To: From: Virgin Valley Water District Board of Directors Wes Smith, Accountant Date: 7 10 12 RE: Change in Policy Regarding Capitalization of Assets After review of our current Fixed Asset / Capitalization/ Depreciation Policy I developed some questions about the current viability of that policy. My research into this issue, lead me to a Best Practices document prepared by the Government Finance Officers Association. A copy of this document titled BEST PRACTICE Establishing Appropriate Capitalization Thresholds for Capital Assets is attached herewith. After reviewing this BEST PRACTICE document I believe that we should make several changes to our Fixed Asset / Capitalization / Depreciation Policy. I propose that our new policy should reflect the following changes: 1. Capitalization thresholds will only be applied to individual items rather than groups of similar items (e.g. R25 Orion Meters) even if multiple units are purchased at one time with a total invoice over the Capitalization limit. 2. The Capitalization threshold shall be set at $5,000. Therefore only individual items that cost $5,000 or more shall be capitalized and depreciated when all other standard criteria for capitalization are met. (Note: Our previous policy called for a threshold for Capitalization of $1,000). I have communicated with our Auditors and they concur with the proposed changes in our Policy. If the Board Approves this change we would make it effective immediately and at year end we would modify (Augment) the Budget to reflect the change in Policy and the related changes in categories of expenditures. Attachments: BEST PRACTICE Establishing Appropriate Capitalization Thresholds for Capital Assets, GFOA Proposed Policy Virgin Valley Water District, Fixed Asset / Capitalization / Depreciation Policy Guidelines Communication from MacRay Curtis of Wisan, Smith, Racker & Prescott, LLP (our Audit Firm)
BEST PRACTICE Establishing Appropriate Capitalization Thresholds for Capital Assets (1997, 2001, and 2006) (CAAFR) Background. The term capital assets is used to describe assets that are used in operations and that have initial lives extending beyond a single reporting period. Capital assets may be either intangible (e.g., easements, water (rights) or tangible (e.g., land, buildings, building improvements, vehicles, machinery, equipment and infrastructure). It is incumbent upon public-sector managers to maintain adequate control over all of a government s resources, including capital assets, to minimize the risk of loss or misuse. As a practical application of the materiality principle, not all tangible capital-type items with useful lives extending beyond a single reporting period are required to be reported in a government s statement of position. Items with extremely short useful lives (e.g., less than 2 years) or of small monetary value are properly reported as an "expense" or "expenditure" in the period in which they are acquired. When outlays for capital-type items are, in fact, reported on the statement of position, they are said to be capitalized. The monetary criterion used to determine whether a given capital asset should be reported on the balance sheet is known as the capitalization threshold. A government may establish a single capitalization threshold for all of its capital assets, or it may establish different capitalization thresholds for different classes of capital assets. Capitalization is, of its nature, primarily a financial reporting issue. That is, a government s principal concern in establishing specific capitalization thresholds ought to be the anticipated information needs of the users of the government s external financial reports. While it is essential to maintain control over all potentially capitalizable items, there exist much more efficient means than capitalization for accomplishing this objective in the case of a government s smaller tangible capital-type items. 1 Furthermore, practice has demonstrated that capital asset management systems that attempt to incorporate data on numerous smaller items are often costly and difficult to maintain and operate. Recommendation. The Government Finance Officers Association (GFOA) recommends that state and local governments consider the following guidelines in establishing capitalization thresholds: Potentially capitalizable items should only be capitalized only if they have an estimated useful life of at least two years following the date of acquisition; Capitalization thresholds are best applied to individual items rather than to groups of similar items (e.g., desks and tables), unless the effect of doing so would be to eliminate a significant portion of total capital assets (e.g., books of a library district); In no case should a government establish a capitalization threshold of less than $5,000 for any individual item; 1 See GFOA s best practice on Ensuring Control over Noncapitalized Items (2006).
In establishing capitalization thresholds, governments that are recipients of federal awards should be aware of federal requirements that prevent the use of capitalization thresholds in excess of certain specified maximum amounts (i.e., currently $5,000) for purposes of federal reimbursement; and Governments should exercise control over potentially capitalizable items that fall under the operative capitalization threshold. 2 Approved by the GFOA s Executive Board, February 24, 2006. 2 See GFOA s best practice on Ensuring Control over Noncapitalized Items (2006).
PROPOSED POLICY WORKING DRAFT Virgin Valley Water District Fixed Asset / Capitalization / Depreciation Policy Guidelines Selected Assets List is NOT All Inclusive Estimated Useful Life G/L #1505 Building & Improvements Well / Pump House 40 yrs Fencing 15 yrs Arsenic Removal Treatment Plant Buildings / Structures 40 yrs Site Costs 10 40 yrs G/L #1510 Source Wells Well Drilling Costs 30 yrs Well / Pump Equipment 10 yrs Power Lines 40 yrs 4 Arsenic Removal Treatment Equipment: 5 yrs a. Controls b. Piping c. Electrical G/L #1520 Transmission Structures Transmission Lines (Non Ductile Iron) 20 yrs Transmission Lines (Ductile Iron) 40 yrs PRV Vaults/Stations 40 yrs Arsenic Removal Plants Transmission Structures yrs G/L #1530 Telemetry Equipment Telemetry Equipment 7 yrs G/L #1550 Reservoirs / Tanks Reservoirs / Tanks 40 yrs G/L #1570 Distributions Lines 1 Meters 7 10 yrs 2 Distribution Waterlines 7 40 yrs G/L #1580 Machinery & Equipment Trucks; Smaller Tools & Mach/Equip 5 yrs 3 Larger Trucks; Larger Mach/Equip 7 15 yrs G/L #1650 Office Capital Assets Software 3 yrs Computers & Other IT Equipment 5 yrs Furniture & Office Equipment 7 yrs Footnotes: 1 Generally use 7yrs or 10yrs 2 There is a broad spectrum of estimated useful lives used for this type of asset. Primarily use the following years; 7, 10, 15, 20, & 40 3 Generally use 7, 10, 12 or 15 yrs 4 Related to the arsenic removal plant equipment category the included various components w/lives ranging as noted above. A reasonable life of 7 yrs was chosen at FY10 fixed asset schedule preparation, however, after discussions with William Peterson it has been determined that equipment in this category will now be given a 5 year useful life (effective 7/1/12). Capitalization / Depreciation It is the policy of The Virgin Valley Water District to capitalize and depreciate a fixed asset using the straight line method over its estimated useful life. Potentially capitalizable items will only be capitalized if they have an estimated useful life of at least two years. Capitalization thresholds will only be applied to individual items rather than groups of similar items (e.g. R25 Orion Meters) even if multiple units purchased at one time bring the total Invoice amount above the Capitalization threshold. The Capitalization threshold shall be set at $5,000. Therefore only individual items that cost $5,000 or more shall be capitalized and depreciated when all other standard criteria for capitalization are met. Fully depreciated fixed assets will remain on the organization's statement of financial position until they are disposed of or otherwise deemed worthless. 1 Policy - Fixed Asset & Depreciation Guidelines- July 2012.xlsx
Wes Smith From: Sent: To: Subject: MacRay Curtis [macraycurtis@ymail.com] Friday, June 29, 2012 2:58 PM Wes Smith Re: Capitalization Guidelines Wes: We concur with the changes you have proposed for capitalization of capital assets. Many local governments have moved to the $5,000 threshhold. At this level, the District will still capture the material assets, and will expense those assets which are not material. This will save significant time and Will have very little effect on the financial stat~ments. MacRay Curtis, CPA Sent from my ipad On Jun 28, 2012, at 11:58 AM, "Wes Smith" <wsmith@wh20.com> wrote: Mac, Per our conversation of 6-28-12 I intend to recommend to our Board of Directors that we make a change in our Capitalization Policy. Our change will follow the Best Practices recommended by The Government Finance Officers Association (GFOA). Our new policy will reflect the following changes: Capitalization thresholds will only be applied to individual items rather than groups of similar items (e.g. R25 Orion Meters) even if multiple units are purchased at one time with a total invoice over the Capitalization limit. The Capitalization threshold shall be set at $5,000. Therefore only individual items that cost $5,000 or more shall be capitalized and depreciated when all other standard criteria for capitalization are met. (Note: Our previous policy called for a threshold for Capitalization of $1,000). If you concur with these changes to our policy, please confirm via e-mail. Thank you for your assistance, Accountant Virgin Valley Water District 500 Riverside Road Mesquite, NV 89027 Phone: 702346-5731 Fax: 702 346-2596 <~OliPfi > CONFIDENTIALITY NOTICE: The information contained in this message is confidential and may be legally privileged. The message is intended solely for the addressee(s). If you are not the intended recipient, you are hereby notified that any use, dissemination, or reproduction is strictly prohibited and may be unlawful. If you are not the intended recipient, please contact the sender by return e-mail and destroy all copies of the original message. 1