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4.5. SR 12-16-2002MEMORANDUM TO: FROM: DATE: Mayor and City Council Lori Johnson, Finance Director December 16, 2002 SUBJECT: Consider Capital Asset Guide Item 4.5. In preparation for implementing Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Einandal Statements - and Management's Discussion and Anal~sis -for State andLocal Governments, a capital asset guide has been developed to address the capital asset information that will be included in the city's comprehensive annual financial report. One of the new reporting elements of GASB 34 is the requirement that governments report general infrastructure assets and depreciate general capital assets. The Capital Asset Guide sets capitalization thresholds for the various capital asset categories, defines which assets should be capitalized, and sets an estimated useful life for each type of capital asset. The attached Capital Asset Guide meets the requirements of GASB 34 and has been approved by Steve MacDonald, Abdo, Eick & Meyers. Action Requested The City Council is asked to adopt the City of Elk River's Capital Asset Guide as attached. s:~council\lori\gasb34.doc CAPITAL ASSET GUIDE Introduction For fiscal year ending December 31, 2003, the City of Elk River will be required to implement Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments. Statement No. 34 establishes new financial reporting requirements for state and local governments throughout the United States. When implemented, it will create new information and will restructure much of the information that governments have presented in their annual reports in the past. The intent of these new requirements is to make annual reports more comprehensive and easier to understand and use. Two key implementation challenges the new reporting model presents are infrastructure reporting and depreciation accounting. Statement No. 34 requires governments to report general infrastructure assets and depreciate general governmental capital assets over their estimated useful lives. While this document is not all encompassing, it has been prepared to provide general guidance on implementing the new reporting requirements in regards to capital assets for financial reporting purposes only. The primary objectives of financial reporting generally pertain to valuation, allocation, presentation and disclosure; therefore, this policy should not be used for property control purposes. This policy will take effect January 1, 2003. Reportin_q Capital Assets Capital assets should be recorded and reported at their historical costs, which include the vendor's invoice (plus the value of any trade-in or allowance, if reflected on the invoice), plus sales tax, initial installation cost (excluding in-house labor) modifications, attachments, accessories or apparatus necessary to make the asset usable and render it into service. Historical costs also include ancillary charges such as freight and transportation charges, site preparation costs, and professional fees. When the historical cost of a capital asset is not practicably determinable, the estimated historical cost of the asset should be determined by appropriate methods and recorded. Estimated historical cost should be so identified in the record and the basis of determination established in the responsible entity's public records. The basis of valuation for capital assets constructed by entity personnel should be the costs of material, direct labor, and overhead costs identifiable to the project. An entity that owns capital assets is responsible for correctly reporting these assets at the date of acquisition. Donated capital assets should be reported at fair value~ at the time of acquisition plus ancillary charges, if any. Donations are defined as voluntary contributions of resources to a governmental entity by a nongovernmental entity.2 Depreciating Capital Assets New to general governmental capital assets is the requirement to depreciate those assets over their estimated useful lives. Depreciation is the process of allocating the cost of an asset over the periods that asset is used for its intended purpose. Capital assets should be depreciated over their estimated useful lives unless they are: · Inexhaustible (i.e., land and land improvements, certain works of art and historical treasures), · Infrastructure assets reported using the modified approach, or · Construction work in progress Fair value is the amount at which an asset could be exchanged in a current transaction between willing parties. A voluntary contribution of resources between governmental entities is not a donation. Land and land improvements are inexhaustible assets and do not depreciate over time Examples of items to be capitalized as land and land improvements are: · Purchase price or fair market value at time of gift · Commissions · Professional fees (title searches, architect, legal, engineering, appraisal, surveying, environmental assessments, etc.) · Land excavation, fill, grading, drainage · Demolition of existing buildings and improvements (less salvage) · Removal, relocation, or reconstruction of property of others (railroad, telephone and power lines) · Interest on mortgages accrued at date of purchase · Accrued and unpaid taxes at date of purchase · Other costs incurred in acquiring the land · Water wells (includes initial cost for drilling, the pump and its casing) · Right-of-way (permanent) Other Improvements Assets built, installed or established to enhance the quality or facilitate the use of land for a particular purpose. Examples of items to be capitalized as other improvements are: · Fencing and gates · Landscaping · Parking lots/driveways/parking barriers · Outside sprinkler systems · Recreation areas and athletic fields (including bleachers) · Golf courses · Paths and trails · Septic systems · Stadiums · Swimming pools, tennis courts, basketball courts · Fountains · Plazas and pavilions · Retaining walls Buildings/building improvements A building is a structure that is permanently attached to the land, has a roof, is partially or completely enclosed by walls, and is not intended to be transportable or moveable. A building is generally used to house persons, property, and fixtures attached to and forming a permanent part of such a structure. Certain buildings or · Installation or upgrade of window or door frame, upgrading of windows or doors, built-in closet and cabinets · Interior renovation associated with casings, baseboards, light fixtures, ceiling trim, etc. · Exterior renovation such as installation or replacement of siding, roofing, masonry, etc. · Installation or upgrade of plumbing and electrical wiring · Installation or upgrade of phone or closed circuit television systems, networks, fiber optic cable, or wiring required in the installation of equipment (that will remain in the building) · Other costs associated with the above improvements Examples of items to be considered maintenance and repairs and not capitalized as buildings are: · Adding, removing and/or moving of walls relating to renovation projects that are not considered major rehabilitation projects and do not increase the value of the building · Improvement projects of minimal or no added life expectancy and/or value to the building · Plumbing or electrical repairs · Cleaning, pest extermination, or other periodic maintenance · Interior decoration, such as draperies, blinds, curtain rods, wallpaper · Exterior decoration, such as detachable awnings, uncovered porches, decorative fences, etc. · Maintenance-type interior renovation, such as repainting, touch-up plastering, replacement of carpet, tile, or panel sections; sink and fixture refinishing, etc. · Maintenance-type exterior renovation such as repainting, replacement of deteriorated siding, roof, or masonry sections · Replacement of a part or component of a building with a new part of the same type and performance capabilities, such a replacement of an old boiler with a new one of the same type and performance capabilities · Any other maintenance-related expenditure which does not increase the value of the building Equipment, Machinery, and Vehicles Fixed or movable tangible assets to be used for operations, the benefits of which extend beyond one year from date of receipt and rendered into service. Personal property paid for jointly by the city and other governmental entities should be capitalized by the entity responsible for future maintenance. Examples of expenditures to be capitalized as equipment, machinery, and vehicles: · Original contract or invoice price · Freight charges 7 · Travel costs incurred by employees in their duties directly associated with development · Payroll and payroll-related costs of employees directly associated with or devoting time in coding, installing, or testing · Costs to develop or obtain software that allows for access or conversion of old data by new information systems Note: Upgrades and enhancements should be capitalized only to the extent that they increase the functionality of the product. Leased Equipment 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% 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% of the fair value of the leased asset. Leases that do not meet any of the above requirements should be recorded as an operating lease and reported in the notes of the financial statements. Outdoor equipment - playgrounds, scoreboards Custodial equipment Photocopiers Motor Vehicles: Cars, light trucks and vans (less than 13,000 lbs) Heavy trucks (13,000 lbs and greater) Firefig hting trucks Heavy equipment - front loaders, graders, etc 15 yrs 10 yrs 5 yrs 3-8 yrs 8-10 yrs 15 yrs 10-20 yrs Infrastructure Roads and highways (including curbs & gutters): Paved Unpaved Parking lots - public Sidewalks Sewer disposal system (sanitary, storm) Bridges: Pedestrian Dams 20 yrs 15 yrs 15 yrs 20 yrs 40 yrs 30 yrs 50 yrs