Fixed Assets Accounting Policy

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1 San Juan County Fixed Assets Accounting Policy Prepared by F. Milene Henley, San Juan County Auditor March 2010 INTRODUCTION Basis of Accounting San Juan County reports financial activity using the revenue and expenditure classifications, statements, and schedules contained in the Cash Basis Budgeting, Accounting and Reporting System (BARS) manual. This basis of accounting and reporting is an other comprehensive basis of accounting (OCBOA) that is prescribed by the State Auditor s Office under the authority of Washington State law, Chapter RCW. Under this type of accounting system, revenues are recognized only when cash is received, and expenditures are recognized when chargeable against the report year s budget appropriations as required by state law. This system generally results in expenditures being recognized when paid except during any open period at the close of the fiscal year when expenditures can be charged against the previous period for claims incurred in the previous period. Open periods are governed by statute for counties (RCW ). This basis results in no assets other than cash and investments and no liabilities being recorded in the financial statements. For example, purchases of fixed assets are expensed during the year of acquisition without any capitalization of fixed assets or allocation of depreciation expense. Purpose Using a cash basis reporting system does not mean, however, that fixed assets need not be identified and tracked. One of the responsibilities of an organization is to exercise internal control. Internal control is the process, effected by those charged with governance, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations Compliance with applicable laws and regulations Reliability of financial reporting Financial internal control is concerned specifically with the safeguarding of assets and the reliability of financial records and the procedures and records that are designed to provide reasonable assurance that:

2 Transactions are executed in accordance with management s general or specific authorization. Transactions are recorded as necessary 1) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements and 2) to maintain accountability for assets. Access to assets is permitted only in accordance with management s authorization. The recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. There are additional reasons for maintaining accurate records of fixed assets. For example, in the preparation of a Federal Indirect Cost Allocation Plan, depreciation must be calculated for all real assets in order to include the cost of facilities in the calculated rate. So even though depreciation is not recorded as an expense for a cash basis entity, it must still be consistently tracked and recorded. Applicability This policy applies to all units of San Juan County government under the control of the San Juan County Council. The San Juan County Auditor s Office has prepared this Fixed Asset Policy to help all departments and funds to understand and to implement the County s fixed asset accounting practices. Reference Specific requirements and general guidelines of the Washington State Auditors Office with respect to fixed asset tracking and reporting are contained in the Budgeting and Reporting System (BARS) Manual for Cities, Counties and Special Purpose Districts (Cash Basis). This policy draws freely from those requirements and guidelines. In addition, the federal government has published in OMB Circular A-102 property management and reporting requirements which apply to all governments that receive federal assistance, and the Internal Revenue Service has established regulations regarding the reporting and depreciation of fixed assets. It is the intent of the policies and procedures contained herein to comply with these federal guidelines; they cannot and are not intended to supersede any federal, state or local laws. FIXED ASSET DEFINITIONS Assets are all resources, tangible or intangible, owned by an entity. Tangible assets are physical assets, i.e., assets that can be touched or seen. They include both current assets and fixed assets. Tangible assets, with the exception of land, are generally depreciable, because they lose value over time. Fixed Asset Policy, March 2010 Page 2 of 14

3 Intangible assets are non-physical assets. They include, for example, client lists, goodwill, patents, copyrights, and easements. Intangible assets often have value because they entitle an organization to the use of other assets. An example is a conservation easement which defines or limits the use of real property. Some intangible assets are depreciable (such as patents), some are amortizable (such as client lists), and some are neither (such as easements). Current assets include both assets readily converted to cash, such as securities and inventory, and personal property (e.g. equipment or machinery) with a useful life of less than one year. Current assets are expensed, either as purchased (such as equipment), or as consumed (such as inventory). Capital assets are tangible and intangible assets with a useful life of more than one year. Fixed assets are tangible assets with a useful life of more than one year. San Juan County has few intangible assets. Two types of intangible assets held by the County are easements and software licenses. Most of the capital assets owned by San Juan County are tangible, fixed assets. For that reason, capital asset accounting is often called fixed asset accounting. The terms will be used interchangeably in this document. Capital assets owned by San Juan County include: Real Property o Land and improvements to land o Infrastructure, including roads, bridges, sidewalks, and drainage systems o Buildings and building improvements Personal Property o Vehicles o Machinery o Equipment and tools o Computers and peripherals o Office furnishings o Software (created) o Works of art and historical treasures o Books and manuals Intangibles o Easements o Software licenses In addition to the above capital items, San Juan County tracks Small and Attractive Assets in its fixed asset accounting system. Small and Attractive Assets are personal property assets that are particularly vulnerable to loss because they are small and readily lend themselves to personal use. Examples include: Fixed Asset Policy, March 2010 Page 3 of 14

4 Computers and related equipment, including personal scanners, video projectors, and other computer peripherals Any property of a type generally used for personal or entertainment purposes, including photographic, phonographic, communication, and video equipment Weapons, including handguns, rifles, and tasers Although these assets usually cost less than the capitalization threshold (see below) for personal property, they are nonetheless tracked as fixed assets because of their vulnerability to loss. CAPITALIZATION THRESHOLDS In accrual basis accounting, capitalization refers to the classification of a cost as a longterm investment to be expensed over a period of years rather than in the current period. As noted in the Introduction, San Juan County, as a cash basis entity, expenses fixed assets in the year purchased. For purposes of tracking fixed assets, however, we use the term capitalization to refer to the classification of assets as fixed assets subject to tracking, and to depreciation as appropriate, under the policies and procedures outlined in this Fixed Assets Accounting Policy. Capitalization thresholds are the minimum unit values at which items are classified as fixed assets and added to the asset records. Capitalization thresholds vary by type of asset and are listed below. Class of Asset Threshold Land and additions to land $0 Improvements to land $5,000 Buildings $10,000 Building repairs/improvements $5,000 Infrastructure $10,000 Personal property not separately listed below $5,000 Works of art and historical treasures $0 Small and Attractive Assets $0 Repair, Maintenance, and Improvements to Capitalize or not to Capitalize? Routine repair and maintenance costs will be expensed as they are incurred. Always included in routine repair and maintenance are painting of any type, and replacement of floor and window coverings. Extraordinary repairs and improvements that meet or exceed the capitalization threshold will be capitalized if they increase the value, life, or future benefits from an existing fixed asset beyond its previously assigned value or life. In order to enable the financial management system to capture appropriate costs, all building or land improvement costs which are to be capitalized must be assigned a project code. Fixed Asset Policy, March 2010 Page 4 of 14

5 BUDGETING FOR CAPITAL PROJECTS The prioritization of capital projects and the selection of capital projects for inclusion in the county budget are determined by the County Council with recommendations from the Capital Budget Committee comprised of County Administrator, the Public Works Director, the Auditor, the Sheriff, the Prosecutor, the Parks Director, and a representative of the courts. This document deals only with the mechanics of budgeting for capital assets. Capital projects are specifically selected for inclusion in the County budget. That is, capital dollars are included in the county budget for specific projects. Therefore, a department cannot budget for one capital project and choose instead to pursue a different capital project, except with the approval of the County Council (or the County Administrator, if such authority has been delegated by the Council to the County Administrator.) Similarly, if a capital project is abandoned or costs less than budgeted, dollars allocated for that project may not be shifted to operating expenses or to other capital expenses, except with approval. Except for Small and Attractive Assets, fixed assets should be expensed to a capital (60 s) object code: 61 Land and Land Improvements 62 Buildings and Structures 63 Other Improvements 64 Machinery and Equipment 65 Construction of Capital Assets (Object code 65, Construction of Capital Assets, is a specific and rarely used code which is used where the expenditure applies to improvement projects involving several distinct subobjects such as land, buildings and structures, and other improvements. It is intended that the classification will be used primarily for undistributed work in progress in capital projects funds. Work orders or other adequate records must be maintained to identify and establish the validity of all amounts which ultimately will be distributed to appropriate capital asset accounts.) Most Small and Attractive Assets will be expensed to a 30 s object code (e.g., 31 = Supplies, 35 = Small Tools & Equipment). These assets, while tracked as fixed assets because of their vulnerability to loss, are not considered capital projects for budgeting purposes. Their budget lines, therefore, can be moved around as needed within the discretion of the department manager. Fixed Asset Policy, March 2010 Page 5 of 14

6 FIXED ASSET ACQUISITION Fixed Assets can be acquired by purchase, by construction, by lease, or by donation. How they are acquired will determine the asset value. Purchase Most fixed assets are acquired by purchase. For purchased items, the purchase price of the item will be the asset value. The asset value will include not only the price of the item itself, but also all ancillary costs, including but not limited to: sales/excise tax, costs of freight and delivery, initial installation cost (including the cost of in-house labor), site preparation costs, professional fees, title and recording fees, and any modifications, attachments, accessories, or apparatus necessary to make it usable and render it into service. These related costs should be coded to the same expense code (except inhouse labor see Construction below) and project code (if applicable) as the purchase price itself, and similarly marked in the financial management system as a Fixed Asset. Interest paid on a purchase is not capitalized. Construction Constructed assets are valued in the same way as purchased assets: that is, the price of all materials purchased for the project, plus all ancillary costs (see Purchase above), are included in the asset value. Also included in the value are the cost of inhouse wages and benefits which go into the construction. Expenditures are not charged to capital asset object codes, however, but to object codes appropriate to the expenditures type (e.g. 10 s for wages, 20 s for benefits, 20 s for supplies, etc.). Project coding and the Fixed Asset designation should be used to distinguish these costs in the financial management system, for aggregation later into a single fixed asset. Lease Leased equipment should be capitalized if the lease agreement meets any one of the following criteria: The lease transfers ownership of the property to the lessee by the end of the lease term. The lease contains a bargain purchase option. The lease term is equal to 75 percent or more of the estimated economic life of the leased property. The present value of the minimum lease payments at the inception of the lease, excluding executory costs, equals at least 90 percent of the fair market value of the leased property. Any lease that does not meet any of the above requirements will be expensed as an operating lease. Leased assets may not be valued at not more than fair market value, nor more than the total price paid over the full term of the lease. Lease payments must be reduced by an Fixed Asset Policy, March 2010 Page 6 of 14

7 imputed interest rate. The Auditor s Office will assist with calculating an asset value for leased assets. Donation Donated assets will be recorded at the fair market value at the time of acquisition, plus appropriate ancillary costs. Fair market value may be determined by comparison sales (e.g. comp sales of buildings and land), published price guides (e.g., the Kelley Blue Book for vehicles), online auction sites (for personal property only), qualified appraisers, or other appropriate means. Documentation of value must be provided to the Auditor s Office. FIXED ASSET IDENTIFICATION AND TRACKING Auditor s Office Responsibilities Fixed assets are identified and tracked by the Auditor s Office using the County s financial management system. On acquisition, the Auditor s Office will determine if an asset meets the capitalization threshold for its asset type. If the asset is to be capitalized, the Auditor s office will create an asset account and, with the help of the appropriate department, complete the initial asset record, including serial or other identification numbers as appropriate. The Auditor s Office will also maintain the asset records by updating them for modifications submitted by the departments, and will initiate and record the results of the annual physical inventory count. Department Responsibilities Departments have primary responsibility for identifying, protecting and controlling the county assets assigned to the department. On acquisition, the department should notify the Auditor s Office of the purchase and assist the Auditor in completing the initial asset record. At any time that an asset is added, deleted, or transferred, the department must complete and submit to the Auditor s Office an Asset Control Form (see Fixed Asset Transfer and Disposition, below). In addition, the departments are responsible for conducting annual physical inventories of assets assigned to the department. By February 28 of each year, the Auditor s Office will supply each department with a list of all assets assigned to the department. Each department will verify the existence and condition of each item on the list, making note of any additions, deletions, and transfers not previously reported. The final list will be reviewed and signed by the department head and returned to the Auditor s Office by March 31. Verification of the inventory shall be done annually by the Auditor s Office by performing a sampling of the physical inventory. In order to ensure objective reporting of inventory items, personnel having no direct responsibility for the assets should perform the physical inventories. Departments are Fixed Asset Policy, March 2010 Page 7 of 14

8 encouraged to exchange and use personnel from other departments to perform their inventory, if possible. DEPRECIATION Depreciation, as noted in the introduction, is recorded in a cash basis entity only for the purposes of internal control and calculating indirect costs. The following guidelines will be used in calculating depreciation: All fixed assets will be depreciated except for land, works of art, historical treasures, and Small and Attractive Assets which cost less than the current capitalization threshold for personal property. The value of land must be separated from the value of improvements on the land in calculating the depreciable basis of real property. Small and Attractive Assets will be considered as if expensed at purchase, and carried in the Fixed Asset list at zero book value. All depreciation will be calculated using the straight line method. Useful lives will be based on either county experience or, if experience-based information is not available, on the current (at the time of acquisition) IRS alternative depreciation system (ADS) useful life for the asset type. Residual (scrap) value will be ignored in calculating depreciation. Real property will be depreciated using a half-year convention, and personal property will be depreciated using a half-month convention. Depreciation will begin when an asset is put into service, which is generally at the time of acquisition. FIXED ASSET TRANSFER AND DISPOSITION Occasionally fixed assets will be transferred from one department or location to another. Fixed assets may also be removed from the fixed asset list, by sale, scrapping, involuntary conversion (e.g. damage), loss or theft. All of these, except for transfers within a department, are subject also to the County s Property Management rules as codified in SJCC Departments which are contemplating disposing of property should first review the surplus property rules contained therein. Transfer A transfer of a fixed asset is a change of location from one department or location to another department or location. Location, in this case, means the operating unit to which the asset is assigned. Some assets may regularly move from one physical location to another without ever changing assignments. For example, The Auditor currently has a large-format scanner in the Assessor s Office, but the equipment belongs to i.e., is assigned to the Auditor. If the Auditor s Office were to buy a new scanner, and therefore no longer needed the current scanner, it might offer to give the old scanner to another department that could use it. It would report that gift as a Fixed Asset Policy, March 2010 Page 8 of 14

9 transfer from one department to another. Similarly, a move of a fixed asset from one location to another within a department such as a computer from the Sheriff s Orcas substation to the Sheriff s Lopez substation must be reported as a transfer. On the other hand, a temporary move of a piece of equipment assigned to Solid Waste from one transfer station to another is not a change of location for fixed asset purposes. Transfers are reported to the Auditor s Office on an Asset Control Form. Sale If the surplus property agent determines that it is in the best interest of the County to sell surplus fixed assets, the sale must follow the procedures outlined in SJCC The sale of property worth $2500 or more per item must be approved by resolution of the County Council. Items worth less than $2500 can be sold at the direction of the surplus property agent. The revenue generated by the sale will be current revenue to the department currently responsible for the asset. The department must turn in an Asset Control Form following the sale in order for the asset to be removed from the fixed asset list. Scrapping Property which has become worthless may be disposed as scrap with the written concurrence of the surplus property agent. An Asset Control Form must be turned into the Auditor s Office to report the disposal. Involuntary Conversions If a fixed asset is completely destroyed by involuntary conversion (fire, flood, etc.): Complete an Asset Control Form for the item and submit it to the Auditor s Office. Have the individual primarily responsible for the item complete and sign a statement describing the events surrounding the damage to the item. Submit this statement with the Asset Control Form. If an item is partially destroyed but reparable, the expense of repairing it should not be capitalized unless the repair restores the item to a substantially better condition than its condition prior to the damage. Code the repair expenditures to object code 31 (repair and maintenance supplies) or to object code 48 (repair and maintenance services), depending on whether the repair is done in-house or by contract. Once repaired, the fixed asset will remain on the active fixed asset list. Loss or Theft If a fixed asset becomes lost, the responsible department should first conduct an intensive search for the asset. The search should include transfers to other departments or locations, storage, conversion to another asset, etc. If the missing item is not found: Complete an Asset Control Form for the item and submit it to the Auditor s Office. Fixed Asset Policy, March 2010 Page 9 of 14

10 Have the individual primarily responsible for the item complete and sign a statement to include a description of the events surrounding the disappearance of the property, who was notified of the loss and when, and steps taken to locate it. Submit this statement with the Asset Control Form. If theft is suspected, have the responsible individual complete a Sheriff s report and submit that a copy of that report with the Asset Control Form. The Auditor s Office will report known or suspected losses or thefts of assets to the State Auditor s Office in accordance with RCW FIXED ASSET CATEGORY DETAIL Note: The following useful lives are guidelines only; a useful life to be assigned to each asset as it is acquired. Land Land Includes shorelands, tidelands, and harbor areas. The value of land purchased with improvements on it must be separated the value of the improvements and tracked separately, as only the improvements on the land can be depreciated. Not depreciable Improvements to land Improvements to land may include fences, driveways, and landscaping. Public drainage systems, sidewalks, bridges, etc., are treated as infrastructure. Useful life as of March 2010: 20 years Infrastructure Infrastructure refers to long-lived capital assets that normally are stationary in nature and can be preserved for a significantly greater number of years than most capital assets. Examples include roads, sidewalks, parking lots, bridges, storm drainage facilities, and detention ponds. For infrastructure assets jointed funded by multiple entities, only the San Juan County costs may be depreciated. Useful life as of March 2010: 20 years Easements Easements are intangible assets which define or limit the use of property. Easements with no end date are not depreciable. Easements with end dates are depreciable over the actual life of the easement. Not depreciable Buildings and building improvements Most buildings purchased or constructed by San Juan County are depreciated as nonresidential real property. Farm buildings and some other types of buildings are subject to different depreciation schedules. Structural additions or improvements to building which add value or extend life are depreciated on the same schedule as the original structure. Useful life as of March 2010 for nonresidential real property: 40 years Single-purchase agricultural structures: 15 years Multiple-purpose agricultural structures: 25 years Park buildings other than administration buildings (e.g. ticket booths): 12.5 years Fixed Asset Policy, March 2010 Page 10 of 14

11 Vehicles Vehicles include all forms of motorized transportation intended for on-road use, including passenger automobiles, trucks, trailers, cargo and utility vehicles, motorcycles, ambulances, dump trucks, mowers, and sweepers. Useful life varies by type. Useful life as of March 2010 for automobiles, light-duty trucks, and motorcycles: 10 yrs Heavy-duty trucks: 12 years Tractor units for over-the-road use: 12 years Trailers and trailer-mounted containers: 12 years Buses: 9 years Machinery Machinery, equipment and tools are as varied as the purposes they serve. They include large off-road construction machinery (e.g. excavators), brush control equipment, winches and hoists, elevators, compressors and pumps, and small tools. Useful life as of March 2010 for most machinery, equipment, and tools: 20 years Mowers: 15 years Agricultural machinery and equipment: 12 years Office furnishings Office furnishings include furniture and fixtures that are not a structural component of a building, including desks, shelving, cabinets, safes, fax machines and copiers/scanners (not directly attached to a computer). Office furnishings do not include computers or computer peripherals. Useful life as of March 2010: 10 years Information systems equipment Computers and computer peripherals that exceed the capitalization threshold will be capitalized. Since most individual computers now cost far less than the capitalization threshold, it will primarily be central computer equipment (e.g. servers) which will be depreciated. All other information systems equipment will be tracked as Small and Attractive Assets (see below). Useful life as of March 2010: 5 years Software Software programs created in-house are valued at the cost of the labor, including benefits, used to create them, plus any ancillary costs. They should be depreciated if the value exceeds the capitalization threshold for personal property. Licenses to use third-party software should be capitalized, if the meet the capitalization threshold for personal property, at the purchase price plus ancillary costs. Annual support and maintenance costs, even when they include upgrades, are expensed. Useful life as of March 2010: 3 years Works of art and historical treasures Works of art may and historical treasures include collections or individual items that are owned by the County and held not for financial gain, but rather for public exhibition, education, or research. Because such items do not have a determinable useful life, they are not depreciable. Not depreciable Fixed Asset Policy, March 2010 Page 11 of 14

12 Libraries, books, and manuals A single book, or a group of books purchased in a single year, at a cost of $5,000 or more, will be capitalized and depreciated over the current ADS useful life of personal property. Library additions that cost less than $5,000 will be expensed. Subscriptions to electronic libraries, such as Westlaw, are expensed annually. Useful life as of March 2010: 6 years Small and Attractive Assets Small and Attractive Assets are assets of any value that 1) lend themselves readily to personal use and 2) because of their size are vulnerable to theft. They include: Computers and computer peripherals, including but not limited to: o Laptops o Printers o Scanners o Monitors o External hard drives o Video projectors Any property of a type generally used for personal or entertainment purposes, including but not limited to: o Video cameras o Digital or film cameras o Radios o CP players or other devices designed to play music o Television sets o DVD and VCR players o Tape recorders Optical equipment, including but not limited to: o Binoculars o Telescopes o Infrared viewers o Range finders Weapons, including but not limited to: o Rifles o Shotguns o Beanbag shotguns o Handguns o Tasers Small and Attractive Assets, even though they are tracked in the County s Fixed Asset List, are neither capitalized nor depreciated. However, if any single item on the above list which exceeds the capitalization threshold for personal property, it should be capitalized and depreciated in the appropriate asset category listed above, i.e., Information Systems Equipment, for computers and peripherals; or Machinery, Equipment and Tools for all other Small and Attractive Asset types. Fixed Asset Policy, March 2010 Page 12 of 14

13 Ancillary Costs Ancillary costs will be included in the cost of a capital asset. However, minor ancillary costs which are either not measurable at the time a capital asset is recorded or expended in a later accounting period, are not required to be capitalized. Below is a list of common ancillary costs. Ancillary costs for land may include: o Legal and title fees o Professional fees of engineers, attorneys, appraisers, financial advisors, etc. o Surveying fees o Appraisal and negotiation fees o Site preparation costs o Costs related to demolition of unwanted structures. Ancillary costs for infrastructure may include o Professional fees of engineers, attorneys, appraisers, financial advisors, etc; o Survey fees o Appraisal and negotiation fees o Site preparation costs o Costs related to demolition of unwanted structures Ancillary costs for buildings and building improvements may include: o Professional fees of architects, engineers, attorneys, appraisers, etc. o Costs of fixtures permanently attached to a building or structure o Insurance premiums, interest, and related costs incurred during construction o Any other costs necessary to place a building or structure into its intended location and condition for use Ancillary costs for furnishings, equipment, or other capital assets may include: o Transportation charges o Sales/use tax o Installation costs o Extended maintenance/warranty contracts or any other normal or necessary costs required to place the asset in its intended location and condition for use Fixed Asset Policy, March 2010 Page 13 of 14

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