COUNTY OF RIVERSIDE  OFFICE OF THE AUDITOR-CONTROLLER CAPITAL ASSETS FY 2004-05 GASB 42 October 27, 2004
CAPITAL ASSETS FY 2003-04 <ul><li>Capital Asset tracking process is entering Phase III (Refining) </li></ul><ul><li>We Are...
CAPITAL ASSET PRIORITIES FY 2004-05 <ul><li>Inter-fund Transactions  </li></ul><ul><ul><li>FY 2004-05 Budget Adjustments <...
In Addition to  TAG NUMBERS, <ul><li>We Are Now Looking For INTER-FUND Transactions </li></ul>
Inter-Fund Capital Asset Transactions- (Lisa Brandl) <ul><li>GOAL: </li></ul><ul><ul><li>Properly classify expenditures in...
Inter-fund Capital Asset Transactions- (Lisa Brandl) <ul><li>Issue:  Assets were not recorded in the Asset Management Modu...
Inter-Fund Capital Asset Transactions- (Lisa Brandl) <ul><li>Need to adjust current fiscal budget to properly classify exp...
The Inter-Fund Puzzle <ul><li>We will be looking at two parts: </li></ul><ul><ul><li>Appropriation 4 Fixed Assets </li></u...
Mark Your Calendars for the Upcoming Training… <ul><li>TOPIC :  Usage of Interfund Accounts, Operating Transfer in/out and...
GASB 42: Released November 2003   <ul><li>Accounting and Financial Reporting for Impairments of Capital Assets and for Ins...
I Know What You Are Going to Say! <ul><li>“ Here we go with some more accounting </li></ul><ul><li>YADA </li></ul><ul><li>...
GASB 42 Basis:   <ul><li>HISTORY: </li></ul><ul><ul><li>The presumption has been that a capital asset’s historical cost (o...
GASB 42 Basis Cont’d. <ul><li>Traditional accounting had to be modified: </li></ul><ul><li>Capital assets were actually ta...
Traditional Accounting for Capital Asset Impairments life         remaining   resumes     over   until service  if necessa...
Permanently Taken Out of Service (Example): <ul><li>Historical Cost   $10,000 </li></ul><ul><li>Accumulated Depreciation  ...
Less Capacity -Shorter Life (Example): <ul><li>Historical Cost $100,000 </li></ul><ul><li>Estimated life (years 1-3)   10 ...
Traditional Accounting Summary:   <ul><li>Impairments only recognized in  TWO  situations:  </li></ul><ul><ul><li>Capital ...
Changes in Private Sector   <ul><li>Recognize All Impairments Other Than Temporary: </li></ul><ul><ul><li>Statement No. 14...
FASB Approach   <ul><li>Identify circumstances indicative of a potential asset’s impairment. </li></ul><ul><li>Apply “Reco...
FASB Indicators - Potential Impairment: <ul><li>Significant decrease in market price </li></ul><ul><li>Significant change ...
Example of “Recoverability” Test   <ul><li>Carrying Value   $50,000 </li></ul><ul><li>Estimated future cash flows: </li></...
GASB View - Usefulness of FASB Approach: <ul><li>Better to have a single approach to capital asset impairment applicable t...
Overview of GASB Treatment           recoveries recoveries resumes     insurance insurance until service  if necessary of ...
GASB 42: Indicators of Potential Impairment: <ul><li>Write-down required ONLY if a specific, easily recognized indicator i...
Calculate and Report an Impairment Loss Only if Both are YES: <ul><li>Is decline in service value significant? </li></ul><...
Temporary v. Permanent Impairments   <ul><li>Temporary Impairments are not recognized </li></ul><ul><li>Permanent Impairme...
Temporary Impairment (Example): <ul><li>Middle School is not being used due to declining enrollment. </li></ul><ul><li>Sho...
Calculations of Impairment- Four Methods <ul><li>The method used depends on the reason for impairment: </li></ul><ul><li>R...
RELATIONSHIPS Lower of Carrying Value or Fair Value Construction Stoppage Service Units or Deflated Depreciation Change in...
Classification of Impairment Losses: <ul><li>Other Financing Use – if impairment is extraordinary or subject to management...
Disclosures & Recoveries <ul><li>Note Disclosures: </li></ul><ul><ul><li>If impairments are not visible in financial state...
GASB 42 Effective Date <ul><li>For fiscal periods beginning after Dec. 15, 2004 </li></ul><ul><li>FOR COUNTY, effective Ju...
Checklist of Significant Slides and Handouts: <ul><li>Traditional Accounting for Capital Asset Impairments-Table </li></ul...
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Capital Assets:Â Status and GASB 42 (Impairments)

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Capital Assets:Â Status and GASB 42 (Impairments)

  1. 1. COUNTY OF RIVERSIDE OFFICE OF THE AUDITOR-CONTROLLER CAPITAL ASSETS FY 2004-05 GASB 42 October 27, 2004
  2. 2. CAPITAL ASSETS FY 2003-04 <ul><li>Capital Asset tracking process is entering Phase III (Refining) </li></ul><ul><li>We Are Doing a Great Job. </li></ul>
  3. 3. CAPITAL ASSET PRIORITIES FY 2004-05 <ul><li>Inter-fund Transactions </li></ul><ul><ul><li>FY 2004-05 Budget Adjustments </li></ul></ul><ul><ul><li>Current Year Actuals </li></ul></ul><ul><li>Capital Leases ( handout) </li></ul><ul><li>Physical Inventory Testing </li></ul><ul><ul><li>Land, Buildings, Equipment </li></ul></ul><ul><li>Infrastructure Additions </li></ul>
  4. 4. In Addition to TAG NUMBERS, <ul><li>We Are Now Looking For INTER-FUND Transactions </li></ul>
  5. 5. Inter-Fund Capital Asset Transactions- (Lisa Brandl) <ul><li>GOAL: </li></ul><ul><ul><li>Properly classify expenditures in County financial statements </li></ul></ul><ul><li>HISTORY: </li></ul><ul><ul><li>Capital assets, projects, and other similar expenditures were budgeted and recorded as Appropriation 4 (Fixed Assets) </li></ul></ul>
  6. 6. Inter-fund Capital Asset Transactions- (Lisa Brandl) <ul><li>Issue: Assets were not recorded in the Asset Management Module </li></ul><ul><li>Conclusion: Need to reclassify CY expenditures for proper presentation in the financial statements as Inter-fund and Contributions </li></ul><ul><li>Examples: </li></ul><ul><ul><li>$1,350,000 funding source for Gov. Dept. XYZ - capital project </li></ul></ul><ul><ul><li>$1,941,000 funding source for Gov. Dept. Q - land acquisitions </li></ul></ul><ul><ul><li>$500,00 for city YMCA Playground - (Contr.?) </li></ul></ul>
  7. 7. Inter-Fund Capital Asset Transactions- (Lisa Brandl) <ul><li>Need to adjust current fiscal budget to properly classify expenditures: </li></ul><ul><li>Current FY 04-05 Expense Budget </li></ul><ul><ul><li>525440 Professional Services 2,500,000 </li></ul></ul><ul><ul><li>540040 Land 6,000,000 </li></ul></ul><ul><ul><li>548200 Infrastructure 20,000,000 </li></ul></ul><ul><li>Proposed Change to FY 04-05 Expense Budget </li></ul><ul><ul><li>536200 Contributions to Other Non-Co Agency 2,000,000 </li></ul></ul><ul><ul><li>536780 Inter-fund Expense-Capital Projects 24,000,000 </li></ul></ul><ul><ul><li>537080 Inter-fund Expense-Misc. 2,000,000 </li></ul></ul>
  8. 8. The Inter-Fund Puzzle <ul><li>We will be looking at two parts: </li></ul><ul><ul><li>Appropriation 4 Fixed Assets </li></ul></ul><ul><ul><li>Appropriation 3 Inter-fund Transactions </li></ul></ul>
  9. 9. Mark Your Calendars for the Upcoming Training… <ul><li>TOPIC : Usage of Interfund Accounts, Operating Transfer in/out and Contribution to/from  </li></ul><ul><li>DATE :  Mid-January thru February - the dates of the sessions will be communicated at a later time  </li></ul><ul><li>PLACE :  Auditor-Controller’s Office conference room, 11th Floor, C.A.C. (4080 Lemon St., Riverside)  </li></ul><ul><li>TRAINING SIZE : 1-2 departments OR 10-20 attendees per session  </li></ul><ul><li>TRAINING COORDINATOR :  Frankie Ezzat, Principle Accountant </li></ul><ul><li>WHO SHOULD ATTEND :  Training Invitations will be sent to various departments based on their usage of interfund accounts. Other users are welcome to attend by contacting Frankie Ezzat at (951) 955-3851 or via email  [email_address] . </li></ul>
  10. 10. GASB 42: Released November 2003 <ul><li>Accounting and Financial Reporting for Impairments of Capital Assets and for Insurance Recoveries </li></ul>
  11. 11. I Know What You Are Going to Say! <ul><li>“ Here we go with some more accounting </li></ul><ul><li>YADA </li></ul><ul><li>YADA </li></ul><ul><li>YADA” </li></ul>
  12. 12. GASB 42 Basis: <ul><li>HISTORY: </li></ul><ul><ul><li>The presumption has been that a capital asset’s historical cost (or its fair value at the date of donation) should be allocated over its estimated useful life on a systematic and rational basis (e.g. depreciation expense) in order to “match” the cost of the capital asset with the related revenues generated by its use. </li></ul></ul>
  13. 13. GASB 42 Basis Cont’d. <ul><li>Traditional accounting had to be modified: </li></ul><ul><li>Capital assets were actually taken out of service </li></ul><ul><li>Capital assets have lost a portion of their service value, but remained in service. </li></ul>
  14. 14. Traditional Accounting for Capital Asset Impairments life         remaining   resumes     over   until service if necessary of Activities depreciation No effect depreciation to fair value Statement Accelerated   Suspend Write -down                             or fair value of Position Carrying value Carrying value Carrying value carrying value Statement       Lower of             Useful Life Useful Life Temporarily Permanently   Shorter Same                 Still in Service Out of Service            
  15. 15. Permanently Taken Out of Service (Example): <ul><li>Historical Cost $10,000 </li></ul><ul><li>Accumulated Depreciation (8,000 ) </li></ul><ul><li>Carrying Value $ 2,000 </li></ul><ul><li>Fair value (salvage) (500) Operating Statement Loss $ 1,500 </li></ul>
  16. 16. Less Capacity -Shorter Life (Example): <ul><li>Historical Cost $100,000 </li></ul><ul><li>Estimated life (years 1-3) 10 years </li></ul><ul><li>Estimated life (year 4+) 8 years </li></ul><ul><li>Depreciation (years 1-3): </li></ul><ul><ul><li>$100,000/10 = $ 10,000/year </li></ul></ul><ul><li>Depreciation (years 4-8): </li></ul><ul><ul><li>$70,000/5 = $ 14,000/year </li></ul></ul>
  17. 17. Traditional Accounting Summary: <ul><li>Impairments only recognized in TWO situations: </li></ul><ul><ul><li>Capital asset permanently removed from service </li></ul></ul><ul><ul><ul><li>IMMEDIATE EFFECT </li></ul></ul></ul><ul><ul><li>Capital Asset’s life shortened </li></ul></ul><ul><ul><ul><li>EFFECT OVER TIME </li></ul></ul></ul>
  18. 18. Changes in Private Sector <ul><li>Recognize All Impairments Other Than Temporary: </li></ul><ul><ul><li>Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, takes the position that a capital asset is impaired for accounting and financial reporting purposes if future directly related cash inflows are estimated to be less than the asset’s carrying value. </li></ul></ul>
  19. 19. FASB Approach <ul><li>Identify circumstances indicative of a potential asset’s impairment. </li></ul><ul><li>Apply “Recoverability” test </li></ul><ul><ul><li>Do new related undiscounted future cash inflows equal or exceed carrying value? (Example to follow) </li></ul></ul><ul><li>Write down assets to fair value if failure to meet the “Recoverability” tests. </li></ul>
  20. 20. FASB Indicators - Potential Impairment: <ul><li>Significant decrease in market price </li></ul><ul><li>Significant change in manner of use or in physical condition </li></ul><ul><li>Significant change in legal factors or business climate </li></ul><ul><li>Costs to-date significantly in excess of expected for acquisition or construction </li></ul><ul><li>Current period operating or cash flow loss and history or projected operating or cash flow losses </li></ul><ul><li>Expectation that a sale or disposition will occur earlier than expected </li></ul>
  21. 21. Example of “Recoverability” Test <ul><li>Carrying Value $50,000 </li></ul><ul><li>Estimated future cash flows: </li></ul><ul><li> Use of Asset $27,000 </li></ul><ul><li> Salvage Value 10,000 </li></ul><ul><li>Total Estimated Future Inflows 37,000 </li></ul><ul><li>Carrying Value over Inflows $13,000 </li></ul><ul><li>RESULT: WRITE DOWN TO FAIR VALUE </li></ul>
  22. 22. GASB View - Usefulness of FASB Approach: <ul><li>Better to have a single approach to capital asset impairment applicable to all capital assets </li></ul><ul><li>GASB 42 : Decrease in service potential rather than cash flows </li></ul>
  23. 23. Overview of GASB Treatment           recoveries recoveries resumes     insurance insurance until service if necessary of Activities loss net of loss net of depreciation to fair value Statement Impairment Impairment Suspend Write -down             value value       carrying carrying       from from   or fair value of Position subtracted subtracted Carrying value carrying value Statement loss loss   Lower of   Impairment Impairment       Useful Life Useful Life Temporarily Permanently   Shorter Same                 Still in Service Out of Service            
  24. 24. GASB 42: Indicators of Potential Impairment: <ul><li>Write-down required ONLY if a specific, easily recognized indicator is present: </li></ul><ul><li>Evidence of Physical Damage </li></ul><ul><ul><li>Mold or wind damage </li></ul></ul><ul><li>Changes in Legal or Environmental Factors </li></ul><ul><ul><li>Underground storage tanks whose useful life was significantly curtailed w/ new environmental regulations </li></ul></ul><ul><li>Technological Changes or Obsolescence </li></ul><ul><ul><li>Old enclosed MRI replaced by popular open style </li></ul></ul><ul><li>Changes in Manner or Duration of Use </li></ul><ul><ul><li>School building now used as a warehouse </li></ul></ul><ul><ul><li>Baseball Park now used for concerts – team moved </li></ul></ul><ul><li>Construction Stoppage </li></ul><ul><ul><li>Permanent stoppage e.g. following discovery of the endangered species “green-eyed wooly rat” at construction site </li></ul></ul>
  25. 25. Calculate and Report an Impairment Loss Only if Both are YES: <ul><li>Is decline in service value significant? </li></ul><ul><li>Is the event or change outside the normal life cycle? </li></ul>
  26. 26. Temporary v. Permanent Impairments <ul><li>Temporary Impairments are not recognized </li></ul><ul><li>Permanent Impairments must be recognized </li></ul><ul><li>Impairments are presumed to be permanent. </li></ul>
  27. 27. Temporary Impairment (Example): <ul><li>Middle School is not being used due to declining enrollment. </li></ul><ul><li>Should the Middle School impairment be recognized? </li></ul><ul><li>If evidence of future enrollment, based on residential development, birth rates, or current elementary school enrollments, demonstrates that the closing is temporary, the impairment should not be recognized. </li></ul>
  28. 28. Calculations of Impairment- Four Methods <ul><li>The method used depends on the reason for impairment: </li></ul><ul><li>Restoration Cost Approach </li></ul><ul><li>Service Units Approach </li></ul><ul><li>Deflated depreciation replacement cost approach </li></ul><ul><li>Lower of carrying value or fair value </li></ul>
  29. 29. RELATIONSHIPS Lower of Carrying Value or Fair Value Construction Stoppage Service Units or Deflated Depreciation Change in Manner or Duration of use Service Units Approach Technological Changes or Obsolescence Service Units Approach Changes in Legal or Environmental Restoration Cost Approach Evidence of Physical Damage Calculation Method Impairment Type
  30. 30. Classification of Impairment Losses: <ul><li>Other Financing Use – if impairment is extraordinary or subject to management control (e.g. duration of use) </li></ul><ul><li>Otherwise – </li></ul><ul><ul><li>Component of Net Program Cost in appropriate functional category </li></ul></ul>
  31. 31. Disclosures & Recoveries <ul><li>Note Disclosures: </li></ul><ul><ul><li>If impairments are not visible in financial statements </li></ul></ul><ul><ul><li>If impairments cause assets to be idle: temp. or perm. </li></ul></ul><ul><li>Insurance Recoveries: </li></ul><ul><ul><li>In governmental funds, recoveries should be classified As Other Financing Sources </li></ul></ul>
  32. 32. GASB 42 Effective Date <ul><li>For fiscal periods beginning after Dec. 15, 2004 </li></ul><ul><li>FOR COUNTY, effective July 1, 2005 </li></ul>
  33. 33. Checklist of Significant Slides and Handouts: <ul><li>Traditional Accounting for Capital Asset Impairments-Table </li></ul><ul><li>Traditional Accounting Summary </li></ul><ul><li>FASB Approach </li></ul><ul><li>Overview of GASB Treatment – Table </li></ul><ul><li>GASB 42 – Indicators of Potential Impairment </li></ul><ul><li>Calculate and Report an Impairment if….. </li></ul><ul><li>GASB 42 Effective Date </li></ul><ul><li>GAAFR REVIEW </li></ul>
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