STAFF REPORT. 1) Resolution Approving a Capital Asset Policy for the City of Davis 2) Exhibit A - City of Davis Fiscal Policies Capital Asset Policy

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1 STAFF REPORT DATE: TO: FROM: SUBJECT: City Council Sandra Sato, Interim Finance Director Recommendation Adopt a Resolution approving a. Fiscal Impact None Council Goal(s) Fiscal stability Background and Analysis The City s outside auditors have recommended that the City develop a formal written capital asset policy to protect the City s assets and improve internal control. The proposed policy establishes that there will be regular inventories of fixed assets and other smaller assets controlled by departments. The proposed policy also sets forth written policies and procedures to account for the City s capital assets in accordance with Generally Accepted Accounting Principles. Adoption of a policy on capital assets was a goal of the department for the current fiscal year. Attachments: 1) Resolution Approving a for the City of Davis 2) Exhibit A - City of Davis Fiscal Policies City Council Meeting 05B - 1

2 RESOLUTION NO. 11-, SERIES 2011 RESOLUTION OF THE CITY COUNCIL OF THE CITY OF DAVIS APPROVING CITY OF DAVIS - FISCAL POLICIES- CAPITAL ASSET POLICY WHEREAS, adoption of a formal written capital asset policy will improve internal control and assist staff in accounting for capital assets in accordance with generally accepted accounting principles; and WHEREAS, adoption of the City of Davis - Fiscal Policies- has been recommended by the City s independent auditors and is a goal of the Finance Department for Fiscal Year NOW THEREFORE BE IT RESOLVED, by the City Council of Davis, that City of Davis - Fiscal Policies- incorporated herein as Exhibit A is hereby approved by the City Council. PASSED AND ADOPTED by the City Council of the City of Davis, California, this 15th day of March, 2011 by the following votes: AYES: NOES: ABSENT: ATTEST: JOSEPH F. KROVOZA Mayor ZOE MIRABILE City Clerk City Council Meeting 05B - 2

3 TABLE OF CONTENTS Capital Asset Policies Introduction. Page Policy Goal Authority for policies Applicability Department responsibilities Valuing, Capitalizing, and Depreciating Assets..Page How to value capital assets Purchased Assets Self-Constructed Assets, including software programs Ancillary Costs.... Page Donated Assets......Page When and what to capitalize New acquisitions Additions Extraordinary repairs, betterments, or improvements Replacements.... Page Bulk Purchase Accounting for infrastructure Depreciation Policy Page When to start depreciation Depreciation Calculations Useful Life for Capital Assets Non-depreciable capital assets Inventory Policy Page Which assets need to be inventoried or cataloged? Small and attractive assets Inventory records requirements Adding capital assets to the inventory. Page Removing capital assets from the inventory Lost or stolen property Physical Inventory Policy... Page Physical inventory frequency Who conducts and verifies the physical inventory Physical inventory instructions Physical inventory reconciliation.... Page Retaining physical inventory records City Council Meeting 05B - 3

4 The goal of a capital asset inventory system and this policy is: 1) to provide control and accountability over capital assets, and 2) to assist departments in gathering and maintaining information needed for the preparation of financial statements. These policies and procedures are the minimum requirements for capital assets that departments must meet. A department may maintain its capital asset inventory system in greater detail, or use additional supporting documentation, as long as they meet the required minimum standards Authority for policies The City of Davis City Council requires all departments to use this policy to protect and report on assets held by the City. Responsibility for maintaining and updating the policy lies with the City Manager or a selected designee. The Finance Division maintains the information and reports it in accordance with generally accepted accounting principles. The City Manager, or a designee, is authorized to update this policy and processes to maintain an efficient and materially accurate fixed asset accounting system Applicability This policy applies to all departments of the City of Davis, unless specially exempted. The term "department" is defined to mean and include every city officer, office, and division, except as otherwise provided. Departments may request a waiver from complying with specific requirements of this policy by application to the City Manager or his designee Department responsibilities Departments are responsible for protecting and controlling the use of their assets. The department head designates, in writing to Finance, one or more department Inventory Officers to be responsible for maintaining and safeguarding the department 's capital assets and implementing a small and attractive asset (as defined in Section 10.32) tracking procedure City Council Meeting 05B - 4

5 10.10 Valuing, Capitalizing, and Depreciating Assets Valuation of capital assets Finance staffs, in conjunction with the departments, are responsible for implementing this section. Capital assets should be valued at cost - including all ancillary charges necessary to place the asset in its intended location and condition for use. Determine the value in the following manner: Purchased Assets Purchased Assets are valued on historical costs including taxes (e.g., sales taxes), and all appropriate ancillary costs less any discounts or rebates. If the historical cost is not practicably determinable, use estimated cost. The capitalized value of land includes the purchase price plus costs such as legal fees, fill, and any excavation costs incurred to put the land in condition for its intended use. Building costs include both acquisition and capital improvement costs, including, in enterprise and trust funds, interest. Capital improvements include structures (e.g., office buildings, storage quarters, and other facilities) and all other property permanently attached to, or an integral part of, the structure (e.g., loading docks, heating and air-conditioning equipment, and refrigeration equipment). Furniture, fixtures, or other equipment are classified as equipment. Since they are not an integral part of a building they are not considered capital improvements. The cost for this asset type reflects the actual or estimated cost of the asset. This includes the cost of an extended maintenance/warranty contract for all such equipment and licensing costs for computer software in the asset s valuation if the contract is purchased at the same time (or soon thereafter) as the capital asset Self-Constructed Assets Self-Constructed Assets are capitalized with all direct costs associated with construction and management costs associated with a construction project. Department project management costs may be capitalized in one of two ways: 1. Actual project management costs are used when they are practicably discernible and directly associated with the project; or 2. A percentage of total budgeted project costs may also be used. The application rate may or may not be designed to recover total department project management costs. Indirect costs are excluded unless they are increased by the construction. Enterprise and trust funds, net interest costs incurred during the period of construction in the capitalized cost of the asset, if material are included. Interest costs are not capitalized in governmental funds City Council Meeting 05B - 5

6 Ancillary Costs Normally, ancillary costs should be included in the cost of a capital asset. However, minor ancillary costs, not measurable at the time a capital asset is recorded, are not required to be capitalized. Ancillary costs for Land include: Legal and title fees; Professional fees of engineers, attorneys, appraisers, financial advisors, etc.; Surveying fees; Appraisal and negotiation fees; Damage payments; Site preparation costs; and Costs related to demolition of unwanted structures. Ancillary costs for Infrastructure include: Professional fees of engineers, attorneys, appraisers, financial advisors, etc; Survey fees; Appraisal and negotiation fees; Damage payments; Site preparation costs; and Costs related to demolition of unwanted structures. Ancillary costs for Buildings and Building Improvements include: Professional fees of architects, engineers, attorneys, appraisers, etc.; Damage payments; Costs of fixtures permanently attached to a building or structure; Insurance premiums, interest, and related costs incurred during construction; and Any other costs necessary to place a building or structure into its intended location and condition for use. For furnishings, equipment, or other capital assets: Transportation charges, Sales tax, Installation costs; and Extended maintenance/warranty contracts or any other normal or necessary costs required to place the asset in its intended location and condition for use, including licensing costs for computer software City Council Meeting 05B - 6

7 Donated Assets Donated assets are recorded at the fair market value at the time of acquisition plus all appropriate ancillary costs. If the fair market value is not determinable due to lack of sufficient records, the estimated cost is used. If land is acquired by gift, the capitalized value is to reflect its appraised or fair market value at the time of acquisition When and What to Capitalize The general policy is to capitalize and inventory all assets with a useful life of 3 years or more and a cost of $25,000 or more. All land and infrastructure with a cost of $150,000 or greater will also be capitalized and inventoried. Exceptions: Federal grant regulations require the city capitalize and inventory assets purchased with federal funds with a cost of $5,000 or more. Although Small and Attractive Assets (assets costing less than $25,000) do not meet the city s capitalization policy, they are considered assets for purposes of identification, records keeping, and tracking due to ease of conversion to private use. Each department is responsible for maintaining a list of these assets and performing regular inventories. When a project is substantially complete, accepted, and placed into service the Construction in Progress is closed out and the asset is capitalized. For capital assets acquired by and used in the operations of governmental fund type accounts, the value of the assets is recorded in the General Capital Assets Account Group New acquisitions New acquisitions that meet the city s capitalization policy as noted above are capitalized. Additions, improvements, replacements, and repairs and maintenance to existing capital assets are not considered new acquisitions and are discussed below Additions Capitalize expansions of or extensions to existing capital assets that meet this policy Extraordinary repairs, betterments, or improvements Capitalize outlays that increase future benefits from an existing capital asset beyond its previously assessed standard of performance. Increased future benefits typically include: An extension in the estimated useful life of the asset. An increase in the capacity or efficiency of an existing capital asset City Council Meeting 05B - 7

8 Replacements For replacement of components of buildings or other major assets, capitalize the cost of outlays when the cost of the replacement exceeds $50,000 and is greater than 10 percent of the replacement value of the entire asset (see example below under exceptions). After replacing a part of another asset, remove the capitalized value and the associated accumulated depreciation of the replaced item from the accounting records - if the amounts are determinable. EXCEPTIONS to this policy are: Replacement roof coverings are not capitalized unless the replacement extends the useful life of the building. Replacement floor coverings and window coverings are not capitalized. Costs to remodel (convert) a building or space to a different use, where the remodeling does not extend the useful life of the structure itself, are not capitalized. Replacement of component unit does not meet the capitalization thresholds outlined above. Component Unit Example: A $55,000 replacement of a plumbing system in a building having a replacement value of $600,000 would not be capitalized. In this case. The $55,000 cost of replacement is not 10% of the building's replacement value. Had the building's replacement value been less than $550,000, the $55,000 system replacement would have been capitalized. TEST FOR COMPONENT UNIT THRESHOLD 1. Partial replacement cost is > $50,000 and > 10% of replacement value of whole asset or 2. Replacement cost > $150, Bulk Purchases The $25,000 capitalization threshold is applied to individual units of fixed assets. For example, seven generators purchased through a single purchase order, each costing $4,000, will not qualify for capitalization even though the total cost ($28,000) exceeds the threshold of $25, Accounting For Infrastructure In accordance with the Governmental Accounting Standards Board Statement Number 34, acquisitions of capital assets defined as infrastructure that meet the city s capitalization policy (cost of $150,000 or greater) are to be capitalized. All capitalized infrastructure type assets will be depreciated City Council Meeting 05B - 8

9 10.14 Depreciation Policy Calculate and record depreciation for all capital assets unless specifically exempted When Depreciation Begins Depreciation normally begins when an asset is purchased or completed. However, if it is not placed into service immediately, depreciation should begin when the asset begins to lose value. Depreciation will be calculated by month with a full month s depreciation taken for assets acquired or disposed of anytime during the month Depreciation Calculations Depreciation will be calculated using the straight-line method. In straight-line depreciation, the cost of the asset is pro-rated over the estimated useful life of the asset. In most cases, the salvage value is considered to be insignificant and is not used for the calculation. Straight-line Depreciation: Asset Cost/ Asset s Useful Life = Annual Depreciation Assets may be depreciated individually or in groups. The cost of assets similar in nature (tables, chairs, etc.) or assets dissimilar but related by mode of operation (water treatment) may be grouped together then depreciated as one group Useful Life for Capital Assets Departments are responsible for indicating an appropriate useful life for their assets based on the depreciation schedule (Appendix A). This schedule may be updated periodically at the discretion of Finance Non-depreciable Capital Assets The following assets are not depreciated: Land Construction in progress City Council Meeting 05B - 9

10 10.30 Inventory Policy Assets to be inventoried or cataloged The following assets are to be inventoried or cataloged: All capital assets described in the policy must be inventoried and listed in the property records of a department. Assets with a cost of $5,000 or more acquired with federal monies or awards also need to be identified by the inventory system. Assets costing less than $25,000 are to be tracked if they are considered small and attractive. These assets will not appear in the City s books; however, a listing will be maintained by the departments as noted below Small and attractive assets Small and attractive assets are those assets that are particularly at risk or vulnerable to loss and cost less than $25,000. The department should implement specific measures to control small and attractive assets in order to minimize identified risks. Departments have discretion in setting their definition of small and attractive assets; examples are: Communications Equipment; both Audio and Video Optical Devices, Binoculars, Telescopes, Infrared Viewers, and Range Finders Cameras, Video Cameras and Photographic Projection Equipment Microcomputer Systems (Laptop and Notebook Computers) Television Sets, Tape Recorders, and VCRs, DVDs Inventory records requirements Departments are to use the city asset management system for all assets that meet the City s capitalization policy City Council Meeting 05B - 10

11 10.34 Adding capital assets to the inventory The department inventory officer is responsible for assigning inventory responsibilities to specific individuals as well as developing and implementing department procedures to ensure that the necessary information is entered into the City s capital asset inventory. These individuals will be responsible for completing the City s Fixed Asset Pending Item Worksheet provided by Finance and returning this form to Finance for input into the asset management system Removing capital assets from the inventory Departments are to adopt internal policies and procedures regarding the timely removal of capital assets from inventory, including procedures for the proper approval of disposal requests. Capital assets are to be removed from active inventory only after being declared surplus by in accordance with Davis Municipal Code Departments are to maintain records of capital asset dispositions in accordance with approved department records retention schedules. At a minimum, records of asset removal must be kept until after the next annual audit by the independent auditors. In addition to this policy, when seeking to dispose of or remove capital assets from inventory, departments are to adhere to guidelines issued by Finance Lost or stolen property When suspected or known losses of inventoriable assets occur, departments should conduct a search for the missing property. The search should include a review of transfers to other divisions or departments, storage, scrapping, conversion to another asset, etc. If the missing property is not found: Notify the Inventory Officer and department head. Have the individual deemed to be primarily responsible for the asset, as well as that individual s supervisor, complete and sign a statement to include a description of events surrounding the disappearance of the property, who was notified of the loss, and steps taken to locate the property. Report known or suspected losses of assets to the Finance Director. Remove the lost or stolen property from the department s inventory and accounting records where applicable. Maintain records for losses of inventoriable assets in accordance with approved department records retention schedules but at least until after the next annual audit City Council Meeting 05B - 11

12 10.40 Physical Inventory Policy Physical inventory frequency Departments will conduct physical inventories at least once every year for all inventoriable assets except as noted below. Due to the stationary nature of certain assets (such as land, infrastructure, buildings, improvements other than buildings, and leasehold improvements), performing a physical inventory every year is not required. Departments will receive a current listing of their capital assets from Finance. A department may conduct their capital assets inventory on a revolving basis if both of the following conditions are met: Every item is subject to a physical count or verification at least once every third year. The inventory program has been submitted to Finance for review and approved and is documented and active Who conducts and verifies the physical inventory In order to ensure objective reporting of inventory items, personnel having no direct responsibility (custody and receipt/issue authority) for inventory items should perform the physical inventory. If it is not feasible to use such personnel for a part of the inventory, then those portions are, at least, to be tested and verified by a person with neither direct responsibility for that portion of the inventory nor supervised by the person directly responsible. Departments are encouraged to exchange and use staff from other departments to perform their inventory if possible Physical inventory instructions Written physical inventory instructions must be documented and distributed to each person participating in the inventory process. The instructions should describe: How and where to record each item, What information to record, What to do when they have a question, What procedures to follow when they finish their assignments, What procedures to follow when equipment is located but not listed, The procedure by which the person counting the assets attests to the accuracy of the count, such as by signing his or her name at the bottom of each inventory page, or signing a cover page for a group of pages sorted by another method (batches, location, equipment type, etc.), and How to record assets not being used or in an obviously unserviceable condition. Such information is to be used to schedule repair or disposition of such assets City Council Meeting 05B - 12

13 10.44 Physical inventory reconciliation After the physical inventory count is completed, the department Inventory Officer is to conduct the reconciliation process. Only when all differences have been identified and explained, is the inventory considered reconciled. Departments should conduct the following steps during the reconciliation process: Search the inventory lists to determine whether inventory noted during the count as unrecorded is, in fact, listed on another portion of the inventory. Enter unrecorded assets into the inventory system as soon as possible after discovery. If a significant number of unrecorded assets are located, a major problem with the asset recording procedures may exist. The department Inventory Officer should determine why the problem is occurring and correct it. Conduct a search in an effort to locate missing assets. For assets not located, follow the lost or stolen property procedures in this policy. After the inventory is reconciled, the department Inventory Officer is to certify the reconciliation with a statement and signature that it is correct and report this to the department head. If the certification cannot be made, the Inventory Officer is to disclose that fact and the department head is to determine the appropriate course of action Retaining physical inventory records The certification, together with the reconciliation and the inventory listing, serves as the support for the inventory balance and for accounting adjustments, if any, and must be retained by the department. The department should retain this documentation in accordance with the approved department records retention schedules. At a minimum the asset records must be retained until after the next annual audit. By June 30 th each year (or every three years if on a rolling basis, a copy of the certification, together with the reconciliation and the inventory listing shall be forwarded to Finance for reconciliation to the Asset Module and General Ledger City Council Meeting 05B - 13

14 Asset Type DEPRECIATION SCHEDULE Useful Life in Years Buildings Improvements Vehicles Computers Equipment Streets Parks and Greenbelts Bike and Pedestrian Pathways Utility Underground Systems 50 years years 3-20 years 5-7 years 3-20 years years years years years Note: This schedule lists the currently identified primary groupings. This schedule may be modified at the Finance Director's discretion as new data is gathered and infrastructure systems are identified, researched and valued. J /Finance/2830-Fixed Assets/Procedures/capitalization policy/davis Capital Policy City Council Meeting 05B - 14