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Tangible Capital AssetsAlberta Regional GFOA Workshops Series Two
January 2008
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Workshop Overview
Provincial and local updates Capital policy Impact on budgets and financial reports Transition Examples 2007 Note Q & A/small groups
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TCA Project Update – Provincial
Infrastructure valuation manual Bridge inventory & valuation Balanced budget legislation Financial reporting & budgets Position papers
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Bridge Inventory & Valuation
Access AIT bridge information Bridge files
Inventory Data Value Accumulated amortization
Audit trail
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Guideline Amendments
Capitalization thresholds Valuation date for counties Policy guideline - Amortization start and
end date
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Position Papers – Priority One
Government partnerships Undeveloped road allowances and rights of
way Networks/components – materiality,
valuation Biological assets Grouping and pooling Contributed assets
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Position Papers – Priority Two
Multiple topics Gravel pits Infrastructure with excess capacity and partial
retirements Land leases Provincial $1 transfers Fully depreciated assets still in use Municipal reserves
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Position Papers – Priority Two (cont)
Multiple topics Treatment of ‘sweat’ equity Tax sale properties acquired by municipality ‘Construction in progress’ Useful life and liability relationship Link to full cost recovery requirement by
Environment
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Position Papers – Priority Three
Implementation accounting entries
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TCA Project Update - Locally
What is your project status?
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Presentation
Accounting
Write-downs
Disposals
Amortization
Segmentation
Aggregation
Thresholds
Principles
Scope
Policy
Capital Policy Framework
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Capital Policy
Authority, purpose and scope Definition & classification of assets Recording and valuing assets Amortization methods and rates
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Capital Policy (cont)
Reviews and write-downs Maintaining records Asset disposal Financial system, asset recording system &
asset management system Financial reporting and budgets
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TCA Impact on Financial Statements & Budgets
Focus on TCA impact Financial reporting changes
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General Impact of Recording TCA
Brings a non-cash dimension to financial reporting and budgeting
Full Accrual Accounting
This change does not require a change in behaviour but it may cause you to change
because there will be more information available.
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Impacts at Transition and Ongoing
Amount of TCA will probably increase. Total TCA will be reduced by ‘accumulated
amortization’. Higher emphasis on Statement of Cash
Flow.
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Impacts at Transition and Ongoing
Statement of Operations TCA purchases not included Capital grants included Non-cash annual amortization expense Gain/loss on disposal of TCA included Write-downs expensed
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What Will be the Impact to our Municipality?Each municipality will be different; some
factors determining impact are: Age of TCA
Net value of unrecorded TCA Accumulated amortization of recorded TCA
Write-down of recorded TCA Assets funded by senior government and
donated assets.
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Should the budget mirror the financial statements? Recommend that amortization expense be
included in the budget. If not, PSAB requires a link between the
budget and financial statements be provided.
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Statement of Financial Position – Current ViewAs at December 31Financial Assets
Cash and investments $ 480,000
Accounts receivable 104,000
Inventory for resale 155,000
739,000
Physical Assets
Inventory for consumption 5,000
Capital assets 14,003,000
14,008,000
Total Assets 14,747,000
Liabilities
Accounts payable 264,000
Deferred revenue 56,000
Long term debt 2,900,000
3,220,000
Municipal Equity
Operating fund 372,000
Capital fund 42,000
Equity in capital assets 11,113,000
11,527,000
Total Liabilities & Municipal Equity $ 14,747,000
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Statement of Financial Position – New ViewAs at December 31
Financial Assets
Cash and investments $ 480,000
Accounts receivable 104,000
Inventory for resale 155,000
739,000
Liabilities
Accounts payable 264,000
Deferred revenue 56,000
Long term debt 2,900,000
3,220,000
Net Debt (2,481,000)
Non-financial Assets
Inventory for consumption 5,000
Tangible capital assets 14,003,000
14,008,000
Accumulated Surplus $ 11,527,000
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Statement of Financial Activities/OperationsAs at December 31
Budget Current New
Revenue
Net municipal taxes $ 1,430,000 $ 1,430,000 $ 1,430,000
Capital grants 200,000 200,000 200,000
Capital debt issued 300,000
Other revenue 1,014,000 1,014,000 1,014,000
2,944,000 2,644,000 2,644,000
Expenditures
Operating 2,151,000 2,151,000 2,151,000
Capital purchases 693,000 693,000
Capital debt repayment 100,000
Amortization of TCA 225,000
2,944,000 2,844,000 2,376,000
Excess (Deficiency) 0 (200,000) 268,000
Capital debt issued 300,000
Capital debt repaid (100,000)
Change in Fund Balances $ 0 $ 0 $ 268,000
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Current Balanced Budget Legislation Cannot budget more expenditures than
anticipated revenues On a 3 year cumulative basis, actual
revenue = or be > than expenditures (Sec 244)
Revenue includes transfers from accumulated surplus
Cash basis approach Operating and capital funds referenced
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Impact of Accounting Standard ChangesTCA Requirement (PS 3150) TCA to be amortized over useful life. Annual amortization (non-cash) to be
expensed; may result in annual deficiencies. CICA requirement does not mandate funding
amortization.
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Impact of Accounting Standard ChangesFinancial Reporting (PS 1000, 1100, 1200) One single statement of operations Annual budget replaces operating & capital budgets Capital purchases/proceeds & debt
proceeds/retirements are not included in ‘Statement of Operations’
‘Accumulated surplus’ is one amount including ‘Equity in TCA’
Focus on financial position (net assets/net debt)
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Proposed Amendments to Legislation and Future Review Transitional Amendment
Back out amortization expense to comply with Section 244
Future Amendments Replace references to operating & capital
funds/budgets with ‘annual budget’ Consider redefining ‘deficiency’
Further Review Measures of municipal financial performance
including debt limits
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Recording an Existing AssetExampleAn Arena built in 1940 has a 2006 appraisal cost of $10M and a land value of $5M. Component breakdown is as follows:
Description % of cost Useful Life Remaining Useful Life
Building Envelope 50% 60 years 0 years
Roof 10% 20 years 2 years
Mechanical 10% 10 years 8 years
Interior Fit – outs 20% 10 years 2 years (includes ice sheet)
Exterior Fit – outs 10% 25 years 20 years
There is no salvage value.
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Discount Factor and Deflated Cost
Discount Factor
Index for in-service year/index for current year
Deflated Cost
Current cost * Discount Factor
Example
1989 Discount Factor: 70.9/112.3 = 0.631
Roof deflated cost: $1M * 0.631 = $631,000
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Discount Factors
Discount Factors for Example
1940 0.071 (8.0/112.3)
1989 0.631 (70.9/112.3)
1999 0.814 (91.4/112.3)
2002 0.890 (100.0/112.3)
2005 0.963 (108.1/112.3)
2006 1.000 (112.3/112.3)
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Inventory/Valuation
Item
Number
Item
Description
Replacement Reproduction or Appraisal
Const
Year
Useful Life in Years
Discount Factor
Salvage Value
CalculatedHistorical
Cost
1 Land $5M 1940 0.071 $0.36M
2 Building Envelope
$5M 1940 60 0.071 $0 $0.36M
3 Roof $1M 1989 20 0.631 $0 $0.63M
4 Mechanical $1M 2005 10 0.963 $0 $0.96M
5 Interior Fit – outs
$2M 1999 10 0.814 $0 $1.63M
6 Exterior Fit – outs
$1M 2002 25 0.890 $0 $0.89M
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Amortization
Item
Number
Item
Description
Historical
Cost
Age
(Yrs)
Useful Life in Years
Amortization Rate
(S/L)Amortization
1 Land $0.36M 67
2 Building Envelope
$0.36M 67 60 * 60/60 $0.36M
3 Roof $0.63M 18 20 * 18/20 $0.57M
4 Mechanical $0.96M 2 10 * 2/10 $0.19M
5 Interior Fit – outs
$1.63M 8 10 * 8/10 $1.30M
6 Exterior Fit – outs
$0.89M 5 25 * 5/25 $0.18M
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Qualitative Considerations
What threshold(s) to use Thresholds in ‘Toolkit’ Cumulative?
Useful life considerations Asset age exceeds useful life
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Qualitative Considerations (cont)
Discount Factor Used CPI Other
Supporting Information Methodology Valuation Useful Life
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Audit Support Third Party Evidence
Invoice Qualified Estimator
Industry Standards CPI Published lists Internally developed
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Audit Support (cont)
Documented Methodology Consistent with methodology used by
qualified third party Sound industry practice
Reasonableness test
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Transition Process Develop TCA inventory and register information Record information in TCA register Document audit trail Determine accumulated amortization prior to
implementation year Adjust General Ledger to implementation year
opening balances Link TCA register to GL in implementation year
(when all TCA are recorded) Record 2009 TCA transactions under new TCA
rules and report in new reporting format
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Transitional Impact
Significant amendment to the financial statements in the first year of reporting due to:
Adding existing unrecorded TCA Deducting the recorded amount for TCA which no
longer exist. Deducting the recorded amount for TCA having
an historical cost below the capitalization threshold.
Reporting the net value of the TCA total cost; deduct accumulated amortization.
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Accumulated Amortization
Identified by asset class in notes to financial statements.
Amount prior to first year of reporting treated as a prior years’ adjustment.
Annual amortization on the revised TCA expensed in year of implementation for that specific year.
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Transition Accounting EntriesNote: Journal entries are always balanced.
Adjust Opening Balances of GL
a. Reduce the existing TCA account balances to zeroCR: Tangible capital assets
DR: Capital debt
DR: Equity in TCA – Prior period adjustment
b. Record the updated TCA valuesDR: Tangible capital assets (historical cost)
CR: Accumulated amortization
CR: Capital debt
CR: Equity in TCA – Prior period adjustment
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Transition Accounting Entry ExampleAssumptions & Data Implement in 2009 GL accounts December 31, 2008:
TCA $10,000
Capital debt $2,000
Equity in TCA $8,000 TCA data at implementation
TCA historical cost $50,000
Accumulated amortization $30,000
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Transition Accounting Entry Example (cont)a. Reduce existing TCA account balances
to zero:
Dr Cr
TCA $10,000
Capital debt $2,000
Equity in TCA $8,000
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Transition Accounting Entry Example (cont)b. Record updated TCA inventory values:
Dr Cr
TCA $50,000
Accumulated amortization $30,000
Capital debt $2,000
Equity in TCA $18,000
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Transition Accounting Entry Example (cont) The change in equity will be treated as a
‘prior period restatement/adjustment’ and referenced in the notes to the financial statements.
If possible, record 2008 amortization in expense accounts for comparative statement purposes.
Retroactive application – expected but not mandatory (CICA guide, pages 34 & 35)
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‘Municipal Equity’ Terminology
Current Terms (Sampleford) Fund Balances
Operating Fund Capital Fund Reserve Fund
Equity in Capital Assets
New Term (used in examples) Accumulated Surplus
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Purchase to RetirementEquipment – Fire truck (pumper)Information or Decisions Required
Actual cost $300,000Useful life 12 yearsAmortization method Straight lineSalvage value $60,000Annual amortization $20,000(assume ½ year rule for purchase and disposal years)
1st year $10,000 (50%)TCA asset register Major class Machinery & Equipment
Minor class Fire EquipmentSub class Pumper truck
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Purchase EntriesAssume that there are links between General
Ledger/Accounts Payable/TCA.
DR TCA asset $300,000
CR Cash/debt $300,000 No impact on Accumulated Surplus; there
may be internal transfers between Equity in TCA and Reserves.
No record in Statement of Operations Affects Statement of Financial Position
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Amortization Expense Annual entry:DR Fire department – equipment amortization expenseCR Accumulated amortization – Machinery &
Equipment(1st year - $10,000, remaining years - $20,000, disposal year if year 13 - $10,000)
Annual closing entryDR Accumulated SurplusCR Fire department – equipment amortization expenseNote: These entries demonstrate what will normally be
done automatically by your financial system.
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Impact on Fire Department BudgetIf funds are normally collected annually for future
purchases, i.e. transfer to capital: amortization would be funded in the Statement of
Operations; move budget from ‘transfer to capital’ to amortization
internal financial records would need to identify these funds
the department bottom line would be breakeven if the amount annually put away equalled the amortization.
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Impact on Fire Department BudgetIf debt is normally used:
the fire department budget would incur an annual deficit of $20,000
cash would still need to be available in the organization to pay the debt which would be budgeted with no expense. If debt retirement allocated to the fire department, then
offset the deficit resulting from the amortization expense.
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Pumper Fire Truck Information at the end of Year 12Cost $300,000
Accumulated amortization $230,000
Net book value $ 70,000
Assume sold in year 13
Amortization entry in year 13 (50/50 rule)
DR Fire Dept – Equipment amortization expense $10,000
CR Accum. Amortization – M & E $10,000
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Sale & Disposal Entries in Year 13Sold for $75,000.DR Cash $ 75,000DR Accumulated amortization $240,000CR TCA asset $300,000CR Profit on disposal of TCA $ 15,000Annual Surplus and Accumulated Surplus will
increase $15,000.(TCA ($300,000) less Accum. Amortization
($240,000) less Cash ($75,000) results in a credit of $15,000 to Accumulated Surplus.
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Example - Replacement of a ComponentBuildingSituation InformationBuilding originally recorded at $5 M with a
useful life of 40 years.
Roof needs to be replaced in 2009: The roof is fully amortized. The life of the roof was 20 years. Replacement cost is $1.1 M. Roof is 14% of the total building cost.
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Replacement Entries
DR Accumulated amortization $ 350,000
DR Loss on disposal of roof $ 350,000
CR TCA – Building $ 700,000
DR TCA – Building – Roof $1,100,000
CR Cash/Debt $1,100,000
Loss on Statement of Operations
Decrease in Accumulated Surplus
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2009 Amortization Entries using 50% rule
Old roof: $700,000/40 * 50% $ 8,750
New roof: $1,100,000/20*50%$27,500
Total 2009 amortization expense $36,250
2009 Accumulated amortization$27,500
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Impact of Amortization on Accumulated Surplus
Decrease if amortization expense is greater than roof related revenues
Remain unchanged if amortization is funded. Increase if funds greater than annual
amortization are put away for future roof replacement.
Statement of Operations will reflect the changes in Accumulated Surplus in the annual deficit/surplus.
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Issues to Consider
What are the audit issues if the roof is expensed? Is this cost material so that it will need to be capitalized?
Is it better to record the cost of the major components at the time of initially recording the asset?
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How Are Networks Determined?
Are the TCA in the proposed network similar? How is age determined? How will the value be established? Should the networks be determined by
geographic location?
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Example – Network to SegmentEngineered Structure – Road System Situation InformationThe municipality has 20 km of paved roads. They have been recorded as networks; a separate network each for the asphalt, subsurface and right of way. The municipality plans to gradually segment each network when rehabilitation work is done.
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Paved Road Information
Historical Cost Useful Annual Replace Average Accumulated
Description Total per km Life Amort. Cost Age Amortization
Years per km Total per km
Asphalt 4 M 200,000 15 13,333 250,000 10 2,666,667 133,333
Subsurface 2.5 M 125,000 40 3,125 850,000 35 2,187,500 109,375
Right of way 1 M 50,000 0 0 0
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Replace 2 km of Asphalt
Replacement cost is $250,000/km Assume component is fully amortized when
replaced. Will set up a separate asset or multiple
assets for the two km of asphalt.
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Replacement Entries
Remove asphalt component from TCA records
DR Accumulated amortization $400,000
(Asphalt – 2 km * 200,000 historical cost)
CR TCA – Engineered Structures – Roads - Asphalt $400,000
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New TCA Records
Create new TCA records in TCA register to provide more detailed information
Segments – geographical location and distance established by policy (for example, by block or km)
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Impact on TCA Network Records Since the asphalt network is the only network
affected, the other networks will not be affected. The other networks may be segmented in the
same manner as the asphalt network. If the asphalt, subsurface and right of way were
one network, a new asset should be created for the subsurface portion for this specific segment with TCA and accumulated amortization adjustments made to the subsurface network.
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Discussion Questions
When networks are used, what methods can be used to determine the average life of the network and the accumulated amortization?
What criteria should be used to determine the best method?
What is the best method?
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Reporting RequirementsPrior to Implementation (PS 3150.45) Report according to PSG-7 during the period
of transition.
PSG-7 TCA of Local Governments (Toolkit, page 55) Disclose information required for asset classes for
which municipality has information. Effective January 1, 2007
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2009 (PS 3150.40-42)
Disclose for each major category of TCA and in total:
Beginning and end of periodCost, accumulated amortization, net carrying amount
For the periodAdditions, disposals, write-downs, amortization
Amortization method, period/rate
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2009 (PS 3150.40-42) (cont)
Net book value of TCA not amortized (not in service, under construction)
Nature & amount of contributed TCA received during period
Nature & use of TCA recognized at nominal value
Nature of works of art & historical treasures Amount of interest capitalized in the period
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2007 Financial Statement NoteSection 6, TCA Implementation Toolkit
Subsection of ‘Significant Accounting Policies’ note Narrative provides authority, background and
progress report Table provides the revised TCA information by
major class Note: This table will not link to the TCA amount in Statement of Financial Position.
TCA GL accounts are not revised until implementation.
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2007 Financial Statement Note Examplei. Narrative
Assets already amortized noting amortization method.
Assets not amortized if some are amortized. Assets classes completely updated. Asset classes still requiring to be completed by
December 31, 2008 (2009) Assets disclosed at nominal value Statement regarding capitalizing interest
(municipality policy)
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2007 Financial Statement Note Example (cont)ii. List of TCA Classes
State that amortization expense not recorded and project the date when it will be recorded.
List major classes and minor Engineered Structure classes.
Provide range of useful life in years for each class reported.
State method of amortization
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2007 Financial Statement Note Example (cont)iii. Table of Financial Information
Table for current year Table for previous year only if TCA project was
started in previous year. Beginning year amount to be zero in year
respective TCA class is completed. Amount of amortization in financial statements in
situations where there has been amortization already in place.
Value of assets not amortized because removed from service
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2007 Financial Statement Note Example (cont)
Cost -
Beginning
of Year Additions
Disposal
s
Write-
down
s
Cost -
End of
Year
Amortization
in Year
Accumulated
Amortization NBV
Land 0 250,000 0 0 250,000 0 0 250,000
Land Improvements
Buildings
Engineered Structures
Machinery & Equipment
Vehicles 0 125,000 0 0 125,000 93,750 93,750 31,250
Sub-total and Total 0 375,000 0 0 375,000 93,750 93,750 281,250
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Discussion Question
How will accumulated amortization be tracked for asset classes completed prior to implementation?
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Note for Prior Period Adjustments Restated to comply with PS 3150 Adjustments to TCA and Accumulated
Surplus Adjust opening 2008 if retroactive If not retroactive, adjust opening 2009
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Note for Prior Period Adjustments Add the net amount for
Assets capitalized but previously expensed Contributed assets not recorded Disposal of assets Write-down of assets Assets capitalized but below threshold
Less Increase in amortization expense
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It’s Your Turn!