Accounting For General Capital Assets And Capital Projects
Chapter5Accounting for General CapitalAssets and Capital ProjectsMcGraw-Hill/IrwinCopyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning ObjectivesAfter studying this chapter, you should be able to: Describe the nature and characteristics of generalcapital assets Account for general capital assets, including:acquisition, maintenance, depreciation, impairmentand disposition Explain the purpose, characteristics and typicalfinancing sources of a capital projects fund5-2
Learning Objectives (Cont’d) Prepare journal entries for a typical capital project,both at the fund level and within the governmentalactivities category at the government-wide level Prepare financial statements for capital projects funds Explain the concepts and accounting procedures forspecial assessment capital projects5-3
What are General Capital Assets? Long-lived assets used by activities reported ingovernmental fundsDistinguished from capital assets that arespecifically associated with activities reported inproprietary and fiduciary funds5-4
Typical Classifications ofGeneral Capital Assets LandBuildingsImprovements Other than BuildingsMachinery and EquipmentConstruction Work in ProgressInfrastructure (e.g., roads, streets, bridges)Intangibles (e.g., patents, easements, waterrights)5-5
Typical Financing Sourcesfor General Capital Assets Tax-supported bondsGrants from other governmental units (e.g.,federal or state grants)Transfers from other fundsGifts from individuals or organizationsSpecial assessment bonds or taxesCapital leasesSpecial development districts (e.g., taxincrement financing, transportation developmentdistricts)5-6
Acquiring Capital AssetsGeneral capital assets are acquired fromexpenditures of: The General Fund Special revenue funds Capital project fundsNote: If money received from governments,individuals, or organizations is restricted for thepurchase or construction of high cost capital assets, itis recommended that a Capital Projects Fund beused5-7
Assigning Costs toGeneral Capital Assets Follow the cost principle (subject to materialitythreshold) Invoice cost or historical costAll other necessary and reasonable costs to placethe asset into use (excluding forgone cashdiscounts and financing charges)Record donated assets at fair value on date ofgift (unless received from another fund, in whichcase use lower of book value or fair value)5-8
Accounting for General Capital AssetsGeneral capital assets are: Capitalized in the governmental activitiesaccounts at the government-wide level Generally, depreciated at the governmentwide levelDebited to Expenditures in the appropriategovernmental fund 5-9
Accounting for General Capital Assets (Cont’d)Certain types of general capital assets are notdepreciated. They include: Inexhaustibleassets such as land Certainnoncapitalized works of art, historical treasures,or similar assets Eligibleinfrastructure using the modified approach(wherein infrastructure is maintained at an establishedcondition level – see next slide)5-10
The Modified Approachfor Infrastructure AssetsThe modified approach can be used for certain ―eligible‖infrastructure assets if An asset management system is in place that includes: an up-to-date inventory of eligible assetscondition assessments of the assets and summary of resultsusing a measurement scaleestimates each year of the annual amount needed to maintainand preserve the assets at the established condition levelThe government documents that these assets are beingpreserved at or above established levels of condition5-11
Accounting for Acquisitionof General Capital AssetsExample: Purchased office equipment for theMayor’s office and paid 50,000 cash from theGeneral FundGeneral Fund:ExpendituresCashGovernmental ,0005-12
Accounting for Capital Leases Follow SFAS No. 13 criteria to determine if the leaseis a capital lease or an operating leaseRecord capital assets and related obligation in thegovernment-wide statements in the amount of thepresent value of minimum lease payments. Reportat fair value if lower than the present value ofminimum lease paymentsRecord an expenditure and other financing source inthe governmental fund that is using the asset5-13
Accounting for Capital Leases (Cont’d)Example: Capital lease with present value of minimumlease payments of 50,000Special Revenue Fund:ExpendituresOther Financing Sources—Capital Lease AgreementsGovernmental Activities:EquipmentCapital Lease Obligations PayableDr.50,000Cr.50,00050,00050,0005-14
Required Capital Asset Disclosures Capitalization policyPolicy for estimating useful lives of assetsBeginning and end of the year balances,including accumulated depreciationAcquisitions during the yearSales or other dispositions during the yearDepreciation expense for the current periodWhy collections (e.g., works of art orhistorical treasures) are not capitalized, ifthat is the case5-15
Costs Incurred After AcquisitionAdditions/betterments vs. replacements/maintenance Capitalize costs of additions and betterments; don'tcapitalize replacements and maintenanceexpenditures Some replacements might be partly additions orbetterments; if so, capitalize as appropriate butremove cost of old asset Requires judgment to determine whether an assethas been enhanced5-16
Accounting for the Disposition ofGeneral Capital Assets Remove original cost of assets beingdisposed. If only part of a structure isdemolished, remove a pro-rata share of thecost Record in both the governmental fund and thegovernmental activities general journals5-17
Accounting for the Disposition ofGeneral Capital Assets (Cont’d)Example 1: Assume a machine is sold for 500. Theasset had originally been purchased for 8,000 usingGF revenues. It is fully depreciatedGeneral Fund:CashRevenues—Misc.(or OFS)Governmental Activities:CashAccumulated DepreciationEquipmentGain on Sale of EquipmentDr.500Cr.5005008,0008,0005005-18
Accounting for the Disposition ofGeneral Capital Assets (Cont’d)Example 2: Assume a building with an original cost of 100,000 (from tax-supported bonds) is demolished; costof demolition was 5,000. It is fully depreciatedGeneral Fund:ExpendituresCashDr.Cr.5,0005,000Governmental Activities:Loss on Disposal of BuildingAccumulated -19
Asset ImpairmentsDefinition: An asset impairment is a significant,unexpected decline in the service utility of a capitalassetCauses: Unexpected circumstances or events (e.g.,physical damage, obsolescence, environmentalfactors, etc.)Duration: Barring evidence to the contrary,impairments should be considered permanent5-20
Measurement of Asset ImpairmentsMeasurement methods for determining amount ofimpairment: Restorative cost approach. Use for impairmentsfrom physical damage Service units approach. Use for impairment due toenvironmental factors Deflated depreciated replacement cost approach.Use for impairment due to change in the manner orduration of use5-21
Reporting of Asset Impairments Report an asset impairment as a reduction of thecarrying value of the capital asset and as afunction/program expense in the government-widestatement of activities. If reported in the Businesstype Activities column, also report the impairment asan asset write-down and operating expense in theproprietary fund operating statement Report as an extraordinary or special item, ifapplicable Report impairment losses net of any insurancerecoveries that occur in the same fiscal year5-22
Capital Projects FundsTwo types of capital projects: General (public benefit)Examples: public buildings; roads, highwaysand bridges; park improvements; etc. Special assessment (private benefit)Examples: street improvements, curbs,sidewalks, street lighting, sewage, etc.Deemed to benefit citizens in aspecified benefit district5-23
Capital Projects Funds (Cont’d)Characteristics of capital projects: Involvelong-lived assets (e.g., buildings, roads andbridges, etc.) Usuallyinvolve a construction project Usuallyrequire long-range planning and extensivefinancing Havea project-life focus, rather than a year-to-yearfocus5-24
Illustrative Transactions forCapital Projects FundsProject authorization/preconstruction phase Usuallyincluded in a multiyear capital improvementplan several years before the start of project Usually requires long-term financingVoter approval required for general obligation (taxsupported) bonds or special sales taxes for capitalprojects (memo entry only for bond/tax authorization) Apply for and obtain grants 5-25
CPF - Illustrative Transactions (Cont’d)Assume approval is obtained for a federal grant aspartial funding for a city’s office building project.Upon approval the following journal entries would bemade:Capital Projects Fund:Due from Federal GovernmentRevenuesGovernmental Activities:Due from Federal GovernmentProgram Revenues—Public Works—Capital Grants and 6
CPF - Illustrative Transactions (Cont’d)It may also be necessary to obtain interim financing,particularly to complete architectural and engineeringdesign. Assume for the office building project, 50,000 was borrowed from the General Fund, to berepaid later from bond proceedsCapital Projects Fund:Dr.Cash50,000Interfund Loans Payable—CurrentGovernmental Activities:No entry neededCr.50,0005-27
CPF - Illustrative Transactions (Cont’d)A contract was let to an architectural firm in the amountof 50,000 for the completion of the architecturaldesign for the new city office building. The followingentry would be required in the capital projects fundCapital Projects Fund:EncumbrancesReserve for EncumbrancesDr.50,000Cr.50,000Governmental Activities:No entry needed5-28
CPF - Illustrative Transactions (Cont’d)The architectural firm for which an encumbrance of 50,000 had been recorded (see preceding slide), tendereda final bill for 48,000. The city immediately paid the billCapital Projects Fund:Construction ExpendituresReserve for EncumbrancesCashEncumbrancesGovernmental Activities:Construction Work in ,0005-29
CPF - Illustrative Transactions (Cont’d)Assume that bonds with a face value of 5,000,000were issued at 101 to finance the projectCapital Projects Fund:Dr.Cash5,050,000Other Financing Sources—Proceedsof BondsDue to Debt Service FundGovernmental Activities:Cash5,050,000Bonds PayablePremium on Bonds PayableCr.5,000,00050,0005,000,00050,0005-30
CPF - Illustrative Transactions (Cont’d)Project implementation/construction phase. Theamount due from the federal government for thepreviously recorded capital grant was received in fullCapital Projects Fund:CashDue from Federal GovernmentDr.100,000Cr.100,000Governmental Activities:Same entry5-31
CPF - Illustrative Transactions (Cont’d)The 50,000 due to the General Fund was repaidCapital Projects Fund:Interfund Loans Payable—CurrentCashGovernmental Activities:No entry neededDr.50,000Cr.50,0005-32
CPF - Illustrative Transactions (Cont’d)A contract was signed with Capital ConstructionCompany in the amount of 5,050,000Capital Projects Fund:EncumbrancesReserve for EncumbrancesDr.5,050,000Cr.5,050,000Governmental Activities:No entry needed5-33
CPF - Illustrative Transactions (Cont’d)A partial billing of 3,000,000 was received fromCapital Construction CompanyCapital Projects Fund:Construction ExpendituresReserve for EncumbrancesContracts payableEncumbrancesGovernmental Activities:Construction Work in ProgressContracts ,000,0003,000,0005-34
CPF - Illustrative Transactions (Cont’d)The amount due to Capital Construction Companywas paid, except for a 5% retained percentage,which in conformity with the provisions of thecontract was withheld pending final inspectionCapital Projects Fund:Contracts PayableContracts Payable—Retained PercentageCashGovernmental Activities:Same entryDr.3,000,000Cr.150,0002,850,0005-35
CPF - Illustrative Transactions (Cont’d)Capital Construction Company completed the cityoffice building project and tendered its final bill inthe amount of 2,000,000Capital Projects Fund:Construction ExpendituresReserve for EncumbrancesContracts PayableEncumbrancesGovernmental Activities:Construction Work in ProgressContracts ,000,0002,000,0005-36
CPF - Illustrative Transactions (Cont’d)The City paid the amount due Capital Construction,except for a 5% retained percentageCapital Projects Fund:Contracts PayableContracts Payable—Retained PercentageCashGovernmental Activities:Same entryDr.2,000,000Cr.100,0001,900,0005-37
CPF - Illustrative Transactions (Cont’d)Upon final inspection, the City incurred 75,000 ofadditional costs for rework. This work was done byemployees of the City’s General Fund. The contractorwas paid the remaining retained percentageCapital Projects Fund:Dr.Cr.Contracts Payable—Retained Percentage250,000Cash250,000(Cash of 75,000 was paid to General Fund; remainder tocontractor)Governmental Activities:Same entry5-38
CPF - Illustrative Transactions (Cont’d)The project being complete, the City closed alltemporary accounts and transferred the residualequity to the debt service fundCapital Projects Fund:Other Financing Sources—Proceeds of BondsRevenuesConstruction ExpendituresFund BalanceDr.Cr.5,000,000100,0005,048,00052,0005-39
CPF - Illustrative Transactions (Cont’d)Transfer of resources remaining at end of project:Capital Projects Fund:Other Financing Uses—InterfundTransfers OutCashFund BalanceOther Financing Uses—InterfundTransfers OutDr.Cr.52,00052,00052,00052,000(Note: The debt service fund entries would be just the opposite of theseentries, except the account is Interfund Transfers In)Governmental Activities:No entry needed5-40
CPF - Illustrative Transactions (Cont’d)The accounts at the government-wide level will beclosed when all other temporary governmentalactivities accounts are closed. Thus, this closingentry is not illustrated here. However, the entry torecord the completed building is as follows:Governmental Activities:BuildingConstruction Work in ProgressDr.5,048,000Cr.5,048,0005-41
General Capital Assets—Required Financial StatementsFor the illustrative capital project: The building is included in the governmentalactivities statement of net assets as a capital asset,net of accumulated depreciation The long-term liability is reported in theGovernmental Activities column of the statement ofnet assetsDepreciation expense is reported at thegovernment-wide level on the statement of activitiesas a pro rata direct expense for each of thefunctions occupying the building 5-42
General Capital Assets—Required Financial Statements (Cont’d)For the illustrative capital project: (Cont’d) The CPF is included as a separate column of thegovernmental funds financial statements, if itmeets the criteria for a ―major fund‖; otherwiseinclude in the ―Other Governmental Funds‖ column If nonmajor, financial information for the CPF mayalso be reported on combining statements—balance sheet; statement of revenues,expenditures, and changes in fund balances5-43
Special Topics—Accrued Intereston Bonds Sold At the government-wide level, as in businessaccounting, cash received from investors forinterest accrued from the issue date to the datethe are sold bonds is usually recorded as a creditto Interest Expense or Accrued Interest Payable At the fund level, accrued interest collected onbonds sold is usually recorded as a revenue of thedebt service fund. Though conceptually flawed,this simplifies budgetary control of revenues andexpenditures in the debt service fund5-44
Special Topics—Capitalizationof Interest Expense The GASB codification indicates that forgeneral capital assets, interest costs incurredduring construction are not capitalized Interest costs are reported as interestexpenses at the government-wide level andas interest expenditures at the fund level5-45
Special Topics—Arbitrage Rebates The interest received by investors on most bondsissued by state and local governments is exempt fromfederal taxes. As a result, investors are willing toaccept a much lower interest rate on these bonds Governments formerly could issue bonds at a low taxexempt rate, invest the proceeds in high yield taxablesecurities, and use the resulting arbitrage spread forcapital or operating purposes Federal law and IRS regulations require that sucharbitrage earnings, subject to certain exemptions, bepaid to the IRS as arbitrage rebates5-46
Special Topics—Multiple Period Projectsand Multiple Projects Multiple-period projects Close Encumbrances at year-end to FundBalanceReestablish Encumbrances balance at thebeginning of the next fiscal year with a debit toEncumbrances and a credit to Fund BalanceMultiple-projects capital projects funds Use project name or other designation to identifyencumbrances and expenditures accounts withthe project5-47
Special Topics—Special Assessment ProjectsSpecial assessments are compulsory tax levies madeagainst certain property to defray the cost of specificimprovements A special assessment district may be called a localimprovement district, or some similar name The construction phase of the improvement project is accountedfor in a CPF If long-term debt is issued with a government commitment forthe debt, then the debt service phase is recorded in a debtservice fund, as illustrated in Chapter 6 of this text If the government is not obligated in any manner for specialassessment debt issued for the project, the receivable isrecorded in an agency fund5-48
Concluding Comments Capital assets used in governmental activities are referredto as general capital assets Acquisition of relatively low cost capital assets is usuallyrecorded in the General Fund or a special revenue fund Acquisition or construction of high cost capital assets isusually recorded in a capital projects fund In either case, capital assets acquired or constructedduring the period are capitalized (i.e., recorded) in thegovernmental activities journal at the government-widelevelEND5-49
governmental activities general journals Accounting for the Disposition of General Capital Assets. 5-18 Accounting for the Disposition of General Capital Assets (Cont’d) Example 1: Assume a machine is sold for 500. The asset had originally been purchased for 8,000 using GF revenues. It is fully depreciated
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