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HomeMy WebLinkAbout[04d] Capital Asset PolicyJL'�� crry uFNT j0SIrrH Council Agenda Item 4(d) MEETING DATE: May 19, 2011 AGENDA ITEM: Capital Asset Policy — Requested Action: Amend the Capital Asset Policy indentifying the useful life of infrastructure based on industry standards. SUBMITTED BY: Finance BOARD /COMMISSION /COMMITTEE RECOMMENDATION: None PREVIOUS COUNCIL ACTION: City Council approved the financial policy book in March 2009. The capital asset policy is included in the book. BACKGROUND INFORMATION: Staff is recommending an assessment policy that describes the useful lives of infrastructure assessed by the City. The useful lives recommendations are based on industry averages. Staff is recommending the capital asset policy be amended for useful lives to mirror the assessment policy. The useful lives are consistent with GASB reporting. In addition, the Government Accounting Standards Board (GASB) adopted a new statement (GASB No.51) to assist governmental entities to account for intangible assets such as software, easements, land rights, patents and trademarks. The GASB went into effect for reporting year 12/31/10 for the City of St. Joseph. The City does have intangible assets to report with easements and sewer capacity rights with the City of St. Cloud. Revisions are recommended in the capital asset policy to reflect the new Standard. Finally, the City uses Banyon software to track capital assets. The software does not provide an option to calculate depreciation on a full month convention; therefore, staff is recommending changing the depreciation method to straight line with a full year convention. The financial impact is insignificant and immaterial with the minimum number of new assets and disposed assets each year. Amendments to the capital asset policy are notated for Council's review and consideration. BUDGET /FISCAL IMPACT: None ATTACHMENTS: Request for Council Action - Capital Asset Policy ........... 4(d):1 -2 Draft Revision — Capital Asset Policy .. ............................... 4(d):3 -9 Auditor's Recommendation — GASB No. 51 ..................... 4(d):10 REQUESTED COUNCIL ACTION: Adopt the amendment to the Capital Asset Policy. 4(d):2 THIS PAGE INTENTIONALLY LEFT BLANK 4(d):2 CAPITAL ASSETS Purpose The capital asset policy is to provide guidance to management for recording, depreciating and tracking the capital assets of the City. Provisions A capital asset is defined as a financial resource that is tangible or intangible in nature, complete in and of itself, and is not a component of another. The asset has a useful life of not less than three (3) years, is not a repair part or supply item and has a value greater than the capitalization threshold of $1,000 or is considered to be an asset for which control is desirable. An inexhaustible land improvement is defined as an improvement that does not require maintenance or replacement, expenditures to bring land into a condition to commence assembly of structures (but not part of the structure), and expenditures for land improvements that do not deteriorate with use or passage of time. The additions are part of the cost of the land and are generally not exhaustible; thus, not depreciable. A capital lease is a lease that may be capitalized as a City capital asset if any one of the following criteria applies: • Ownership of the property transfers to the lessee by the end of the lease term, • The lease contains a bargain purchase option, • The lease term is equal to 75% of the estimated useful life of the asset, or • The present value of the minimum lease payments exceeds 90% of the fair value of the asset at the beginning of the lease. Capital Assets to be inventoried The following capital assets are considered inventory items and must be carried on the property records of the City: All land and land improvements (inexhaustible) regardless of value, Capitalized capital assets with a unit cost (including sales tax and ancillary costs) of $1,000 or greater. These assets would include the following: o Land improvements (exhaustible): ■ Fencing and gates • Landscaping • Parking lots /driveways /parking barriers • Outside sprinkler systems • Recreation areas and athletic fields (including bleachers) • Disc golf course • Paths and trails • Stadiums • Swimming pools /tennis courts /basketball courts • Fountains ■ Retaining walls • Buildings and building improvements, • Infrastructure and infrastructure improvements, 400 o Plant and lines, o Easements,— Added infrastructure • Sewer treatment and conveyance rights, / • Furniture, vehicles, equipment, machinery, • Leasehold improvements, and • Construction in progress ■ The City recognizes that construction in progress is on -going and that when deemed complete by Administration and City Engineering staff, construction in progress will be listed as an acquired asset and normal depreciation procedures will be followed. Accountable assets and highly pilferable property with a unit cost (including sales tax and ancillary costs) less than $1,000 but greater than $350 identified as small and attractive will not be capitalized, but will remain inventoried. These assets are as follows: o Communications equipment, • Audio equipment, • Video equipment, • Cameras and photographic projection equipment, • Microcomputer systems, laptops and notebook computers, pda's, • Other IT accessorial equipment and components (i.e. scanners, data displays, etc.), and • Radios, television sets, tape recorders, video cassette recorders, digital video devices, and video cameras. Value of the Capital Assets to be inventoried: The capital asset is valued at its historical value or the estimated historical value if the actual value is not known at the time of purchase. The cost of a capital asset should include capitalized interest and ancillary charges necessary to place the asset into its intended location and condition of use. Donated assets will be reported at their estimated fair value at the time of donation, plus ancillary charges if any. Ancillary costs to be included in the value of the capital asset include the following items: • Freight and handling charges (including shipping insurance), • Cost of construction, • Allocation of fringe benefits and overhead expenses, • Insurance premiums during construction, • Installation and inspection costs, • Appraisal and negotiation fees, • Title, legal, commission, closing and survey fees incurred in connection with the acquisition of land, • External architectural, engineering, and design costs, • Land preparation and demolition costs of existing buildings or other structures with the intent of using the cleared land, and • Other charges incurred to place the asset into use. Costs to be excluded from the cost of a capital asset include the following items: • Other charges incurred to place the asset into use. • Demolition, removal and disposition of existing equipment in preparation for a new project, EXCEPT for the cost to remove and demolish a building or other structure existing at the time of acquisition of land, • Relocation and rearrangement of existing equipment, • Start -up, including the costs of correcting flaws, 4(d):4 • Licensing and registration fees for vehicles and operational equipment, • Extraordinary costs incidental to the construction of capital assets, such as those due to lightening, flood, fire, or other causes, • For asset exchanges, monies paid or received as part of the exchange, • Costs to maintain and repair assets (including street seal- coating), • Costs of abandoned construction, • Administrative and executive salaries, even though a portion of the salary may be related to the acquisition of the capital asset, and • Interest related to the construction period. Inventory Records Requirements The main control of asset inventory records will be the responsibility of Finance department. The Finance department will update inventory records when applicable or at the fiscal year end. Department heads will be responsible for tagging capital assets within their department, maintaining necessary control, and maintenance of the asset. Department heads will be responsible to notify the Finance department of changes to any assets acquired, such as but not limited to, additions, disposal of assets due to damage, there is no longer any usefulness of life, additions or repairs that may increase the usefulness of life. The City shall use Banyon software to track capital assets and Laser fiche for bar coding assets. Physical Inventory The City will conduct a physical inventory at least once every other fiscal year for all inventorlable capital assets. Each Department head is responsible for all capital assets within their department. However, in order to ensure objective reporting of inventory items, physical inventories should be performed by personnel having no direct responsibility (custody and receipt /issue authority) for assets subject to the inventory count. If it is not feasible to use such personnel for any part of the inventory, then those portions are, at least, to be tested and verified by a person with neither direct responsibility for that portion of the inventory nor supervised by the person directly responsible. The Department head is responsible for scheduling the inventory count at the minimum annual basis. The Finance department will also conduct periodic spot checks of the capital assets at least two times per year. The spot check will not be a full inventory count, but a random sampling selection of inventorial assets. The Finance department is responsible for writing procedures for inventorying capital assets and what to do if changes to the records are required. Depreciation Method The City will use the straight -line method with the full th yearconvention to depreciate all of its exhaustible capital assets. Property placed in service at any time during a given year will be treated as if it had been placed in service on the first day of that- a4ew -h year. If property is disposed of prior to the end of the estimated useful life, no depreciation is allowed for the MORth year of disposition. Land, inexhaustible land improvements, easement and construction in progress will not be depreciated. 4(d):5 Useful Lives of Capital Assets The following table is a guideline to use when determining the life of a capital asset. A capital asset should normally be within the range given; however, there are exceptions to the rule. To be considered a capital asset, the item must have a useful life of three or more years. Land Improvements: Landscaping 5 -15 years Paving projects 15 -20 years Fencing, signs, and other 10 -20 years Buildings, Non -Park 40 years Buildings, Park 30 years Building Improvements 15 years Infrastructure and Infrastructure Improvements: Street Construction /Reconstruction 15 years Added Street Overlays 10 years 25 years infrastructure and life Curb & Gutter /Sidewalks Residential Alleys 15 years Non - Residential Alleys 15 years 40 - 6A year Changed life Water Systems Sanitary Sewer Systems 40 - 6A years to 40 years Storm Sewer Systems 40 - 60 year St. Cloud Sewer Treatment Rights: Wastewater Treatment Facility 50 years Wastewater Conveyance System 20 years 5 -10 years ture Land Furniture & Fixtures Vehicles: Light general purpose 5 years Heavy general purpose 5 -7 years Fire Trucks 20 years Equipment: Computer and Peripherals (Hardware) 3 -5 years Computer (Software) 3 years Office 3 -7 years Playground 5 -7 years Fire /Police 5 -7 years Street /Sewer /Water /Other 5 -7 years Machinery 5 -7 years Reporting Requirements: The Finance Director will provide a written report to the Administrator and City Council after each inventory is completed. Any significant deficiencies in capital asset tracking will be reported to the Administrator and City Council as soon as they are discovered with corrective action plan suggestions. The City's Auditors will present an annual overview of the City's financial position, including capital assets, to the City Council. 4(d):6 Other Considerations Specific procedures for maintaining the capital asset records will be provided and updated by the Finance department. The Finance department's capital asset tracking procedures are attached to this document, but are not approved by City Council as part of the Capital Asset Policy. CAPITAL ASSET TRACKING PROCEDURES Purpose The capital asset procedures are a detailed account for maintaining records and are intended to be a guideline for staff and to give insight to the policy makers to the internal controls taken to maintain creditability of the assets held by the City. Capital Asset Tracking The main inventory control of capital assets will be held within the Finance department of the City. The Finance Director and staff will maintain all records of acquired, disposed, or changes that may reduce the useful life or increase the useful life of an asset within the inventory of capital assets. Assets will be inventoried and categorized following the Capital Asset Policy set forth by the City Council. The physical inventory record shall include but is not limited to the following data elements: *Location and department of asset • Acquisition date •Purchase price including any ancillary costs • Description of asset •Useful life • Local tag number •Manufacturer • Serial and /or model number •Quantity • Parcel number (Land use only) Physical Inventory A full physical inventory will be conducted at least once every other fiscal year by City staff not directly responsible or supervised for the inventoried department assets. If it is not feasible to use such personnel for any part of the physical inventory, then at least portions will be tested and verified by staff not directly responsible or supervised for the department assets. A final bi- annual written report will be submitted by the Finance Director to the Administrator and City Council. A physical inventory by department will be conducted annually to include all insurable and capital assets. The annual department inventory shall be conducted by each department and conclude with a statement of the completed inventory. The statement should read the inventory was completed on the exact number of items inventoried, who conducted the inventory, any findings and corrective action plans, and the department head's approving signature. The inventory results will be turned into the Finance Director. The Finance Director will report the inventory results to the Administrator and City Council. A physical spot check inventory will be conducted at least two (2) times per year by the Finance department to test for existence and completeness. The Finance department will randomly select ten (10) inventoried items from.the capital asset tracking system (Banyon) to the locations the asset is assigned to. The Finance department will randomly select ten (10) assets around the City to verify the assets are on the capital asset tracking system. Further, the assets' barcode information will be verified in Laser fiche. 4(d):7 Inventoried Capital Assets Missing • When capital assets from the master inventory control list are missing, it will be necessary to notify the department head that is responsible for the asset. • The Department head will need to determine if the asset has been transferred to different department, placed in storage, scrapped or converted to another asset and complete the necessary Capital Asset Acquisition /Disposal /Change Form describing the events surrounding the loss of asset. • If there are a significant number of assets missing or the value of the missing asset exceeds $1,000 the department head must determine why there is a problem and submit a plan of action to correct the situation to the Administrator, and copy the Finance department. Capital Assets Located but not Inventoried • When capital assets have been located but are not on the master inventory control list, a search of the complete inventory list should be completed. • The Capital Asset Acquisition /Disposal /Change Form will need to be completed by the department head and the Finance department. • If there are a significant number of assets located, the department head must determine why there is a problem and submit a plan of action to correct the situation to the Administrator, and copy the Finance department. Upon completion of the physical inventory personnel will sign certifying all findings and actions that have been taken to correct the inventory. These reports will then be given to the Finance Director for review and for final approval by the Administrator and City Council for the corrective action to the master inventory control list. Additions to Capital Assets The department head is ultimately responsible for ensuring Capital Asset Acquisition /Disposal /Change Forms are provided to the Finance department. The Finance department will monitor City invoices for possible capital asset additions. If the Finance department receives an invoice for an item that should be added to the capital asset tracking system, the Finance department will contact the department head to complete the proper forms. Specific procedures for capital asset additions are as follows: • Upon receipt and acceptance of an inventorial capital asset the department head is responsible for supervising the addition of the asset to the inventory system. • Capital Asset Acquisition /Disposal /Change Forms shall be initiated by the gaining department recognizing that an inventory item has been delivered and property ownership has been transferred to the City. To be complete the information on this form will have to be completed between the Finance department and the department head. • If an appraisal is completed to value the asset, the appraisal report must be submitted to the Finance department to properly value the capital asset. • The Finance department will issue the local tag number to the department head, based on the department and the sequential number of the inventory system. The department heads are responsible for making sure the capital asset receives a bar coded tag. Besides the procedures listed here, the department head must follow Minnesota Statutes and the City's Purchasing Policy relating to acquiring of capital assets. 4(d):8 Disposal of Capital Assets The department head is responsible for notifying the Finance department for capital assets that are disposed. The Finance department will review cash receipts for assets sold also. Specific procedures for capital asset disposals are as follows: • Department heads will first notify the Finance Director of the potential disposal of a capital asset. • The Finance Director will determine the proper procedure to dispose of the asset. If the item has no value or is cost prohibitive to sell, the department head will be notified to make the asset available to other cities, schools, counties, or the State of Minnesota before making it available to the general public. • The Finance Director will notify the Administrator of the asset to be disposed and the matter will be placed on the next City Council agenda for the Council to declare the property surplus. Once the Council has declared the property surplus the appropriate disposal method will be followed. • Department heads are responsible to complete the Capital Asset Acquisition /Disposal /Change Form indicating if the asset was sold or junked. Sold assets will be accompanied with any appraisal information, bill of sale, receipt showing value of sale, and who acquired the asset. • After completing the Capital Asset Acquisition /Disposal /Change Form, the form will be returned to the Finance department for recording of disposed asset to the capital asset tracking system. • The Finance department will enter any receipts for the sale of a capital asset through Banyon's Point of Sale software. The receipt will be coded to the proper fund and recorded as an "other finance source" for the sale of a capital asset. • The department head is responsible for removing the local tag number and any other identifying marks that would indicate the asset belonged to the City. The tag should be turned into the Finance department with the disposal form if salvageable. In addition the guidelines listed above, all disposals must follow Minnesota Statutes relating to disposal of equipment (assets). Changes to Capital Assets There are various times that a capital asset may require a change. A few examples are: • The asset transferred to another department, • The asset is damaged causing the book value to be in excess of the actual, • The asset's life is extended or decreased from the original estimated life, or • An appraisal had been completed and found that the fair market value of the asset should be changed. o Whenever there is a question as to change in value, the department head and Finance Director should determine if a change in value should occur and the Capital Asset Acquisition /Disposal /Change Form completed and signed by the department head. 4(d):9 CITY OF ST. JOSEPH Stearns County, Minnesota RECOMMENDATIONS FOR MANAGEMENT December 31, 2009 CONSIDER THE IMPLICATIONS OF GOVERNMENTAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 51, ACCOUNTING AND FINANCIAL REPORTING FOR INTANGIBLE ASSETS Governments possess many different types of assets that may be considered intangible assets, including easements, land rights, patents, trademarks and computer software. Currently, there is an absence of sufficiently specific authoritative guidance that addresses questions regarding whether and when intangible assets should be considered capital assets for reporting purposes, resulting in inconsistencies in the accounting and financial reporting of intangible assets among state and local governments, particularly in the areas of recognition, initial measurement and amortization. Governmental Accounting Standards Board (GASB) Statement No. 51 establishes accounting and financial reporting requirements for intangible assets to reduce these inconsistencies, thereby enhancing the comparability of the accounting and financial reporting of such assets among state and local governments. This Statement requires that all intangible assets not specifically excluded by its scope provisions be classified as capital assets. The Statement identifies an intangible asset as having the following three characteristics: • It lacks physical substance. • It is nonfinancial in nature. • Its useful life extends beyond a single reporting period. The requirements of this Statement are effective for the year ending December 31, 2010. The provisions of this statement generally are required to be applied retroactively. For governments that were classified as phase l or phase 2 governments for the purpose of implementing GASB Statement No. 34, retroactive reporting is required for intangible assets acquired in fiscal years ending after June 30, 1980, except for those considered to have indefinite useful lives as of the effective date of this Statement and those that would be considered internally generated. Retroactive reporting of intangible assets by phase 3 governments is encouraged but not required. CONSIDER THE IMPLICATIONS OF GASB STATEMENT NO. 54, FUND BALANCE REPORTING AND GOVERNMENTAL FUND TYPE DEFINITIONS GASB Statement No. 54 was enacted to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing governmental fund type definitions. The initial distinction that is made in reporting fund balance information is identifying amounts that are considered nonspendable, such as fund balance associated with inventories or prepaid expenses. This Statement also provides for additional classification as restricted, committed, assigned and unassigned based on the relative strength of the constraints that control how specific amounts can be spent. 4(d):10