Issued Date: 06/24/08
The following policy is to address Warren County Board of Education’s compliance with provisions of Board of Educational Accounting Standards Board Statement 34. This policy will address most of the questions concerning implementation of the standard. This policy will take effect upon its passage by the Warren County Board of Education Board of County Commissioners.
1. Capital Assets Definition
Capital assets include: land, land improvements, buildings, building improvements, construction in progress, machinery and equipment, vehicles, infrastructure, easements, and works of art and historical treasures.
A capital asset is to be reported and, with certain exceptions, depreciated in Board of Education-wide statements. In the Board of Education-wide statements, assets that are not capitalized are expended in the year of acquisition.
Infrastructure assets are long-lived capital assets that normally can be preserved for a significant greater number of years than most capital assets and that are normally stationary in nature. Examples include roads, bridges, tunnels, drainage systems, water systems, and dams. Infrastructure assets do not include buildings, drives, parking lots or any other examples given above that are incidental to property or access to the property.
Warren County Board of Education will use the definitions listed as the definitions of capital assets and infrastructure assets. An asset must have an estimated useful life greater than one reporting period (year) to be considered for capitalization and depreciation.
2. Information Needed for an Inventory Record
Board of Educational entities should develop strategies to ensure they have an accurate, complete, and up-to-date record of capital assets. Each Board of Education entity should have such an inventory beginning in 1980 when NCGA Statement No.1 created the General Fixed Asset Account Group.
Completeness and accuracy should be ensured through physical counts, review of purchase records, prior inventory count records, listings maintained by other Board of Education agencies, and other methods deemed necessary.
Board of Educational entities will need to devise a method to determine historical costs or estimated historical cost of capital assets on hand. Future asset acquisition will be valued at the acquisition cost for purchased items and donated items will be capitalized at fair market value on the donated date.
Each Board of Educational entity should have an inventory of all capital assets. Each inventory record should include: description, year of acquisition, method of acquisition (e.g., purchase, donation, etc.),funding source, cost or estimated cost, salvage value, and estimated useful life. The inventory record will also need to identify the function(s) that use the asset.
Warren County Board of Education will have an inventory of all capital assets. Each asset’s inventory record will include: description, year of acquisition, method of acquisition (e.g., purchase, donation, etc.), funding source, cost or estimated cost, salvage value, and estimated useful life. The inventory record will also identify the function(s) that use the asset. Warren County Board of Education will report capital assets that serve essentially all functions on a separate line or as part of the general administration (or its counterpart) function. If depreciation is reported as a separate line item, the face of the statement must clearly indicate that this line item excludes depreciation expense charged to functions.
Warren County Board of Education will do its best to determine historical costs or estimated historical cost of capital assets on hand. Future asset acquisition will be valued at the acquisition cost for purchased items and donated items will be capitalized at fair market value on the donated date.
3. Recording Land
Land is to be capitalized but not depreciated. It is recorded at historical cost and remains at that cost until disposal. If there is a gain or loss on the sale of land, it is reported as a special item in the statement of activities.
Warren County Board of Education will record land at historical cost, if known. If the historical cost is not known; alternate methods of evaluation, such as land value comparisons, historical values and advice from specialists such as the Assessor of Property will be utilized. Evaluation methods shall be fully documented.
4. Recording Land Improvements
Land improvements include items such as excavation, non-infrastructure utility installation, driveways, sidewalks, parking lots, flagpoles, retaining walls, fencing, outdoor lighting, and other non-building improvements intended to make the land ready for its intended purpose. Land improvements can be further categorized as non-exhaustible and exhaustible.
Non-Exhaustible - Expenditures for improvements that do not require maintenance or replacement, expenditures to bring land into condition to commence erection of structures, expenditures for improvements not identified with structures, and expenditures for land improvements that do not deteriorate with use or passage of time are additions to the cost of land and are generally not exhaustible and therefore not depreciable.
Exhaustible - Other improvements that are part of a site, such as parking lots, landscaping and fencing are usually exhaustible and are therefore depreciable. Depreciation of site improvements is necessary if the improvement is exhaustible.
5. Recording Buildings
Buildings should be recorded at either their acquisition cost or construction cost. The cost of new construction should be carefully evaluated. Existing buildings, if original costs is not known,replacement value figured by county’s insurance agent, will be figured using the CPI Index to back trend into original value. Usually projects consist of major components such as land, land improvements, building construction (including professional fees and permits), furniture, fixtures and equipment. In addition, buildings include components (e.g., roof, air conditioner system, etc.) that should be recorded separately when significant because these building components have different useful lives. The value of each component needs to be determined and placed within its own category.
Warren County Board of Education will record buildings at either their acquisition cost or construction cost. If the buildings were constructed by debt proceeds, the cost of new construction will be the total amount of debt issued with allowance for components such as land, land improvements, building construction (including professional fees and permits), furniture, fixtures and equipment, roof, air conditioner system, etc. who separate cost can be determined. Warren County Board of Education will record these components separately when significant because these components have different useful lives. The value of each component will be determined and placed within its own category.
6. Recording Building Improvements
Building improvements that extend the useful life should be capitalized. Board of Educational entities should therefore review major maintenance projects for the last several years to determine those that should become part of the restatement of assets for purposes of complying with Statement 34.
Examples of building improvements include roofing projects, major energy conservation projects, remodeling and replacing of major building components. A Board of Educational entity will need to determine the practicality of identification of these projects and prepare an inventory.
The inventory will need to include a project description, the year completed, funding source and dollar amounts. Only those projects that meet the capitalization threshold need to be included. Further, as a practical matter, Board of Educational entities should establish a cutoff date for retroactive recognition of site and facility improvements. It is recommended that Board of Educational entities review projects for the last three to five years unless meaningful data are readily available for preceding years.
Warren County Board of Education will record building improvements that extend the useful life at either their acquisition cost or construction cost. Warren County Board of Education will record these building improvements separately when significant because these building improvements have different useful lives. The value of each building improvement will be determined and placed within its own category.
7. Recording Construction in Progress
Construction in progress should be capitalized and not depreciated. It should be reported with land and other non-depreciating assets at the Board of Education-wide level. Unspent debt proceeds from capital assets related debt should be reported in the net assets section of the statement of net assets as “restricted for capital projects.”
8. Recording Machinery and Equipment
Assets such as furniture, machinery and equipment (that meet threshold levels) should be identified and inventoried. See Section 13 for threshold level and discussion. Some assets, individually, may fall below the capitalization threshold but may be purchased in large quantities by the Board of Educational entity. Examples include library books, textbooks and computers. Board of Educational entities should aggregate such assets and consider the materiality and significance of them and if material or significant capitalize such items either individually or in the aggregate.
9. Recording Library Books
If library books are considered to have a useful life of greater than one year, they are capital assets and are depreciable. Because most library collections consist of a large number of books with modest values, group or composite depreciation methods (as discussed in Depreciation Methods to Calculate an Asset's Depreciation) may be appropriate. In certain situations, library books may be considered works of art or historical treasures and could be reported using those provisions (see Recording Works of Art and Historical Treasures).
10. Recording Vehicles
Vehicles should be identified, inventoried, and if applicable depreciated. Warren County Board of Education will record the vehicles at historical cost.
11. Recording Easements
An easement is an interest in land owned by another that entitles its holder to a specific limited use or enjoyment (right to use the land). Therefore, easements are not required to be reported in the financial statements unless the entity paid for the easement.
12. Recording Works of Art and Historical Treasures
Works of Art and Historical Treasures should be recorded at historical costs. Depreciation is not required for collections or works of art that are inexhaustible.
13. Establishing and Setting the Threshold Levels for Recording Capital Assets
As noted earlier, Warren County Board of Education will do its best to determine historical costs or estimated historical cost of capital assets on hand and will value future asset acquisition at the acquisition cost for purchased items and donated items will be capitalized at fair market value on the donated date.
Warren County Board of Education will have two threshold levels of capital asset evaluation that needs to be defined. The tracking threshold is the valuation level that Warren County Board of Education will utilize to provide accountability and care taking for capital assets. The capitalization and depreciation threshold is the valuation level that Warren County Board of Education will utilize to determine which capital assets will be included for capitalization and depreciation purposes for financial statement presentation.
GASB Statement #34 in its implementation advice, states that, “Care should be taken when determining the threshold. A threshold that is too low may result in a burdensome record-keeping system. A threshold that is too high could cause material misstatement of the Board of Educational entity’s financial condition complete”.
Warren County Board of Education will use the following valuation levels for its tracking threshold and its capitalization and depreciation threshold for capital assets.
Land $1 Capitalize all
Land Improvements $25,000
Building Improvements $25,000
Construction in Progress $25,000 Capitalize all
Machinery and Equipment $25,000
Warren County Board of Education will also consider associated debt of capital assets. Warren County Board of Education will capitalize all assets purchased with debt proceeds in order to minimize the potential of negative net assets being reported in the statement of net assets.
Exceptions - The capitalization policy should address all exceptions. For example:
- Unique items that you want to track and inventory regardless of the cost (e.g.,weapons for police).
- Groups/classes of assets where individual asset items are less than the capitalization limit, but when all assets of that group are added together the dollar amount far exceeds the capitalization limit. These groups/classes of assets should be capitalized and depreciated. (e.g., library books in a public library).
14. Depreciation Definition
In accounting terms, depreciation is the process of allocating the cost of tangible property over a period of time, rather than deducting the cost as an expense in the year of acquisition. Generally, at the end of an asset’s life, the sum of the amounts charged for depreciation in each accounting period (accumulated depreciation) will equal original cost less salvage value. Good accounting and financial management practices require that a Board of Education entity take both the cost expiration and the declining value of an asset into consideration. The cost expiration of a Board of Education entity’s assets must be recognized if the cost of providing services is to be realistically reported. Also, the decline in the value of those assets must be considered if the Board of Education entity’s net assets are to be stated correctly.
15. Information Needed to Calculate Depreciation
Warren County Board of Education will calculate depreciation on a capital asset based on the following five factors.
- the date the asset was placed in service – date purchased or acquired
- the asset’s cost or acquisition value – historical or alternate method
- the asset’s salvage value – worth when no longer useful for purpose
- the asset’s estimated useful life (in months), and
- the depreciation method.
16. Asset’s Estimated Useful Life
Estimated useful life means the estimated number of months or years that an asset will be able to be used for the purpose for which it was purchased. Capital assets should be depreciated over their estimated useful lives.
Warren County Board of Education will use the following table for estimated useful lives of its Non-Infrastructure capital assets.
Land No Depreciation
Buildings – Temporary T-Buildings, Other Portables 25-40
Kitchen Equipment 12
Warren County Board of Education will use the following table for estimated useful lives of its infrastructure capital assets.
Easements No Depreciation
Drainage Systems 25
Water systems 25
Sewerage disposal Works System 25
Levees and canals (unlined) No Depreciation
Canal lining 30
Steel, Sheetpile 30
Earthen embankment No Depreciation
Asphalt - rural 40
Asphalt - urban 20
Bridges – concrete 75
17. Depreciation Methods to Calculate an Asset’s Depreciation
Warren County Board of Education will use the straight-line method to calculate depreciation on its Non-Infrastructure capital assets.
The straight-line method is the simplest and most commonly used for calculating depreciation. It can be used for any depreciable property. Under the straight-line depreciation method, the basis of the asset is written off evenly over the useful life of the asset. The same amount of depreciation is taken each year. In general, the amount of annual depreciation is determined by dividing an asset’s depreciable cost by its estimated life. The total amount depreciated can never exceed the asset’s historic cost less salvage value. At the end of the asset’s estimated life, the salvage value will remain.
18. Reporting Depreciation Expense in the Financial Statements
For general capital assets, depreciation is reported only on Board of Education-wide financial statements. Depreciation expense is reported on the Statement of Activities. Statement 34 requires that depreciation for assets specifically identified with specific functions is to be included in the direct expenses of those functions. Capital assets that serve essentially all functions are reported on a separate line or reported as part of the general administration (or its counterpart) function. If depreciation is reported as a separate line item, the face of the statement must clearly indicate that this line item excludes depreciation expense charged to functions.
Depreciation expense for general infrastructure assets should not be allocated to the various functions. It should be reported as a direct expense of the function (for example, public works or transportation) that the reporting Board of Education normally associates with capital outlays for, and maintenance of, infrastructure assets or as a separate line in the statement of activities.
19. Reporting Capital Assets in the Financial Statements
Capital assets and the associated accumulated depreciation are reported in the Statement of Net Assets. Accumulated depreciation may be reported separately, or capital assets may be presented net of accumulated depreciation on the statement. Capital assets that are not being depreciated, such as land or infrastructure assets reported using the modified approach should be reported separately if the Board of Education has a significant amount of these assets. Capital assets also may be reported in greater detail, such as by major class of asset (for example, infrastructure, buildings and improvements, vehicles, machinery and equipment). It is recommended that all Board of Educational entities report both the historical cost and accumulated depreciation in the face of the statement.