings is not defined as infrastructure Additionally, activities involving the Telecommunications Infrastructure Fund also do not meet the definition of infrastructure Works of art, historical treasures, and similar assets are capital assets according to GASB whether they are held singly or in collections if they meet all of the following conditions in accordance with paragraph 27 of GASB 34 as follows: Held for public exhibition, education, or research in furtherance of public service, rather than financial gain Protected, kept unencumbered, cared for and preserved Subject to an organization policy that requires the proceeds from sales of collection items to be used to acquire other items for collections Monuments are capital assets that may qualify as works of art, historical treasures, or similar assets if they meet the requirements above Depreciation is not required for those capitalized collections or individual items that are considered to be inexhaustible Inexhaustible collections of individual works of art or historical treasures are those with extraordinary long useful lives Because of their cultural, aesthetic, or historical value, the holder of the asset applies efforts to protect and preserve the asset in a manner greater than that for similar assets without such cultural, aesthetic, or historical value 1244 Accounting for Maintenance, Additions and Betterments Accounting for costs related to capital assets after their acquisition requires careful differentiation between maintenance expenditures, additions and betterments Maintenance costs are those outlays which are necessary to keep an asset in its intended operating condition but which do not materially increase the value or physical properties of the asset Maintenance costs should be charged to appropriate expenditure accounts and not capitalized as capital assets Texas Education Agency - Resource Guide January 2010

8 Financial Accounting and Reporting 89 In contrast, all additions and betterments to capital assets should be capitalized at cost when acquired or when construction or installation is completed An addition refers to a physical extension of some existing asset or the acquisition of an entirely new asset which does not merely replace one of similar function and value A betterment exists when a part of an existing asset is replaced by another and the replacement provides a significant increase in the life or value of the property Where a betterment has been determined as such, the amount to be capitalized in the accounts is the difference between the cost of the new asset acquired and the cost of the asset which it replaced 1245 Accounting for Impairment of Capital Assets GASB 42 defines asset impairment as a significant, unexpected decline in the service utility of a capital asset Capital assets are acquired because of the services they provide, so impairments affect the asset s service utility When the asset was acquired, the event or change in circumstance would not have been expected to occur during the useful life of the capital asset, so the event/circumstance is classified as not normal and ordinary There are phrases used in determining if an impairment has occurred that are necessary to define: service utility usable capacity that was expected to be used to provide service when a capital asset was acquired level of utilization portion of the usable capacity currently being used original usable capacity capacity when asset was acquired current usable capacity capacity after event/circumstance or as a result of normal or expected decline in useful life maximum service capacity when surplus capacity is provided for safety, economic, or other reasons usable service capacity capacity excluding the surplus capacity noted above Determining whether a capital asset has been impaired is a 2-part test: 1) Identify possible impairments January 2010 Texas Education Agency - Resource Guide

9 90 Financial Accounting and Reporting a) Physical damage fire, flood, earthquake and the amount of damage requires work be done to restore the service utility of the asset b) Laws or regulations or other environmental factors that affect the capital asset c) Technological advancements or obsolescence d) Change in manner or duration of use e) Construction stoppage 2) Test for actual impairment a) The magnitude of the decline in service utility is significant b) The decline in service utility is unexpected Impairment measurement 1) If the district will no longer use the asset, or construction stoppage is involved, the district should report the capital asset at the lower of carrying value or fair value 2) If the district will continue to use the asset, it should measure the amount of impairment (portion of historical cost that should be written off) by the method that best reflects the decline in the capital asset s service utility: a) Restoration cost approach b) Service units approach c) Deflated depreciated replacement cost approach The following table indicates the measurement approach generally used in each of the possible impairment situations Physical damage Laws, regulations or environmental factors Technological development or obsolescence Restoration cost approach Service units approach Service units approach Texas Education Agency - Resource Guide January 2010

10 Financial Accounting and Reporting 91 Change in manner or duration of use Deflated depreciated replacement cost approach or service units approach Construction stoppage Damages to capital assets caused by tornadoes, wind and rainstorms (and other acts of God), fire, theft, and vandalism should be recorded so as to reflect the difference between the cost of replacement or restoration and the insurance or other contributions or subsidies received as reimbursement therefore If there is a complete loss of the asset, the old asset should be written off by a debit to Investment in Capital Assets and a credit to the appropriate capital asset account Partial losses or damages that are replaced or repaired should be recorded at cost and treated as an expense The original value of such assets should be retained, unless additions or betterments are made in conjunction with the repairs If additions or betterments are made, the guidance contained in the earlier discussion of Accounting for Maintenance, Additions and Betterments should be followed Notes: (1) See Appendix 7, Accounting for Catastrophic Gains and Losses, for an example of entries associated with catastrophes (2) If repairs occur in two fiscal years, the associated repair expenditures, insurance proceeds and additions to capital assets should be recorded in the appropriate fiscal year Deferred expenditure and revenue accounts should not be utilized Disposals or Retirement of Capital Assets Retirement of capital assets, because of sale, scrapping or changes to capitalization policies, should require certain approvals to guard against the disposal of equipment which could be used by other departments and to guard against an illegal unauthorized disposition January 2010 Texas Education Agency - Resource Guide

11 92 Financial Accounting and Reporting Disposal of capital assets purchased with Governmental Fund Types and Private-Purpose Trust Fund resources are handled differently than those purchased with proprietary funds Governmental Fund Types and Private-Purpose Trust Funds capital assets - When a capital asset is disposed of, regardless of reason, the entry recording the acquisition is reversed in the general capital asset fund Entries to record insurance adjustments, trade-in allowances, and receipts from sales of capital assets are recorded in the fund which acquired the item If individual identification of capital assets has been maintained the recorded cost of the item being disposed of is easy to obtain If certain capital assets are without identification an inventory policy must be established to determine what costs are to be written off As an example, if 200 desks have been purchased over a period of time and 100 were purchased at $20 each while the second hundred were purchased at $30 each, what amount will be written off the books for 10 desks being retired? Not knowing which 10 desks are being retired, the following methods are available in determining the amounts to be written off the general capital asset fund: Averaging method - In this method the total cost of the desks is divided by the total number of desks A new average cost is calculated whenever another purchase of desks is made First-in, First-out method - In this method it is assumed that the first items acquired will be the first to go In the desk example the 10 desks would be retired at $20 each If 110 desks were to be retired, the first hundred would be retired at $20 each while ten more would be retired at $30 each The selection of one of the above group control methods should be a management decision and once selected, maintained consistently from year to year If no cash is involved in the disposal of a capital asset, the disposal is handled by elimination of the asset and reduction of the investment account which records its source In the desk example above, the cost of the ten desks is credited to the furniture control account and debited to the investment account for furniture The detail ledger is also reduced This entry is opposite to the entry recorded when the purchase was made If the assets are sold, an additional entry is made in the fund which recorded the purchase If the ten desks had been sold for $5 each, a $50 entry (debit cash, credit revenue) would be recorded in the fund which purchased the asset If costs are associated with the disposal of capital assets, an entry is made in the fund which purchased the asset to debit expenditures and credit cash for the additional costs The assets are then removed from the capital asset accounts in a manner similar to situations where no cash is involved Texas Education Agency - Resource Guide January 2010

12 Financial Accounting and Reporting 93 If a capital asset is traded in for a new capital asset, the general capital asset fund is credited by the cost of the original asset; it is then debited by the cost of the new purchase The actual difference paid in cash is recorded in the fund which recorded the original expenditure for the asset These entries will: (1) remove old assets from the property records; (2) charge the expenditures to the correct fund; (3) record the acquisition of the new equipment Proprietary Fund Types and similar trust funds - The primary difference between accounting for disposals and retirements of capital assets for governmental fund types and proprietary fund types is that for proprietary fund types a school district will almost always recognize a gain or loss on the disposal or retirement However, a school district will never recognize a gain or loss on disposal or retirement in a governmental fund type as the entire proceeds from disposition are recorded in the governmental fund type (and the asset is included in the General Capital Asset Fund) The gain or loss to be recognized by the school district is calculated as illustrated in Exhibit 4 below: Exhibit 4 Computation of Gain/Loss on Disposition Proceeds received upon disposition $100,000 Less: Carrying value $200,000 Accumulated depreciation (125,000) (75,000) Gain on disposition $ 25,000 Proceeds received upon disposition $ 50,000 Less: Carrying value $200,000 Accumulated depreciation (125,000) (75,000) Loss on disposition ($25,000) January 2010 Texas Education Agency - Resource Guide

13 94 Financial Accounting and Reporting As illustrated in Exhibit 4, accounting for disposition of capital assets for proprietary and similar trust funds is handled in the same manner as private sector companies These valuation methods can also be used to determine the values associated with proprietary fund capital assets Note: See sample journal entries in Appendix 7, Accounting for Capital Assets Subject to Depreciation, Illustration # Depreciation Accounting for General Capital Assets in the financial records of school districts differs from the commercial methods of recording and reporting capital assets Depreciation is a method of spreading the loss in value of a capital asset over several periods and is applicable to the government-wide reporting to measure net income and capital maintenance Capital assets yield their services gradually over a period of years rather than all at once, as in the case of current assets such as supplies General capital assets are those not normally accounted for in a proprietary fund or fiduciary fund Capital assets that are being or have been depreciated should be reported net of accumulated depreciation in the statement of net assets (Accumulated depreciation may be reported on the face of the statement or disclosed in the notes) Capital assets that are not being depreciated, such as land or infrastructure assets reported using the modified approach should be reported separately if the school has a significant amount of these assets Capital assets such as land and some types of improvements usually are not depreciated because they normally do not deteriorate due to use and the passage of time (inexhaustible) Capital assets are recorded at historical cost or, if donated, at their estimated fair market value These basic principles must be observed in all phases of capital asset accounting Capital assets should be depreciated over their estimated useful lives unless they are either inexhaustible or are infrastructure assets reported using the modified approach Inexhaustible capital assets such as land and land improvements should not be depreciated Depreciation expense should be reported in the government-wide statements of activities; the proprietary fund statement of revenues, expenses, and changes in fund net assets; and the statement of changes in fiduciary net assets GASB Codification Section states that "depreciation expense should be measured by allocating the expected net cost of using the asset (original cost less estimated salvage value) over its estimated useful life in a systematic and rational manner" Salvage value is the estimated fair value of a capital asset remaining at the conclusion of its estimated useful Texas Education Agency - Resource Guide January 2010

14 Financial Accounting and Reporting 95 life It may be calculated for a class of assets or individual assets The TEA s suggested depreciation method is the straight line depreciation method; however, any acceptable method determining depreciation may be used The depreciation method can vary for different categories of assets Some of the common categories of depreciation are: straight-line method decreasing-charge methods, which include declining balance, double-declining balance, and sum-of-the-years -digits, among others increasing-charge methods unit of production/service methods, which allocate the depreciable cost of an asset over its expected output The composite method may also be used to calculate depreciation expense Under the composite method a group of similar assets or dissimilar assets in the same class are depreciated using the same depreciation rate The estimated life for the group may be based upon the weighted average or simple average of the useful lives of the assets in the group or upon the weighted average or upon assessment of the life of the group as a whole Composite depreciation should not be applied across classes of assets: for example, buildings, equipment, furniture, and vehicles (however, all buildings could be grouped and a single composite rate applied to all) Annual depreciation using the straight-line method is determined by taking actual cost, subtracting estimated salvage value, and dividing by the number of years that the asset is expected to be used Accumulated depreciation for an asset is the annual depreciation times the number of years that is has been actually used For example, assume that a capital asset costing $10,500 is expected to be used for ten years, and at the end of ten years the salvage value is estimated to be $500 Annual depreciation is $1,000, which is determined by taking the actual cost of $10,500, subtracting the estimated salvage value of $500, and then dividing by the estimated life of ten years Accumulated depreciation at the end of five years, for example, is $5,000, determined by multiplying annual depreciation of $1,000 by five years For simplicity in accounting, depreciation of capital assets is usually determined at the close of each fiscal year Once a method of depreciation is placed into use by a school district, it should be consistently and systematically applied In determining estimated useful life a district should consider an asset s present condition, use of the asset, construction type, maintenance policy, and how long it is expected to meet service and technology standards For estimated useful lives, districts can use (1) general guidelines obtained from professional or industry organizations, (2) information for comparable assets of other governments, or (3) internal information Capital assets should not be written off when they become fully depreciated Capital assets should be written off when they are disposed of As a result of differences between estimated useful lives used for depreciation computations and actual useful lives, governments may, in limited cases, have capital assets that are fully depreciated but have January 2010 Texas Education Agency - Resource Guide

15 96 Financial Accounting and Reporting not been disposed of Such capital assets should continue to be reported by the government Fully depreciated capital assets do not affect the net balance of capital assets reported in the statement of net assets However, the balances of historical cost and accumulated depreciation that are disclosed in the financial statements or notes to the financial statements are affected by and should include fully depreciated capital assets that have not been disposed of Note: Appendix 7, Accounting for Interfund Transactions illustrates establishment of an internal service fund operation, including an entry to establish and to account for accumulated depreciation The journal entry examples in Appendix 7 are included to offer guidance in determining depreciation of capital assets These guidelines should be useful to accounting personnel in school districts which maintain funds with capital assets 1247 Control of Capital Assets In addition to entries involving the general ledger accounts, detailed subsidiary records should be maintained to maximize the control of capital assets These records should include the following information as a minimum: The item purchased Date of purchase Purchase price Life expectancy Location number Inventory number Texas Education Agency - Resource Guide January 2010

16 Financial Accounting and Reporting 97 Fund from which purchased Other information that may be useful for control In the subsidiary ledger, all capital assets belonging to a given school might be grouped together (eg, land, buildings, and equipment records for a particular school segregated from records of the other schools) Another method is to maintain subsidiary records for all capital assets as a group (eg, all subsidiary records for buildings would be grouped together; however, there could be a breakdown within this grouping to identify buildings with program intent or function) The method selected depends upon the number and location of capital assets, the degree of accountability and responsibility for capital assets, and the data processing system requirements The subsidiary record, regardless of its physical form, should at least provide for a complete description of the item to permit positive identification, cost and purchase data, and its location Adequate accounting procedures and records for capital assets are essential to the protective custody of school property In addition to protective custody, an appropriate system: Designates responsibility for custody and proper use Provides data for management of capital assets Provides data for financial control, developing financial reports and adequate insurance coverage Of paramount importance is the security of the system Any material change in the customary recording of distribution or disposal of capital assets is a financial matter that should be decided by the school district s administration Management must impose discipline throughout the organization so that an appropriate level of internal control will be maintained to assure that adequate custody of capital assets is maintained For items subject to inventory control (for example, certain low-cost items recorded under supplies and materials), for insurance purposes and because of the risk of theft, the school district should use one of the local optional expenditure codes under 639X to provide a reconciling amount to balance total additions (639X and 66XX) to the inventory listing Items recorded on the inventory listing that were charged to 639X are not General Capital Assets and, accordingly, are not recorded in the general capital asset accounts January 2010 Texas Education Agency - Resource Guide

17 98 Financial Accounting and Reporting In addition, capital assets need to be recorded either individually or as part of a group and need to be coded individually for identification Unit or group control: Capital assets will either be under unit or group control Unit control means that a piece of equipment is accounted for as a single unit in itself and that it retains its separate identity throughout its life and at time of disposition Group control means that equipment items which are the same with respect to function, material, shape and size are accounted for as a group rather than single units That is, the individual piece of equipment loses its identity as such and is one of a group As an illustration of group control, consider a school district with 100 teacher desks which are all the same Instead of maintaining a record on each individual desk, one record is kept on the group of 100 desks Numerical codes: All movable capital assets should be marked numerically, or with some kind of code, to permit positive identification There are a number of methods for permanently marking school district capital assets including: Tags Labels Indelible ink Bar code labels Engraving School age children have a propensity for playing with identification markings until they are illegible The method and locations of identification markings should be placed with that propensity in mind Detailed records should be maintained on each piece or group of furniture and equipment A form should be devised for recording transfer of property from one department or location to another and furniture and equipment assigned to a particular department or location should not be transferred without the written approval of the person responsible for the physical control of the property No item of furniture or equipment should be permitted to leave the assigned premises without a property pass signed by a proper authority (ie, system property manager) Texas Education Agency - Resource Guide January 2010

18 Financial Accounting and Reporting 99 School district policies should address the use of school district capital assets in a location other than that assigned The policy should also address the offsite use of school district assets by employees 1248 Inventories of Capital Assets Certain capital assets, such as furniture and equipment, should be inventoried on a periodic basis Annual inventories taken usually at the end of the school term before the staff members leave are recommended Discrepancies between the capital asset/inventory list and what is on hand should be settled Missing items should be listed and written off in accordance with established policy 1249 Reporting of Capital Assets GASB Codification Section 1400 states that a clear distinction should be made between general capital assets and capital assets of proprietary and fiduciary funds Capital assets of proprietary funds should be reported in both the government-wide and fund financial statements Capital assets of fiduciary funds should be reported only in the statement of fiduciary net assets All other capital assets of the governmental unit are general capital assets They should not be reported as assets in governmental funds but should be reported in the governmental activities column in the government-wide statement of net assets Depreciable capital assets should be reported in the Statement of Net Assets at historical cost net of accumulated depreciation Depreciable capital assets may be reported on the face of the statement as a single item or in major classes Non depreciable capital assets that are either inexhaustible, such as land, or infrastructure assets reported using the modified approach should be reported as separate line items on the Statement of Net Assets if they are significant GASB has defined an inexhaustible capital asset as one whose economic benefit or service is used up so slowly that its estimated useful life is extraordinarily long Construction in progress should be included with the non depreciable capital assets in the Statement of Net Assets Accumulated depreciation should be reported in the Statement of Net Assets on the face of the statement (parenthetically or as separate line item reducing capital assets) Regardless of the presentation in the Statement of Net Assets, the notes to the financial statements January 2010 Texas Education Agency - Resource Guide

19 100 Financial Accounting and Reporting should disclose accumulated depreciation separately in addition to changes in accumulated depreciation The following detailed disclosures should be presented for each major class of capital asset: governmental activities separate from business-type activities, capital assets being depreciated separate from those that are not being depreciated, and historical costs separate from accumulated depreciation For each of the classes, the following information should also be presented, as applicable: Beginning- and end-of-year balances Capital acquisitions Sales or other dispositions Current depreciation expense Additionally, the amounts of depreciation expense charged to each of the functions in the statement of activities should be disclosed Examples of major classes of capital assets are land, infrastructure, buildings and improvements, vehicles, machinery and equipment, and construction in progress Intangible Assets GASB 51, Accounting and Financial Reporting for Intangible Assets is effective for fiscal year 2009/2010 It is a clarification of financial reporting requirements for intangible assets established in GASB 34 Under GASB 51, an intangible asset does not have a physical substance, is nonfinancial in nature, and has an initial useful life greater than one reporting period Some examples are trademarks, copyrights, royalty interests, right-ofway easements, and internally generated computer software, such as websites, or modified commercially available computer software Intangible assets should be disclosed like other capital assets in the financial statements, and the capitalization rules are also the same as other capital assets Amortization is taken over the periods for which service capacity is expected to exist If there is an indefinite useful life, the asset is not amortized On a governmental funds accounting basis, the expenditures should be recognized as expenditures in the 6600 series of accounts In the government-wide statement of net assets, the intangible assets would be reported as part of capital assets The most common type of intangible asset most school districts will encounter is internally generated computer software This includes software developed by district employees or a third party, as well as commercially available software to which more than minimal incremental effort is applied to ready it for use in district operations The district should follow the specified conditions approach to determine which of the three stages of activities are involved in order to determine which costs should be capitalized Texas Education Agency - Resource Guide January 2010

20 Financial Accounting and Reporting 101 Commercially available software that is purchased or licensed by the district without modification (not internally generated) generally meets the description of an intangible asset If a district enters into a licensing agreement with a vendor for multiple components, such as use of the software, modifications to meet the district s requirements prior to going into operation, user training, routine maintenance, and rights to upgrades, the portion for use of the software generally would be capitalized, while user training and routine maintenance would be expensed Another example would be a five-year agreement with annual payments for the right to use the software, which would be reported as an intangible asset along with a long-term liability Depending on the materiality, external modifications of computer software should be capitalized if they result in an increase in functionality or efficiency of the software or extend the estimated useful life 125 Liabilities Liabilities are debt or other legal obligations arising out of transactions in the past, which are payable but not necessarily due Encumbrances are not liabilities; they become liabilities when services or materials for which the encumbrance was established have been rendered or received Liabilities can be divided into two major categories: Current Long-term Current liabilities are those liabilities expected to be liquidated (ie, paid) with expendable available resources In many instances a liability must be payable within 60 days to be considered current Several different accounts that can be considered as current liabilities if those liabilities are liquidated within 60 days or less are: Accounts payable Payroll liabilities Arbitrage rebate liabilities January 2010 Texas Education Agency - Resource Guide