Chapter 7

Objectives: • Account for fixed assets in governments• Account for other asset transactions• Account for marketable securities

What’s included in capital assets

• Land• Buildings• Equipment• Improvements other than buildings• Construction in progress• Infrastructure• Works of art• Intangible assets

Valuation- Governmental Funds

• Historical Cost as in businesses• Can capitalize interest but this is less advantageous for governments and few use it• Donated assets valued at FMV (for proprietary funds increase contributed capital) if held for sale• Trade-ins - new assets reflects FMV of what is exchanged for new asset

Depreciation

• Depreciation in Governmental Funds• Entire cost of asset is expended when received/bought• Not recognized in governmental funds

• Depreciation recognized in proprietary funds • Capitalizing assets isn’t in the objectives for financial resources• If no profit motive so recognition is unnecessary• Recognized on government-wide statements

When received

Expenditure 50,000Cash 50,000

Trade-Ins- Governmental

Old machine 10,000, A/D 4,000FMV of new 17,000, Trade-in 3,500

GF- Expenditures 13,500Cash 13,500

Government-wide trade-ins

• Take off old assets with associated A/D• Have to recognize loss but can defer gain • Only applies to exchange of like assets

A/D 4,000Asset- new 17,000Loss 2,500

Machine 10,000Cash 13,500

Infrastructure

• Listed at historical cost (least useful)• Would depreciation recognition and book values trigger better assessment of the infrastructure?• Without some reporting can users determine stewardship, financial condition and improvement or deterioration of entity?•After GASB 34, must capitalize•Must assess condition every three years

Donated Assets

Not capitalized if the following conditions present: •Held for exhibition, education or research•Protected or preserved•If sold, proceeds used to buy other such assetsIf being held for sale, then held as an asset until sale.

Government-Wide

Capitalized and depreciated Under certain circumstances can exempt from depreciation If exempt, disclose condition and maintenance record GFOA opposed to infrastructure recognition and depreciation

Deferred Maintenance

o Any delayed repairs must be disclosedo Five year record of maintenance

against required maintenance to bring assets up to operating condition

o Helps users assess upcoming expenditures

Impairment of assets

Should test capital assets for impairment when significant change occurs.

Write-off can be measured in several ways Restoration cost approach – estimated cost to

restore the asset to expected utility. Service units – How much asset’s ability to

provide service has eroded. This is written-off Deflated depreciated replacement cost –

Subtract carrying value from current replacement cost at the impaired level

Investments

• Marked to market, no categories • Pressures to increase yields• Must engage in risk management • Repurchase agreements • Derivatives

• Investment pools

Investment Disclosures

• Amount of bank balances collateralized, and uncollateralized • Which securities are insured and held by the government• Amount of securities held by an agent or trustee registered in the government’s name• Amount of securities held by an agent or trust not registered in government’s name

Additional Disclosures

• Credit risk – credit ratings of investments• Concentration of credit risk - if more than

5% in any one issuer• Interest rate risk• Foreign currency risk

Review

Know how to account for fixed assets Know how to account for asset transactions Know how to account for marketable

securities