Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 7: Capital assets and investments in marketable securities

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Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 7: Capital assets and investments in marketable securities. Chapter 7 - Capital assets and investments in marketable securities. In this chapter, the learning objectives are: Why and how governments account for capital assets in both fund and government-wide statements; why and how governments account for transactions involving donated assets, trade-ins, and collectibles;...
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Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 7: Capital assets and investments in marketable securities. Chapter 7 - Capital assets and investments in marketable securities. In this chapter, the learning objectives are: Why and how governments account for capital assets in both fund and government-wide statements; why and how governments account for transactions involving donated assets, trade-ins, and collectibles;....

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Click icon to add picture Chapter 7 CapitalAssets and Investments in Marketable Securities Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 7 | 1 All rights reserved. Learning Objectives Why and how governments account for capital assets in both fund and government-wide statements Why and how governments account for transactions involving donated assets, trade-ins, and collectibles GASB’s controversial provisions regarding infrastructure What special problems asset impairments create How investments should be reported Why investments in marketable securities may be of high risk Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 7 | All rights reserved. General Capital Assets Associated with the government as a whole, rather than with any specific fund Non financial in character. Distinguished from other capital assets that are specifically associated with activities reported in proprietary and fiduciary funds. Examples: The City ofAustin 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. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 7 | All rights reserved. Common Classifications of GCAs Land Buildings Equipment Improvements to land and buildings Construction in progress Works of art Historical treasures Infrastructure (e.g., roads, bridges, tunnels, drainage system) Intangible assets Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 7 | All rights reserved. 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, Transfers from other funds, Special assessment bonds or taxes, Capital leases Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 7 | All rights reserved. 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. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 7 | All rights reserved. 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: Expenditures-Capital Outlay Cash Dr. Cr._____ $50,000 50,000 Gov’t –wide (Gov’tal Act.)*: Equipment $50,000 Net Assets, Invested in CapAssets 50,000 Granof, et a*Note:iThis entry is not made on the books. It is only a conversion at eoy Chapter 7 | All rights reserved. Placing a value (assigning costs) on GCAs •For PurchasedAssets: • Capitalized cost should include purchase price + transportation + installation costs • For land: Legal fees + title fees + appraisal costs + closing costs + costs of demolishing existing structures that cannot be used • 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 Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 7 | All rights reserved. Placing Value (assigning costs) on GCAs 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 Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 7 | All rights reserved. Placing Value (assigning costs) on DCAs Donated assets: reported at estimated acquisition value (replacement cost). Exhaustible assets are depreciated over the remaining useful lives in their government-wide statements. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 7 | All rights reserved. Infrastructure Infrastructure is: ◦ Government’s capital assets ◦ Immovable, stationary in nature ◦ Preserved for a longer period. Ex: roads, sidewalks, bridges, tunnels, highways, 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.* ◦ *Exception: They need not be depreciated if the government can demonstrate that they are being maintained/preserved at a specified condition level. ◦ 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. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 7 | All rights reserved. TWOApproaches 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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