Chapter 7
Capital Assets and Investments in
Marketable Securities
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Learning Objectives
Accounting for GENERAL CAPTIAL
ASSETS
Accounting for DONATED ASSETS
Trade-Ins
Collectibles
GASB’s controversy on Infrastructure
Assets
Asset Impairments
Investments in Marketable Securities
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General Capital Assets
Associated with the government as a whole
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.
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Common Classifications of GCAs
Land
Buildings
Improvements other than Buildings
Machinery and Equipment
Construction in Progress
Infrastructure (e.g., roads, streets, bridges)
Intangible assets (GASB 51). ―Accounting and
Financial Reporting for Intangible Assets,” (2007).
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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 (e.g., Federal
or state grants)
-Transfers from other funds
-Special assessment bonds or taxes
-Capital leases
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Important Recommendation for
GCAs & DCAs
If funds received from governmental units,
individuals, or organizations is
restricted for the purchase or
construction of specified capital assets
– it is recommended that a Capital
Projects Fund be used.
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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.
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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
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Placing a value (assigning costs) on GCAs
For Purchased Assets
Follow Cost Principle (subject to materiality
threshold)
Invoice cost or historical cost
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
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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
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Placing Value (assigning costs) on DCAs
Donated assets: reported at estimated
fair market value. Exhaustible assets
are depreciated over the remaining
useful lives in their government-wide
statements.
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Infrastructure
Infrastructure is:
o Government’s capital assets
o Immovable, stationary in nature
o Preserved for a longer period. Ex: roads, sidewalks, bridges,
tunnels, 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.*
o *Exception: They need not be depreciated if the government
can demonstrate that they are being maintained/preserved at a
specified condition level.
o 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.
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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.
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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.
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Accounting for Collectibles
GASB No. 34 does not require capitalization
of artworks if they are:
1) held for public exhibition or research 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.
Capitalized
--Revenue upon receipt of gifts should be recognized.
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Accounting for Impaired Assets
GAAP: 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.
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Marketable Securities - Overview
GAAP is 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.
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1) General Investments
Example-Footnote
The City of Austin, Tx in its CAFR for FY 2008
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, 2008. Investments in local
government investment pools are carried at
amortized cost, which approximates fair value.
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Disclosure Requirements
Governments should organize disclosures
by investment type
Governments should disclose their
vulnerability to specific types of risks
o Credit risks
o Concentration of credit risks
o Interest rate risks
o Foreign currency risks
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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 960
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 98.5% of the
City's total investable funds are contained in this
portfolio.
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2) Derivatives
GAAP is GASB Statement No. 53, Accounting and
Financial Reporting for Derivative Instruments which
addresses the recognition, measurement, and disclosure
of information regarding derivative
instruments entered into by state and local governments.
Governments must explain the nature of derivative
transactions including
o Reasons to enter
o Significant terms of the transactions
o Vulnerability to specific types of risks
Credit risks
Concentration of credit risks
Interest rate risks
Foreign currency risks
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Definitions
Custodial Credit Risk: Investments are exposed to
custodial credit risk if the investments are uninsured, are
not registered in the County’s name and are held by the
counterparty.
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.
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3) Repo & Reverse Repo
Illustrative example is on the next
ppt. slide
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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 requires that in Government-wide statements,
governments capitalize capital assets and depreciate them over
their economic lives.
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 through its standards requires disclosure of a wide range of
investment information.
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