COUNTY OF RIVERSIDE OFFICE OF THE AUDITORCONTROLLER CAPITAL

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COUNTY OF RIVERSIDE OFFICE OF THE AUDITOR-CONTROLLER CAPITAL ASSETS FY 2004 -05 GASB 42

COUNTY OF RIVERSIDE OFFICE OF THE AUDITOR-CONTROLLER CAPITAL ASSETS FY 2004 -05 GASB 42 October 27, 2004

CAPITAL ASSETS FY 2003 -04 • Capital Asset tracking process is entering Phase III

CAPITAL ASSETS FY 2003 -04 • Capital Asset tracking process is entering Phase III (Refining) • We Are Doing a Great Job.

CAPITAL ASSET PRIORITIES FY 2004 -05 • Inter-fund Transactions – FY 2004 -05 Budget

CAPITAL ASSET PRIORITIES FY 2004 -05 • Inter-fund Transactions – FY 2004 -05 Budget Adjustments – Current Year Actuals Capital Leases ( handout) • Physical Inventory Testing • – Land, Buildings, Equipment • Infrastructure Additions

In Addition to TAG NUMBERS, • We Are Now Looking For INTER-FUND Transactions

In Addition to TAG NUMBERS, • We Are Now Looking For INTER-FUND Transactions

Inter-Fund Capital Asset Transactions- (Lisa Brandl) GOAL: – Properly classify expenditures in County financial

Inter-Fund Capital Asset Transactions- (Lisa Brandl) GOAL: – Properly classify expenditures in County financial statements HISTORY: – Capital assets, projects, and other similar expenditures were budgeted and recorded as Appropriation 4 (Fixed Assets)

Inter-fund Capital Asset Transactions- (Lisa Brandl) Issue: Assets were not recorded in the Asset

Inter-fund Capital Asset Transactions- (Lisa Brandl) Issue: Assets were not recorded in the Asset Management Module Conclusion: Need to reclassify CY expenditures for proper presentation in the financial statements as Inter-fund and Contributions Examples: – $1, 350, 000 funding source for Gov. Dept. XYZ - capital project – $1, 941, 000 funding source for Gov. Dept. Q - land acquisitions – $500, 00 for city YMCA Playground - (Contr. ? )

Inter-Fund Capital Asset Transactions- (Lisa Brandl) Need to adjust current fiscal budget to properly

Inter-Fund Capital Asset Transactions- (Lisa Brandl) Need to adjust current fiscal budget to properly classify expenditures: • Current FY 04 -05 Expense Budget – 525440 Professional Services – 540040 Land – 548200 Infrastructure • 2, 500, 000 6, 000 20, 000 Proposed Change to FY 04 -05 Expense Budget – 536200 Contributions to Other Non-Co Agency – 536780 Inter-fund Expense-Capital Projects – 537080 Inter-fund Expense-Misc. 2, 000 24, 000 2, 000

The Inter-Fund Puzzle We will be looking at two parts: – Appropriation 4 Fixed

The Inter-Fund Puzzle We will be looking at two parts: – Appropriation 4 Fixed Assets – Appropriation 3 Inter-fund Transactions

Mark Your Calendars for the Upcoming Training… • TOPIC: Usage of Interfund Accounts, Operating

Mark Your Calendars for the Upcoming Training… • TOPIC: Usage of Interfund Accounts, Operating Transfer in/out • DATE: Mid-January thru February - the dates of the sessions will • PLACE: Auditor-Controller’s Office conference room, 11 th Floor, • TRAINING SIZE: 1 -2 departments OR 10 -20 attendees per • TRAINING COORDINATOR: Frankie Ezzat, Principle • WHO SHOULD ATTEND: Training Invitations will be sent to and Contribution to/from be communicated at a later time C. A. C. (4080 Lemon St. , Riverside) session Accountant 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 protected] riverside. ca. us.

GASB 42: Released November 2003 • Accounting and Financial Reporting for Impairments of Capital

GASB 42: Released November 2003 • Accounting and Financial Reporting for Impairments of Capital Assets and for Insurance Recoveries

I Know What You Are Going to Say! “Here we go with some more

I Know What You Are Going to Say! “Here we go with some more accounting YADA”

GASB 42 Basis: • HISTORY: – The presumption has been that a capital asset’s

GASB 42 Basis: • HISTORY: – 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.

GASB 42 Basis Cont’d. Traditional accounting had to be modified: • Capital assets were

GASB 42 Basis Cont’d. Traditional accounting had to be modified: • Capital assets were actually taken out of service • Capital assets have lost a portion of their service value, but remained in service.

Traditional Accounting for Capital Asset Impairments Out of Service Permanently Still in Service Same

Traditional Accounting for Capital Asset Impairments Out of Service Permanently Still in Service Same Shorter Temporarily Useful Life Carrying value Lower of Statement carrying value of Position or fair value Write -down Suspend Accelerated Statement to fair value depreciation of Activities if necessary until service over resumes remaining No effect depreciation life

Permanently Taken Out of Service (Example): Historical Cost Accumulated Depreciation Carrying Value Fair value

Permanently Taken Out of Service (Example): Historical Cost Accumulated Depreciation Carrying Value Fair value (salvage) Operating Statement Loss $10, 000 (8, 000) $ 2, 000 (500) $ 1, 500

Less Capacity -Shorter Life (Example): Historical Cost $100, 000 • Estimated life (years 1

Less Capacity -Shorter Life (Example): Historical Cost $100, 000 • Estimated life (years 1 -3) 10 years • Estimated life (year 4+) 8 years • Depreciation (years 1 -3): • – $100, 000/10 = • $ 10, 000/year Depreciation (years 4 -8): – $70, 000/5 = $ 14, 000/year

Traditional Accounting Summary: Impairments only recognized in TWO situations: 1. Capital asset permanently removed

Traditional Accounting Summary: Impairments only recognized in TWO situations: 1. Capital asset permanently removed from service IMMEDIATE EFFECT 2. Capital Asset’s life shortened EFFECT OVER TIME

Changes in Private Sector Recognize All Impairments Other Than Temporary: – Statement No. 144,

Changes in Private Sector Recognize All Impairments Other Than Temporary: – 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.

FASB Approach • Identify circumstances indicative of a potential asset’s impairment. • Apply “Recoverability”

FASB Approach • Identify circumstances indicative of a potential asset’s impairment. • Apply “Recoverability” test – Do new related undiscounted future cash inflows equal or exceed carrying value? (Example to follow) • Write down assets to fair value if failure to meet the “Recoverability” tests.

FASB Indicators - Potential Impairment: • • • Significant decrease in market price Significant

FASB Indicators - Potential Impairment: • • • Significant decrease in market price Significant change in manner of use or in physical condition Significant change in legal factors or business climate Costs to-date significantly in excess of expected for acquisition or construction Current period operating or cash flow loss and history or projected operating or cash flow losses Expectation that a sale or disposition will occur earlier than expected

Example of “Recoverability” Test Carrying Value $50, 000 • Estimated future cash flows: Use

Example of “Recoverability” Test Carrying Value $50, 000 • Estimated future cash flows: Use of Asset $27, 000 Salvage Value 10, 000 • Total Estimated Future Inflows 37, 000 • Carrying Value over Inflows $13, 000 • • RESULT: WRITE DOWN TO FAIR VALUE

GASB View - Usefulness of FASB Approach: • Better to have a single approach

GASB View - Usefulness of FASB Approach: • Better to have a single approach to capital asset impairment applicable to all capital assets • GASB 42 : Decrease in service potential rather than cash flows

Overview of GASB Treatment Out of Service Permanently Still in Service Temporarily Lower of

Overview of GASB Treatment Out of Service Permanently Still in Service Temporarily Lower of Statement carrying value of Position or fair value Carrying value Same Shorter Useful Life Impairment loss subtracted from carrying value Write -down Suspend Impairment Statement to fair value depreciation loss net of of Activities if necessary until service insurance resumes recoveries

GASB 42: Indicators of Potential Impairment: Write-down required ONLY if a specific, easily recognized

GASB 42: Indicators of Potential Impairment: Write-down required ONLY if a specific, easily recognized indicator is present: • Evidence of Physical Damage – Mold or wind damage • Changes in Legal or Environmental Factors – Underground storage tanks whose useful life was significantly curtailed w/ new environmental regulations • Technological Changes or Obsolescence – Old enclosed MRI replaced by popular open style • Changes in Manner or Duration of Use – School building now used as a warehouse – Baseball Park now used for concerts – team moved • Construction Stoppage – Permanent stoppage e. g. following discovery of the endangered species “green-eyed wooly rat” at construction site

Calculate and Report an Impairment Loss Only if Both are YES: Is decline in

Calculate and Report an Impairment Loss Only if Both are YES: Is decline in service value significant? 2. Is the event or change outside the normal life cycle? 1.

Temporary v. Permanent Impairments Temporary Impairments are not recognized • Permanent Impairments must be

Temporary v. Permanent Impairments Temporary Impairments are not recognized • Permanent Impairments must be recognized • Impairments are presumed to be permanent.

Temporary Impairment (Example): Middle School is not being used due to declining enrollment. •

Temporary Impairment (Example): Middle School is not being used due to declining enrollment. • Should the Middle School impairment be recognized? • 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. •

Calculations of Impairment. Four Methods The method used depends on the reason for impairment:

Calculations of Impairment. Four Methods The method used depends on the reason for impairment: 1. Restoration Cost Approach 2. Service Units Approach 3. Deflated depreciation replacement cost approach 4. Lower of carrying value or fair value

RELATIONSHIPS Impairment Type Calculation Method Evidence of Physical Damage Restoration Cost Approach Changes in

RELATIONSHIPS Impairment Type Calculation Method Evidence of Physical Damage Restoration Cost Approach Changes in Legal or Environmental Service Units Approach Technological Changes or Obsolescence Service Units Approach Change in Manner or Duration of use Service Units or Deflated Depreciation Construction Stoppage Lower of Carrying Value or Fair Value

Classification of Impairment Losses: • Other Financing Use – if impairment is extraordinary or

Classification of Impairment Losses: • Other Financing Use – if impairment is extraordinary or subject to management control (e. g. duration of use) • Otherwise – – Component of Net Program Cost in appropriate functional category

Disclosures & Recoveries • Note Disclosures: – If impairments are not visible in financial

Disclosures & Recoveries • Note Disclosures: – If impairments are not visible in financial statements – If impairments cause assets to be idle: temp. or perm. • Insurance Recoveries: – In governmental funds, recoveries should be classified As Other Financing Sources

GASB 42 Effective Date • For fiscal periods beginning after Dec. 15, 2004 •

GASB 42 Effective Date • For fiscal periods beginning after Dec. 15, 2004 • FOR COUNTY, effective July 1, 2005

Checklist of Significant Slides and Handouts: • • Traditional Accounting for Capital Asset Impairments-Table

Checklist of Significant Slides and Handouts: • • Traditional Accounting for Capital Asset Impairments-Table Traditional Accounting Summary FASB Approach Overview of GASB Treatment – Table GASB 42 – Indicators of Potential Impairment Calculate and Report an Impairment if…. . GASB 42 Effective Date GAAFR REVIEW