Latest audit issues with capital assets

Transcription

1 Latest audit issues with capital assets Presented to Washington Public Treasurer s Association April 11, 2019 Kristen E. Harris, CPA, MBA, Financial Management Specialist Center for Government Innovation O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

2 Today s topics Recent audit issues in GAAP reporting of capital assets; including: Why and how they occur Discussion of underlying accounting theory related to these issues, where applicable Best practices for prevention Questions we have received in the last year Capital asset resources that are available O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 2

3 Management s assertions over financial transactions Existence Classification Completeness Rights and Obligations Valuation O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 3

4 Existence related audit issues Reported assets actually exist. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 4

5 Duplicate assets recorded How did this happen? Two different staff posted same asset Asset recorded in the wrong fund, and then recorded again in the correct fund Other duplications of assets Tips to preventing it... Organize capital asset records so that they are clearly identified Review processes over additions Reconciliation of additions to capital outlay expenditures O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 5

6 Assets disposals missed What happened? Inventory identified missing assets but records were not updated Audit cannot locate assets Audit identifies significant event in minutes (building destroyed by fire) but it was not removed Tips to preventing it... Finance should be in the loop about entity events Review various sources of information for possible disposals Perform inventories and update records O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 6

7 Improper capitalization What happened? Assets below capitalization threshold Assets recorded based on requisition date (led to premature recording) Policies Policies Policies Policies Policies Tips for preventing it: Regularly update and review policies Ensure staff responsible is trained on policies and technical Oversight over what is being capitalized O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 7

8 Identification issues What happened? Records are not clear enough to identify older assets Older capital costs recorded in batches with no identifying information Tips for preventing it: Research and clean up records Record assets, not projects Relate financial assets to operational records See SAO resource on asset identification O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 8

9 Completeness All assets are actually reported. What s missing? O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 9

10 Assets didn t get capitalized (and should have) What happened? Did not record parks land purchase Did not record right-of-way Removed an asset thinking it was a duplicate, but it was not Other unknown causes Tips for preventing it: Have a good process to ensure all assets get recorded Reconcile assets to operational records periodically Consider a full review if there might be past problems O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 10

11 Noncash transactions missed What happened? Capital asset contributions from private developers were identified and recorded for streets, but not for water or sewer (entity was in process of fixing after attending a BARS training). Tips for preventing it: Ensure the department knows what information to provide Review the information for reasonableness and completeness O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 11

12 Valuation All assets are reported at the correct value. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 12

13 What is capitalizable? What happened? Capital asset included only federal reimbursable project costs not total project costs Omitted costs that were necessary to get the asset ready for its intended use. Tips to preventing Adequate training and technical guidance to staff Use of project codes in the GL to capture project costs Secondary review over what is capitalized, including a consideration of what might be omitted O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 13

14 What can you capitalize? Acquisition costs (examples; legal, appraisal, survey, land preparation, demolition costs) if: Directly identifiable with a specific asset Incurred after acquisition is probable or likely to occur Internal costs Yes salaries and wages of those employees working on a given construction project Yes costs clearly related with construction that could be allocated (i.e. costs of field office at project site). No general and administrative costs (i.e. overhead costs) No Interest incurred (new with GASB 89) O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 14

15 Lacking support for value What happened? No support for the value for several capital assets (several years old) No support for several land purchases (one fairly large from 1997). Tips: Follow records retention requirements for capital assets Options: research records, recreate individual asset records, estimate to evaluate reasonableness Make sure this is corrected for moving forward O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 15

16 Construction in progress What happened? Projects are substantially complete but are not reclassified and depreciated: Had a process but not effective Not getting cooperation from operational departments Waiting until final inspection or release of retainage Tips in preventing it: Understand what substantially complete means Open up lines of communication with engineers Initial and secondary review of projects classified as CIP O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 16

17 Construction in progress criteria BARS Date Placed in Service When substantially completed/placed in service such as when it can at least partially perform its intended function Use professional judgement O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 17

18 What happened? Other depreciation errors Not following policy for mid-year additions Errors within the spreadsheet Errors with the accrual of depreciation (i.e. journal entry) Tips for preventing it: Ensure a policy is established, communicated, and followed Have a review process over the depreciation calculation An effective review over journal entries O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 18

19 Mid year conventions BARS guidance states/requires: Depreciation charges should be made for each month the asset is in service Must do for large additions Can do half year or exclude depreciation in first year of operation, so long as it doesn t materially distort operating income O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 19

20 Group/composite depreciation While on the subject of depreciation, please note: It is allowable to depreciate similar and dissimilar assets in a group (i.e. not individually) See guidance in BARS ; some limitations apply Common practice for PUDs Example: All police fleet cars, all roads and bridges of a state, a grouping of buildings O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 20

21 Useful life What happened? Useful life did not get evaluated... resulting in fully depreciated assets. Reasonableness of useful life estimate discussed Useful lives used inconsistent with policy Entity moved dams to non-depreciable Tips: Evaluate fully depreciate items (see info on next slide) Re-evaluate useful lives periodically (and policies). Consider modified approach if you do not think depreciation is appropriate. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 21

22 Useful life What if I have fully depreciated assets still in use? First, make sure these are assets you still actually have Second, evaluate if it is for acceptable reasons Useful life by class is an average some assets will exceed the average Use of composite rates on buildings results in accelerated depreciation Evaluate materiality before recording a prior period adjustment (materiality = effect on depreciation or net book value; not 100% of fully depreciated amount) O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 22

23 Relevant criteria for useful life Entities have a responsibility to review in later years, GASB Implementation guide Q Consider internal sources of useful life information, such as: GASB implementation guide Q property replacement policies for equipment or vehicles property disposal records budget documents Consider several factors when calculating useful life (next slide). GASB 34 (p 161), implementation guide Q O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 23

24 How is useful life calculated? How long it is expected to meet service and technology demands Present Condition Use of the asset Government s own experience Useful life Maintenance Policy Intangibles legal, regulatory, or contractual provisions Construction Type O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 24

25 What if you plan to maintain in perpetuity? Modified approach - alternative approach to depreciating infrastructure assets (GASB 34 par 23-26). Establish condition level Maintain at or above that level Don t depreciate The modified approach does have certain requirements that must be followed. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 25

26 Rights and obligations All assets reflect the legal rights of the entity. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 26

27 Improper capitalization What happened? Port capitalized dredging costs (there is no underlying asset that they own). Tips in preventing it: Perform research on large, unusual transactions Remember assets must be used in operations to be capital Pause if you don t own the underlying asset, or you plan to transfer it to another government right away, these could be barriers to capitalizing O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 27

28 Ownership/GASB references (GASB IG Q7.9.6) Is title to an asset always equivalent to ownership? Generally yes holding title equates to ownership; and the entity that holds title should report the asset in its financial statements. Exception capital lease lessee reports assets under a capital lease although the lessor holds title. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 28

29 Ownership/GASB references (GASB IG Q7.12.2) What if ownership is unclear? Not usually the case with land and buildings Infrastructure may not be as clearly documented in such cases, the government with primary responsibility for managing the asset should report it. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 29

30 Assets must be used in operations : As used in this section, the term capital assets includes land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure, and all other tangible or intangible assets that are used in operations 3 and that have initial useful lives extending beyond a single reporting period O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 30

31 Classification All assets are reported in the proper account and opinion unit. GOVERNMENTAL ACTIVITIES WATER FUND STORMWATER FUND O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 31

32 Misclassification/Opinion units What happened? Capital assets reported in the wrong opinion unit Tips in preventing it: Ensure capital assets are easy to identify in the records, descriptions of assets are meaningful Secondary review of new additions each year Provide training to accounting staff O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 32

33 Determining material thresholds The Questions Is a threshold of XX too high? Can I expense a certain type of asset? Our Answer Local government s can only expense items that otherwise qualify as assets on the premise of immateriality. In setting a threshold, management must evaluate materiality and whether a significant amount of capital assets would be excluded. So long as it has an immaterial effect, management can expense a certain type of asset as supported by its capital asset policy. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 33

34 Raising the threshold The Question If we raise the threshold, how do we handle the assets that are below the new threshold? New Threshold Asset Asset Our Answer You should leave the assets on your books, and just apply the new threshold moving forward. Old Threshold?? O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 34

35 Capitalization The Questions Should I capitalize a water system plan, which included a rate study? Should I capitalize feasibility study costs? City of ABC Our Answer No, it would not be capitalized because it is not associated with the probable construction of any specific asset. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 35

36 Capitalization The Question If two governments are both contributing to a road project, how should the asset get recognized? Our Answer The underlying asset can only be reported by one government, which is the government holding title to the land. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 36

37 Useful life The Question Should I depreciate major building improvements over the time I will recoup the costs through rental revenue? Over the time period for the related debt that paid for it? 10 years? 15 years? 25 years?????????? Our Answer The basis for useful life should be solely based on information about the asset itself and its useful life. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 37

38 Useful life The Question How do I make changes to useful life it if becomes clear an asset will last longer than originally estimated? Future Past Our Answer Prospectively, over the remaining years left. No adjustment is done to prior periods. Equipment of $1,000,000 with accumulated depreciation of 600,000 original life of 10 years but we determine will last another 10 years so $400,000/10 = $40,000/year O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 38

39 Fully depreciated assets The Question Do I write off capital assets now that they are fully depreciated? Our Answer No, you only remove capital assets when they are disposed of. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 39

40 Transfer assets between funds The Question How do I handle an asset transferred between funds? Between the primary government and its component unit? Our Answer This should be done at book value. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 40

41 Annexations The Question How do I handle an annexation? Our Answer This falls under GASB 69 transfers of operations, and should be recorded at carrying value of the transferor. O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 41

42 Highlights on BARS updates Capital asset section in BARS has been further updated New section on transferred assets Revised section on improvements/major maintenance Updates to group/composite depreciation Added limited information about the modified approach Partial update with regard to capitalization of interest, not required with GASB 89 although not yet in effect O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 42

43 Center resources on capital assets Capital asset checklist: //portal.sao.wa.gov/performancecenter/#/address?mid =6&rid=18513 Capital asset identification: //portal.sao.wa.gov/performancecenter/#/address?mid =6&rid=18523 Small and attractive assets best practices: s?mid=6&rid=18520 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 43

44 Tips from capital asset identification resource 1. Use clear descriptions 2. Record assets, not project 3. Evaluate individual asset tracking 4. Leverage operational tracking 5. Plan for asset retirements 6. Decide early about componentization 7. Consider informational value 8. Consider materiality 9. Anticipate complexities 10. Execute a plan and update financial policies O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 44

45 Tip #1: Use clear asset descriptions 1/1/17 Johnson Creek Project Johnson Creek pump station 12/31/ Improvements Courthouse remodel flooring & fixtures There must be enough information to identify the actual asset Have an overall plan Maintain support O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 45

46 Tip #2: Record assets, not projects What assets are included? O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 46

47 Tip #3: Evaluate individual asset tracking When does it not make sense to depreciate assets individually in the financial records? Transformers Utility Poles Meters Create an asset class and depreciate them in a group or in mass such as with similar assets see GASB codification O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 47

48 Tip #4: Leverage operational tracking Operations tracks detailed assets to manage them Finance tracks assets to report them externally Redundant? What opportunities to streamline might exist? O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 48

49 Tip #5 Plan for Removals and Replacements FOR SALE Plan to make removals easy Easy to find out about assets (get notification) Easy to locate the original asset Easy to record it (value) O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 49

50 Tip #6 Decide early if you will componentize General component Building Shell Building finishes Service Systems Building Component Site preparation 50 Foundation 50 Steel Frame 50 Roof cover 20 Construction interior 20 Floor cover 20 Electric 23 Heating, AC 23 Plumbing 23 Fire 23 Elevators 23 Estimated life Depreciation is more accurately measured when based on the useful life of each component. PSU Financial Services Policy Manual O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 50

51 Tip #8: Consider materiality Minimizing recordkeeping costs Ensuring all significant capital assets are capitalized Best Practices for Internal Controls over Small and Attractive Assets portal.sao.wa.gov/performancecenter/#/address?mid=6&rid=18520 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 51

52 Tip #9 - Anticipate complexities Anticipating & planning Accuracy, consistency Saves time & issues later O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 52

53 Tip #10: Make a plan & update policies Strategize Options Brainstorm Strategize How do you want your asset records to look? Options Of all the possibilities, what works best for your unique government? Plan Brainstorm How do you make it effective but also as simple as possible? O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 53

54 Resources Additional Auditor s Office resources Client Help Desk Local Government Services Other Resources GASB Guidance, 1400 Capital Assets (GASB codification) GFOA s book, Accounting for Capital Assets, A Guide for State and Local Governments Municipal Research and Services Center (MRSC) has several resources available to local governments, including current policies over capital assets GAAFR (Blue Book) Chapter 25 O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 54

55 Questions? Kristen E. Harris, CPA, MBA Financial Management Specialist, Center for Government Innovation (360) x115 Auditor s Office Help Desk O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r 55