"Amortization Definition - PDF"
“Intangible Assets…The implementation of GASB Statement 51, Accounting and Financial Reporting for Intangible Assets” GASB Statement 51 Issued: June 2007 Effective: Financial Statements Beginning after June 15, 2009 Need to account for and report separately intangible assets as part of capital assets in the Statement of Net Assets History and Overview Statement issued by GASB to provide additional guidance on intangible assets referenced in GASB Statement 34 How to Implement Statement 51 Developing a Systematic Plan Provides evidence and support to the financial statements Documents management’s decisions Helps gain an understanding of intangible assets for inclusion moving forward Improves financial reporting How to Implement Statement 51 Gain an Understanding of Certain Aspects of Intangible Assets Identification, Recognition Valuation (Measurement) Determining Useful Life (Amortization) Definition and Identification 3 Characteristics to Classify an Asset as an Intangible Asset Lacks Physical Substance Non-Financial in Nature Life Beyond a Single Reporting Period Definition and Identification An Intangible Asset is Recognized when it is Either: Separable (It can be Sold, Transferred, etc) Arises from Contractual or Legal rights Definition and Identification Intangible Assets that do not apply Assets Created for Profit Assets Resulting from a Lease Transaction Goodwill Created from a Combination Definition and Identification Common Examples Easements Water or Timber Rights Patents or Trademarks Internally Generated Computer Software Definition and Identification The Powers of Government Tax, Levy Fees Eminent Domain, Regulate Powers Received by Statute or Charter Draw Water *Not an Intangible Asset* Internally Generated Intangible Assets Patents, Trademarks, Computer Software Condition-approach for Identification (Need to meet all 3 conditions) Determination of the Specific Objective of the project Demonstration of the Technical Feasibility Demonstration of the Current Intension Internally Generated Intangible Assets Computer Software Condition-approach for Identification Preliminary Project Stage. Activities in this stage include the conceptual formulation and evaluation of alternatives, the determination of the existence of needed technology, and the final selection of alternatives for the development of the software. This stage is expensed under GASB Statement 51. Application Development Stage. Activities in this stage include the design of the chosen path, including software configuration and software interfaces, coding, installation to hardware, and testing, including the parallel processing phase and data conversion. This stage is capitalized and amortized over the estimated useful life under GASB Statement 51. Post-Implementation/Operation Stage. Activities in this stage include application training and software maintenance. This stage is expensed under GASB Statement 51. Value (Measurement) GASB “Fair value of an asset is the amount at which the asset could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.” Historical Cost Best Estimated Historical Cost Useful Life (Amortization) Definite Useful Life Amortized over Management’s Estimated life of the asset – however cannot exceed the period to which the service Capacity is limited (normally contractual) Indefinite Useful Life Not Amortized Implementation Plan – Step 1 Identification Create List of types of Intangible Assets to look for Perform a Review of the Governmental Entity List Intangible Assets Found (Description, Date, Historical Cost) Note if Intangible Asset has an Definite or Indefinite Useful life Note if Asset was expensed or capitalized on the date of the transaction Implementation – Step 2 Measurement Indefinite Useful life Historical Cost - move amount to current reporting period No Historical Cost - based on other similar transactions, time value of money, other factors, estimate historical cost. Review all Intangible Assets for Impairment Implementation – Step 2 Measurement Definite Useful life Historical Cost - move amount to current reporting period, calculate estimated accumulated amortization based on useful life and date of transaction No Historical Cost - based on other similar transactions, time value of money, other factors, estimate historical cost, move amount to current reporting period, calculate estimated accumulated amortization based on useful life and date of transaction Review all Intangible Assets for Impairment Implementation – Step 2 Measurement Example: In 2005, the Water District entered into a contract with a land owner, to use the land owner’s logging road, in order to access a timber lot owned by the District . The contract paid the land owner $10,000 for the right to use the road for a 10 year period. As of the reporting period for 2010, the contract meets the definition of an Intangible Asset. To restate the District’s financial statements, management should record an intangible asset $10,000 and Accumulated Amortization of $5,000 for a total value of $5,000 with 5 years of remaining life. Implementation – Step 3 Reporting / Restatement For governments that were classified as phase 1 or phase 2 governments (Phase 1, $100 million or more in revenues, Phase 2, between $10 million and $100 million in revenues) for the purpose of implementing Statement 34 , retroactive reporting is required for intangible assets 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. Implementation – Step 3 Reporting / Restatement If determining the actual historical cost of these intangible assets is not practical due to the lack of sufficient records, these governments should report the estimated historical cost for these intangible assets that were acquired in fiscal years ending after June 30, 1980. Implementation – Step 3 Reporting / Restatement For governments that were classified as phase 3 governments (under $10 million in revenues) for the purpose of implementing Statement 34 , retroactive reporting of these intangible assets is encouraged but not required. Retroactive reporting of intangible assets considered to have indefinite useful lives as of the effective date of this Statement is not required but is permitted. Implementation – Step 3 Reporting / Restatement Retroactive reporting of internally generated intangible assets (including ones that are in development as of the effective date of this Statement) also is not required but is permitted to the extent that the approach in paragraph 8 can be effectively applied to determine the appropriate historical cost of an internally generated intangible asset as of the effective date of the Statement. Implementation – Step 3 Reporting / Restatement The provisions related to intangible assets with indefinite useful lives should be applied retroactively only for intangible assets previously subjected to amortization that have indefinite useful lives as of the effective date of this Statement. Accumulated amortization related to these assets reported prior to the implementation of this Statement should be restated to reflect the fact that these assets are not to be amortized. Implementation – Step 3 Reporting / Restatement After a full list of intangible assets has been obtained and proper measurement has been applied, management should make an assessment whether to restate the financial statements and account for the intangible assets as part of capital assets whether to determine that restatement is immaterial and only record intangibles going forward. Any restatement should apply to the earliest reporting period presented in the financial statements and should be properly disclosed in the Notes to the Financial Statements. Practical Observation As a practical observation, quasi-municipalities such as water and sewer districts or proprietary funds of municipalities for the most part have traditionally followed the accrual basis of accounting and have capitalized assets as part of their normal financial reporting. In many cases some of the more common intangible assets such as easements or computer software have either been already capitalized and depreciated or were capitalized as part of a contribution of land or system contributed from a developer. Part of management’s assessment may include not only restating Beginning Net Assets for these items that may have been expensed but also possibly separating the intangible assets from capital assets already capitalized in the financial statements. Questions & Comments This presentation is intended as a tool to assist the attendees of the New England Water Works Association’s Annual conference in understanding the implementation of GASB Statement 51. The information contained in this publication should be read in conjunction with GASB Statement 51 and related other Statements issued by GASB and should not be used for any other purposes without the expressed consent of Macdonald Page & CO LLC.