Capital Assets and Investments in Marketable Securities

Size: px

Start display at page:

Download "Capital Assets and Investments in Marketable Securities"

Edith Parks
5 years ago
Views:

transactions involving donated assets, trade-ins, and collectibles GASB s controversial provisions regarding infrastructure What special problems asset impairments

1 Chapter 7 Capital Assets and Investments in Marketable Securities Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 1 Learning Objectives Why and how governments account for capital assets in both fund and government-wide statements Why and how governments account for transactions involving donated assets, trade-ins, and collectibles GASB s controversial provisions regarding infrastructure What special problems asset impairments create How investments should be reported Why investments in marketable securities may be of high risk Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 2 1

2 General Capital Assets Associated with the government as a whole, rather than with any specific fund Non financial in character. Distinguished from other capital assets that are specifically associated with activities reported in proprietary and fiduciary funds. Examples: The City of Austin defines capital assets as assets with an initial individual cost of $1,000 or more and an estimated useful life of greater than one year. The City of Houston defines capital assets as assets with an initial cost of more than $5,000 (amount not rounded) and an estimated useful life in excess of four years. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 3 Common Classifications of GCAs Land Buildings Equipment Improvements to land and buildings Construction in progress Works of art Historical treasures Infrastructure (e.g., roads, bridges, tunnels, drainage system) Intangible assets Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 4 2

3 Acquisition and Common Financing Sources for GCAs & DCAs Acquisition: Purchase, Construction, Contributed/Donated (DCA), Annexed, Capital Leases, Foreclosure, Eminent domain, Escheat Financed: Tax-supported bonds, Grants from other governmental units, Transfers from other funds, Special assessment bonds or taxes, Capital leases Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 5 Accounting for GCAs Government-wide Statements: Capitalized in the governmental activities column Depreciated Fund Statements: Full Cost debited to Expenditures in the appropriate governmental fund when the assets are acquired. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 6 3

4 Accounting for GCAs - Example Example: The Sample city purchased office equipment for the Mayor s office and paid $50,000 cash from the General Fund. General Fund: Dr. Cr. Expenditures-Capital Outlay $50,000 Cash 50,000 Gov t wide (Gov tal Act.)*: Equipment $50,000 Net Assets, Invested in Cap Assets 50,000 *Note: This entry is not made on the books. It is only a conversion at eoy Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 7 Placing a value (assigning costs) on GCAs For Purchased Assets: Capitalized cost should include purchase price + transportation + installation costs For land: Legal fees + title fees + appraisal costs + closing costs + costs of demolishing existing structures that cannot be used All other necessary and reasonable costs incurred to put an asset into use (less cash or other discounts and financing charges) For constructed assets: Direct labor and materials + overhead + architect fees + insurance premiums Capitalize interest on constructed assets per GASB Std. # 34 Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 8 4

5 Placing Value (assigning costs) on GCAs (Miscellaneous items) Initially unrecorded assets (i.e. discovered assets or a new inventory of assets) Record at estimated cost Foreclosures 1) Record at aggregate of accumulated taxes, interest, penalties, legal cost, OR 2)FMV whichever is lower Trade-Ins Record at FMV of the new asset Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 9 Placing Value (assigning costs) on DCAs Donated assets: reported at estimated acquisition value (replacement cost). Exhaustible assets are depreciated over the remaining useful lives in their governmentwide statements. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter

6 Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 11 Depreciation included in Expenses Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter

10 Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 19 Infrastructure Infrastructure is: Government s capital assets Immovable, stationary in nature Preserved for a longer period. Ex: roads, sidewalks, bridges, tunnels, highways, drainage systems, water and sewer systems, dams, lighting systems etc. GASB 34: requires that infrastructure be accounted in the same manner as the capital assets.* *Exception: They need not be depreciated if the government can demonstrate that they are being maintained/preserved at a specified condition level. To avoid recording depreciation, governments must: - perform condition assessments at least every three years; - have an up-to-date inventory of eligible assets - estimate the amount to maintain and preserve the eligible assets. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter

11 TWO Approaches for Infrastructure Accounting Traditional approach: Capitalize & Depreciate Modified approach: All expenditures incurred to maintain and preserve those assets should be expensed. Additions and improvements should be capitalized. Assessed condition of the assets and the basis of that assessment must be disclosed. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 21 Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter

12 Expense for either: -Depreciation or - Maintenance Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 23 Expenditure for either: -Maintenance or -Whole Asset ( Capital Outlay ) Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter

13 Criticisms of Statement No. 34's Approach to Infrastructure No indication that data on the historical cost of infrastructure would be used. No need to capitalize those assets because they cannot be stolen or misused. Comparison between measure of output (performance) and monetary value assigned to the assets is not meaningful. Infrastructure assets seldom have alternative uses. Past construction costs are of no significance. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 25 Transition -- Infrastructure Prospective reporting is required at effective statement date Retroactive reporting is required as follows: -Phase 1 governments: June 15, Phase 2 governments: June 15, Phase 3 governments: Never Retroactive reporting is required only for assets acquired after June 30, Illustration: For example, in 2008 the replacement cost of a road constructed in 1994 was $10 million. A road construction price level index was 90 for 1994 and 120 for The road would be recorded at an initial cost of $7.5 million ($10 million times 90/120). If the road had a useful life of 30 years, then at the end of 2008 (after 15 years, it would be 50% depreciated. Hence it would have a book value of 50% of $7.5 million -- $3.75 million. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter

14 Accounting for Collectibles GASB No. 34 does not require capitalization of artworks if they are: 1) held for public exhibition, education,or research in furtherance of public service, rather than for financial gain AND 2) protected and preserved AND 3) the proceeds from sale of the collectibles are used to acquire other collectibles. Art and collectibles that do not meet these conditions must be capitalized. For capitalized art revenue upon receipt of gifts should be recognized Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 27 Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter

15 Accounting for Impaired Assets GASB Std. # 42 Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. Assets that have declined in their service utility significantly and unexpectedly are considered impaired. If impaired: a portion of the asset s historical cost representing the impairment must be written off. Impairment amount measured by 3 methods: - Restoration cost approach - Service Units approach - Deflated depreciated replacement cost approach. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 29 Marketable Securities - Overview GASB Stmt #31 Accounting and Financial Reporting for Certain Investments and for External Investment Pools. 1) General Investment Governments either directly invest in stocks or bonds or small governments may participate in investment pools maintained by other governments. 2) Derivatives Governments typically engage in derivative transactions not to speculate but, rather, to reduce the overall investment risk. 3) Repurchase Agreement & Reverse Repurchase Agreement Repurchase agreement (Repo): short-term investment in which investor transfers cash in exchange for securities and the cash + plus interest is repaid in exchange for the same securities. Reverse Repurchase agreement (Reverse Repo):Here, government is the borrower rather than the investor. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter

16 1) General Investments Example-Footnote The City of Austin, TX in its CAFR for FY 2013 had the following footnote on investments. Investments Certain investments are required to be reported at fair value, based on quoted market prices. Realized gains or losses resulting from the sale of investments are determined by the specific cost of the securities sold. The City carries all of its investments in U.S. government and agency debt securities and money market mutual funds at fair value as of September 30, Investments in local government investment pools are carried at amortized cost, which approximates fair value. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 31 Disclosure Requirements Governments should organize disclosures by investment type Governments should disclose their vulnerability to specific types of risks - Credit risks - Concentration of credit risks - Interest rate risks - Foreign currency risks Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter

17 City of Houston: Notes on Investments These funds are managed internally by City personnel. The investments listed below do not include the City's three pension funds, which are described elsewhere in this report. 1. General Investment Pool 9900 The General Investment Pool consists of all working capital, construction and debt service funds which are not subject to yield restriction under IRS arbitrage regulations. The funds of the City's enterprise systems, as well as the general fund are commingled in this pool in order to gain operational efficiency. Approximately 99% of the City's total investable funds are contained in this portfolio. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 33 Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter

20 2) Derivatives GASB Stmt. No. 53 Accounting and Financial Reporting for Derivative Instruments Derivatives should be reported at their fair values Changes in fair value should be reported as gains or losses on both fund and government-wide statements of changes in net position Exception: derivative instruments that represent effective hedges against other assets or liabilities should be deferred and reported on balance sheets as deferred inflows or outflows Extensive disclosure - nature of derivative transaction - reasons why they were entered - discussion of exposure to credit risk, market risk, and legal risk - disclose significant terms and any violations of legal, regulatory, or contractual provisions by investing in derivatives Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 39 Definitions Custodial Credit Risk: Investments are exposed to custodial credit risk if the securities are uninsured, uncollateralized, not in the name of the government itself, or not in the physical possession of the government. Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. Concentration of credit risk is the risk of loss attributed to the magnitude of an investment in a single issuer. Interest Rate Risk: All investments carry the risk that changes in market interest rates will adversely affect the fair value of an investment. Foreign Currency Risk: Foreign currency risk is the risk that fluctuations in the exchange rate will adversely affect the value of investments denominated in a currency other than the US dollar. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter

21 3) Repo & Reverse Repo Repo Transaction $Cash Securities Reverse Repo Transaction Securities $Cash Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 7 41 Summary Governments report general capital assets as expenditures when they construct or acquire them in their governmental fund statements which are accounted for on a modified accrual basis. Thus governments maintain the off the balance sheet record of these assets. GASB Std. # 34 mandates that governments account for their infrastructure assets just as they do other capital assets. However governments are not required to depreciate infrastructure assets if they preserve them at a specified condition level. Investments made by governments are of concern because of the substantial risk that investors can incur through default, declines in value and even fraud. GASB standards require that with few exceptions all investments, should be reported at fair value. As a consequence, gains and losses in value must be recognized in a flows statement each period as changes in fair value occur. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter

Chapter 7. Capital Assets and Investments in Marketable Securities. Chapter 7 Granof-5e 1

Chapter 7. Capital Assets and Investments in Marketable Securities. Chapter 7 Granof-5e 1 Chapter 7 Capital Assets and Investments in Marketable Securities Chapter 7 Granof-5e 1 Learning Objectives Accounting for GENERAL CAPTIAL ASSETS Accounting for DONATED ASSETS Trade-Ins Collectibles GASB