1p. Fixed Asset Capitalization Policy.1
1
I.
CITY OF
�
CHANNA
690 COULTER DRIVE • P.O. BOX 147 • CHANHASSEN, MINNESOTA 55317
(612) 937 -1900 • FAX (612) 937 -5739
MEMORANDUM
Date: 10/18/96
To: Pam Snell, Finance Director
From: Cathy Holen, Accountant II�
RE: Fixed Asset Capitalization Policy
' The City of Chanhassen has made a significant investment in general fixed assets and proprietary fund
fixed assets and intends to maintain an accurate and up -to -date fixed asset system for purposes of
financial reporting, for capital outlay planning, and for safeguarding & other internal controls.
' Based on its objectives, it would be in the City's best interest to maintain a listing of items $500 or
more.
It is therefore recommended that the City of Chanhassen adopt a formal capitalization policy requiring
that all purchases of individual items (or groups of items intended for use as a single unit or groups of
items intended for common use at a single confined location) for $500 or more and having a useful
life of more than 2 years be classified as capital expenditures and recorded as fixed assets in the
general fixed asset account group or in the appropriate proprietary fund.
1
ions for a Fixed Asset System
Insurance values.
•: Asset replacement and capital budgeting.
❖ Safeguarding of assets & other internal accounting
controls.
Utility rate setting (depreciation, system replacement
policy).
Internal Service Fund charges and asset replacement
internal escrow charges.
❖ Grant reimbursement of indirect costs.
❖ Grant compliance (Circular N & Single Audit Act).
September 21, 1995 MGFOA Annual Conference
:ons for a Fixed Asset System
❖ Sale or disposition of property - conformance with
Statutes.
Financial reporting (bond rating, Certificate of
Achievement, unqualified audit opinion).
❖ Calculating Service Efforts and Accomplishments
(SEA). Determining the full cost of delivered
services.
Potential requirement to report "Capital Use
Charges ". See Preliminary Views of the GASB on
major issues related to Government Reporting
Model: Core Financial Statements.
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r
I
September 21, 1995 MGFOA Annual Conference
1
n
September 21, 1995 MGFOA Annual Conference
cies & Procedures
❖ Components:
- 100 chairs for Council Chambers @ $150 each or
- A $2,500 work station consisting of detachable
component partitions, table tops, drawers & shelves or
- Sets of recycle containers for 20 different locations
throughout City Buildings costing $350 each
September 21, 1995
MGFOA Annual Conference
cies & Procedures
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:• Capitalization Threshold:
- 80 / 20 rule - 80% of asset value is in 20% of the assets
- Greater threshold results in significantly lower number of
'
assets to control
- Greater threshold results in less comprehensive data on
assets owned
- Tiered control systems may give greatest ilexibility:
'
• Inventory and valuation control - tagged or identified and
capitalized asset
♦ Inventory control only - tagged or identified, but not
'
capitalized
• Tagged only (the appearance of a control can be a deterrent to
theft or misuse of City assets)
n
September 21, 1995 MGFOA Annual Conference
cies & Procedures
❖ Components:
- 100 chairs for Council Chambers @ $150 each or
- A $2,500 work station consisting of detachable
component partitions, table tops, drawers & shelves or
- Sets of recycle containers for 20 different locations
throughout City Buildings costing $350 each
September 21, 1995
MGFOA Annual Conference
'Lti +iv:
..,? cies & Procedures
Sample capitalization decision chart for components
Do individual
components meet
the threshold?
Are components
intended for use as
no a single unit?
Intended for
common use as at
no a single confined
location?
yes
yes I yes
no
Don't
Capitalize
Capitalize
September 21, 1995
MGFOA Annual Conference
cies & Procedures
•:• Components (cont.):
- Consistency is important,
- Review objectives and resources. For example, if financial
reporting is the primary objective or if resources are scarce, the
capitalization policy may result in the least number of assets to
control.
- Group capitalization and depreciation sometimes used, but
generally only by very large organizations.
September 21, 1995 MGFOA Annual Conference
1
riminary Planning
Determine which objectives you are expecting your
system to satisfy:
- Financial reporting
- Insured values
- Maintenance contracts
- Vehicle licensing
- Replacement values
- Capital asset budgeting
- Equipment maintenance scheduling
- Other
September 21,1995
MGFOA Annual Conference
y ` liminanj Planning
❖ Increased complexity increases ongoing efforts to
maintain and reduces the likelihood of timely
maintenance. Be realistic in setting your objectives &
goals.
Involve those who will benefit from the system and
be required to assist in the ongoing maintenance.
Assign responsible staff for project management.
Establish policies regarding capitalization criteria,
depreciable lives, components, etc.
September 21, 1995
MGFOA Annual Conference
Audit Procedures
Determine the fixed asset capitalization value. State laws often establish requirements
for the minimum value to be capitalized. The Florida Auditor General's office, for
example, requires all assets in excess of $500 to be capitalized in the GFAAG, and in the
absence of any state law or regulation, the author recommends that the value be at least
50 Some governments have adopted $1,000 as their capitalization value.
A government that establishes this value early can avoid problems later because
personnel taking the inventory will know not to include items with a lower value than
the capitalization value.
OBSERVATION: The author has seen several governmental entities that had inventoried
virtually all assets of any value, including pencil sharpeners, can openers, and folding chairs.
A lot of work was required to delete those nominal value items from the inventory.
2, Prepare inventory sheets to record the following information:
— Fixed asset label number (see below)
— Description of item, including color or other identifying characteristics
— Serial number, if any
— Model number, if any
— Location— department, division, office (need to be able to find the asset next year)
— Cost, if known
— Vendor, if known
— Date purchased, if known
— Age, if known
— Other information needed
3. Obtain fixed asset labels that can be affixed to the item being inventoried. These labels
are available from several sources and can be affixed easily to the item. In placing these
labels on the items, the author strongly recommends that a standard location be used for
similar items. For example, all desks will have the label affixed to the outside right hand
corner of the desk. All chairs will have the label affixed under the bottom of the seat.
Using a common location will make it easier to perform the inventory in subsequent
years.
OBSERVATION: Without a common location, an auditor may be unable to locate the label
and assume the asset was not inventoried. Accordingly, he or she may place another label on it.
The author has seen assets with two and three labels on them in different locations.
4. Enter the information from the inventory sheets above into a computerized fixed asset
system or a manual ledger.
5. Determine the value of the asset using actual costs, estimated historical costs, or market
value at the time of donation. For items whose costs cannot be estimated, it is acceptable
to make an "educated guess."
502 / LOCAL GOVERNMENT AUDITS