© Prentice Hall Publishing – Governmental and NonProfit Accounting 7e 1-1 Freeman / Shoulders9 -...

© Prentice Hall Publishing – Governmental and NonProfit Accounting 7e 1-1 Freeman / Shoulders 9 - 1

CHAPTER 9CHAPTER 9

GENERAL CAPITAL ASSETS; GENERAL CAPITAL ASSETS; LONG-TERM LIABILITIES; LONG-TERM LIABILITIES;

PERMANENT FUNDSPERMANENT FUNDS Introduction to Interfund-GCA-GLTL Accounting

© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders 9 - 2

OVERVIEWOVERVIEWConcludes general government accounting of

the textDiscusses the relationship of and accounting for– General capital assets (GCA) and– General long-term liabilities (GLTL)to the governmental fund types

Introduces “Permanent Funds” (not common)


LEARNING OBJECTIVESLEARNING OBJECTIVESFor General Capital Assets and General

Long-Term Liabilities

– To maintain information needed for government-wide reporting purposes

– To account for various types of transactions– To understand relationships and accounting

for transactions with governmental funds– To understand reporting and note disclosure

requirements


LEARNING OBJECTIVESLEARNING OBJECTIVESFor Infrastructure– To account for and report general

infrastructure capital assets properly– To understand and apply the modified

approach for accounting for infrastructure capital assets

For Permanent Funds– To understand the nature and use of

Permanent Funds– To account for and report Permanent Funds


GCA & GLTL ACCOUNTS GCA & GLTL ACCOUNTS OVERVIEW & ACCOUNTINGOVERVIEW & ACCOUNTING GASB specifies only reporting GCA

and GLTL in the government-wide financial statements

Accounting procedures will vary as GASB provides none

See Figure 9-1 as it 1. Summarizes the relationships of these

accounts with the governmental funds and2. Accumulates reporting information for

government-wide financial statements


GCA & GLTL ACCOUNTSGCA & GLTL ACCOUNTS General capital assets– Book value of governmental (not

enterprise) funds capital assets– Classified by type (land, buildings, etc.)

General long-term liabilities– Capital asset-related debt (bonds, notes)– Vacation and sick leave, claims and

judgments, and non-capital debt


GCA & GLTL ACCOUNTSGCA & GLTL ACCOUNTSNET ASSETSNET ASSETS

Invested in capital assets, net of related debt– Increases (Entries in Figure 9-1)

(1) Cost of GCA acquired(5) Capital asset-related debt retired

– Decreases (Entries in Figure 9-1)(2) Capital asset-related debt incurred(3) Depreciation expense(4) Net value of GCA dispositions


GCA & GLTL ACCOUNTSGCA & GLTL ACCOUNTSNET ASSETSNET ASSETS

Restricted– Difference between restricted assets and non-

capital asset-related liabilities Unrestricted– Difference between remaining assets & liabilities

Increases (Entry in Figure 9-1)(7) Non-capital GLTL retired

Decreases (Entry in Figure 9-1)(6) Non-capital GLTL incurred


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSExamples– Land– Buildings and improvements– Infrastructure– Equipment

Asset lives extend beyond single reporting period

The assets are not physically consumed by use, but economic use declines over time


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSDefined as “all capital assets other than those

accounted for in proprietary or trust funds”Acquisition of general capital assets recorded

in governmental funds as expendable financial resources are used

However, capital assets are not recorded as governmental fund assets (since the assets are not financial resources)


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETS Acquisition means by governments

1. Purchase2. Construction (own forces or contracted)3. Capital lease4. Gift5. Foreclosure (taking of property for non-payment of taxes)6. Eminent domain (power of government to seize property,

and compensate owner, for public use)7. Escheat (reversion of property to a government in absence

of legal claimants)


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSInitial valuation for assets acquired– Cost

Value of consideration given or receivedAll outlays incurred to bring asset to readiness

– Estimated original costAllowed by GASB standards, if cost not

available– Gift

Fair value when received(Continued)


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETS Initial valuation for assets acquired– Under foreclosure; lower of

1. Amount due for taxes / assessments, penalties and interest or

2. Appraised fair value– By eminent domain

Same manner as a purchase Compensation determined by the courts

– Through escheat process Fair value when acquired


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETS Classification for financial reporting– No set GASB standard for reporting– Most governments follow GFOA

recommendation as follows: Land (and improvements preparing it for use) Buildings (and improvements made part of building) Infrastructure (bridges, roads, sidewalks, dams) Machinery and equipment (automotive, office) Construction in progress (Incomplete construction)


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETS Infrastructure– Long-lived stationary (immovable) asset

systems Examples; roads, bridges, tunnels, drainage,

water, sewer and lighting systems, dams– Capitalization of major infrastructure

assets required under GASB 34, whereas it was previously optional


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETS Infrastructure– Capitalization (under GASB 34):

Now required, whereas it was previously optional Retroactive recording not required for small

governments under $10 million in 1999 revenues)1. Permits estimated cost for recording infrastructure

back to fiscal years ending after June 30, 1980 at implementation transition

2. Requires capitalization of only major asset systems acquired or significantly reconstructed or improved in fiscal years ending after June 30, 1980


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETS Infrastructure – initial capitalization– Criteria to define major infrastructure assets

requiring reporting under GASB 34 in first fiscal years ending after June 15, 1999

– Determination of major general infrastructure assets should be at network or subsystem level

1. Asset subsystems – at least 5% of the total cost of all general capital assets or

2. Asset networks – at least 10% of the total cost of all general capital assets

– Reporting of non-major networks encouraged, but not required


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETS

Capitalization policy– GAAP only applies to material and

significant items in the circumstances

– However, governments should consider– Legal compliance– Materiality and control considerations

when developing a capitalization policy



Capitalization policy– Legal compliance

Threshold levels ($1,500, $1,000, $500, $100) may not address– Materiality or– Different asset (buildings vs. equipment) classes

However, dollar threshold must comply with state and local laws and regulations


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETS Capitalization policy– Materiality

Item considered material if:1. Dollar value significant to financial statements2. Proper accounting required regardless of magnitude Important because:– Material items must conform with GAAP– Immaterial items need not conform to GAAP

Governments can set policy by asset class with different capitalization policies for each class


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSCapitalization policy– Control considerations

May dictate capitalization of certain asset typesCost could be less than legal or materiality

thresholds for items such as– Personal computers– Guns– Communication devices

Immaterial items need not conform to GAAP


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSRecording and reporting works of

art/historical treasures– Record at cost or fair value at donation date– Not required to capitalize if the collection

meets all three of the following criteria1. Held for exhibition, education, or research2. Protected, unencumbered, cared for, and preserved3. Policy requiring the proceeds of collection item sales

to be used to acquire other collection items


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSRecording and reporting works of

art/historical treasures– Report donations as revenues in government-

wide Statement of ActivitiesWhether or not capitalizedIf not capitalized, also shown as an expense equal

to the revenue amount recognized– Report depreciation if capitalized and items

are exhaustible; otherwise not depreciated


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSDepreciation / accumulated depreciation– Recorded in the GCA accounts– Depreciation expense

Reported in the governmental activities column of the government-wide Statement of Activities

Not an expenditure, so Not recorded in the governmental funds

– Accumulated depreciation Reported in the governmental activities column of the

government-wide Statement of Net Assets



Modified approach – infrastructure– Infrastructure depreciation not required

if government meets two requirements:

1. Uses an asset management system2. Documents that infrastructure being

preserved at a disclosed condition level



Modified approach – infrastructure– The asset management system for eligible

infrastructure should Have an up-to-date inventory of eligible assets Perform condition assessments Estimate annually the amount to maintain

and preserve the assets at the established condition level


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETS Modified approach – infrastructure– Documentary evidence requires professional

judgment to meet the second requirement that asset is being preserved

1. Complete condition assessments performed consistently at least every three years

2. Results of the three most recent condition assessments provide reasonable assurance that the assets are being preserved approximately at or above the condition level established and disclosed by the government


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETS Modified approach – infrastructure– If eligible assets meet requirements

Assets are not depreciated Expenditures incurred related to the assets

are -– Expended, if for repair and replacement– Capitalized, if increasing capacity or efficiency

– Once requirements are no longer met, assets should be depreciated in subsequent reporting periods


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSAssets financed from GF or SRFs– Entry in General Fund

Expenditure recorded– Dr Expenditures – Capital outlay - $29,100– Cr Vouchers payable - $29,100

– Entry in General Capital Assets AccountsAsset capitalized– Dr Equipment - $29,100– Cr Net assets – Invested in capital assets - $29,100


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSAssets financed by capital lease– Entry in General Fund

– Dr Expenditures – Capital outlay - $900,000– Cr Other financing sources – Capital lease - $850,000– Cr Cash - $50,000

– Entry in General Capital Assets Accounts– Dr Land – Under capital lease - $100,000– Dr Buildings – Under capital lease - $800,000– Cr Net assets – Invested in capital assets - $900,000

– Entry in General Long-Term Liabilities Accounts– Dr Net assets – Invested in capital assets - $850,000– Cr Capital lease liabilities - $850,000


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSAssets financed from CPFs– Entry in Capital Projects Fund

Expenditure recorded– Dr Expenditures – Capital outlay - $1,270,000– Cr Vouchers payable - $1,270,000

– Entry in General Capital Assets AccountsAsset capitalized– Dr Construction in progress - $1,270,000– Cr Net assets – Invested in capital assets - $1,270,000


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSAsset (land with an estimated value of $2,000)

acquired through foreclosure for taxes, penalties and interest owed of $1,000– Entry in Special Revenue Fund

Expenditure recorded / tax lien written off– Dr Expenditures – Capital outlay - $1,100– Cr Tax lien receivable - $1,000

– Entry in General Capital Assets Accounts Asset capitalized

– Dr Land - $1,100– Cr Net assets – Invested in capital assets - $1,100


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSAssets acquired through gifts– No entry in governmental funds as no

financial resources were received/expended– However, a $1,500 capital contribution

revenue will be reported in the government-wide Statement of Activities

– Entry in General Capital Assets AccountsAsset capitalized at its fair value– Dr Land - $1,500– Cr Net assets – Invested in capital assets - $1,500


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSSale, retirement or replacement accounting– General Capital Assets Accounts

1. Remove the asset-carrying value by – Debiting the related accumulated depreciation account(s) and– Crediting the asset account(s)– Reducing the Net Assets—Invested in Capital Assets account

– Fund receiving proceeds of sale2. Record any proceeds as “other financing sources” in

the accounts of the recipient governmental fund– Government-wide Statement of Activities

Report a gain or loss on disposal in the amount of the difference between items 1 and 2


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSIntragovernmental sale– Enterprise Fund sells equipment at book value

to the GF - public works department– Enterprise Fund entry

Dr Due from General Fund - $15,000 Dr Accumulated depreciation - Equipment - $1,000 Cr Equipment - $16,000

– General Fund entry Dr Expenditures - Capital outlay - $15,000 Cr Due to Enterprise Fund - $15,000

– General Capital Assets Accounts entry Dr Equipment - $15,000 Cr Net assets – Invested in capital assets - $15,000


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSReporting and Note Disclosures– Report in the governmental activities

column of the government-wide Statement of Net Assets

– Provide detailed capital assets information in the notes to the basic financial statements

– Distinguish those assets associated with governmental activities from those associated with business-type activities


GENERAL CAPITAL ASSETSGENERAL CAPITAL ASSETSReporting and Note Disclosures– Notes should disclose (Figure 9-3)

GCA information by major classes of assets Any GCA that are not being depreciated Beginning- and end-of-year balances Accumulated depreciation presented

separately from historical cost Acquisitions of capital assets Sales or other dispositions Current-period depreciation expense, with

disclosure of the amounts charged to each of the functions in the Statement of Activities


GENERAL LONG-TERM LIABILITIESGENERAL LONG-TERM LIABILITIES

Definition– Unmatured principal of general government

long-term debt– Excludes –

Matured debt of governmental fundsAll debt of proprietary funds or trust funds

– Not a liability of any specific fund


GENERAL LONG-TERM LIABILITIESGENERAL LONG-TERM LIABILITIESExamples– Bond issues– Special assessment debt

(If government obligated in some manner)– Long-term notes– Claims and judgments – Compensated absences– Capital lease liabilities– Unfunded pension contributions



Relationship CPFs and GLTL accounts– Issuance of debt for Capital Projects Fund– CPF entry

Dr Cash - $1,000,000 Cr Other Financing Sources – Bond proceeds - $1,000,000

– GLTL entry Dr Net assets – Invested in capital projects - $1,000,000 Cr Serial bonds payable - $1,000,000



Relationship DSFs and GLTL accounts– Maturity of debt payable from DSF– DSF entry

Dr Expenditures - $160,000 Cr Matured Bonds Payable - $100,000 Cr Matured Interest Payable - $50,000 Cr Fiscal Agent Fees Payable - $10,000

– GLTL entry Dr Serial bonds payable - $100,000 Cr Net assets – Invested in capital projects - $100,000



Defaulted bonds– No specific GASB guidance– Authors preferred approach

Remove from General Long-Term LiabilitiesReport in DSF or GFDisclose default in notes to financial

statements



In-substance defeasance– When all conditions are met

Remove defeased debt from GLTL accounts Record advance refunding bonds in GLTL accounts

– If defeasance requirements are not met Old debt remains in GLTL accounts Proceeds from advance refunding bonds recorded in

DSF to service the old debt New advance refunding bonds recorded and reported

in GLTL accounts



Reporting and Note Disclosures– Report in the governmental activities

column of the government-wide Statement of Net Assets

– Report the GLTL by type– Annual CAFR often includes added

schedules– Provide detailed information in the notes

to the basic financial statements



Reporting and Note Disclosures– Notes should disclose (Figure 9-4)

Beginning and end-of-year balancesIncreases and decreases (separately presented)Portions of each item due within one yearFunds used to liquidate other long-term

liabilities (such as compensated absences and pension liabilities) in prior years


PERMANENT FUNDSPERMANENT FUNDSAccount for resources held in trust by the

government for the benefit of the government (or its citizenry)

Principal of the trust is to be maintained intact (nonexpendable)

Exceptions:– Expendable trust funds benefiting the

government reported as Special Revenue Funds– Trust funds benefiting others reported as

Private-Purpose Trust Funds


PERMANENT FUNDSPERMANENT FUNDSExamples requiring use– Receiving gift or bequest with the stipulation that

(a) Principal is to be kept intact and (b) Earnings are to be used for certain purposes

– Establishing an employee loan fund Both principal and earnings may be maintained intact Costs might be chargeable to principal

– Entering other trust agreements Maintain cemeteries, landmark buildings in perpetuity Earnings are expendable only for repairs/maintenance


PERMANENT FUNDSPERMANENT FUNDS Financial reporting same as other

governmental funds with following required– Balance sheet (Figure 9-5)– Statement of revenues, expenditures, and changes in

fund balance If Permanent Fund includes both

– Nonexpendable principal amounts and– Expendable earningsthe fund balance may need classification between – “Fund Balance - Expendable” and– “Fund Balance - Nonexpendable’’


PERMANENT FUNDSPERMANENT FUNDSSample transactions– (1) Accepting gift to maintain baseball field

Dr Cash - $210,000 Cr Revenue (donations) - $210,000

– (2) Purchasing investmentsDr Investments - $203,000Dr Accrued Interest receivable - $400 Cr Cash - $203,400


PERMANENT FUNDSPERMANENT FUNDSSample transactions– (3) Recognizing investment income

Dr Cash - $3,000 Cr Accrued interest receivable - $400 Cr Interest revenues - $2,600

– (4) Selling investments at a gain (*) Dr Cash - $3,090 Cr Investments - $3,042 Cr Interest revenues - $35 Cr Gain on sale of investments - $13 (*)

(*) Gain added to trust corpus – See entry (9)


PERMANENT FUNDSPERMANENT FUNDSSample transactions– (6) (a) PF-Transfer of earnings to GF (*)

Dr OFU, Transfer to GF - $5,000 Cr Cash - $5,000

– (6) (b) GF-Receipt of earnings from PF Dr Cash - $5,000 Cr OFS, Transfer from PF - $5,000

(*) Earnings usually transferred to Special Revenue funds when restricted for specific use

© Prentice Hall Publishing – Governmental and NonProfit Accounting 7e 1-1 Freeman / Shoulders9 -...

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