Revision/Update Information: May 1989

Contents

The purpose of this manual is to introduce fixed asset accounting concepts and to provide Ohio local governmental entities with assistance in establishing their own fixed asset systems. The fixed asset system is a subsystem of the entity accounting system and can be subdivided further into a fixed asset accounting system and a fixed asset management system.

A fixed asset accounting system is a system of policies, procedures and methods for recording and reporting monetary amounts associated with fixed asset transactions.

A fixed asset management system is a system of methods, policies and procedures which address the acquisition, use, control, protection, maintenance and disposal of assets.

Throughout this manual, the two subsystems will be discussed together as forming the entity's fixed asset system.

A fixed asset is defined as a financial resource meeting all of the following criteria:

1. It is tangible in nature.
2. It has an extended useful life, which the district may identify as one year, two years or longer.
3. It is not a repair part or supply item.
4. It has a value greater than the capitalization threshold established by the Board of Education or is considered to be an asset for which control (accountability) is desirable.

The capitalization threshold dollar amount varies from district to district. Typically, an entity with a budget of less than 1 million might choose a threshold amount in the range of $100 to $300; an entity with a budget of more than 1 million might select a threshold amount of $500 or more.

A district may wish to identify specific assets solely for control purposes. These "controlled" or "critical nature" assets would include assets that are sensitive, portable or prone to theft. Examples might be calculators, tape players, telephones and audio-visual equipment.

During the initial fixed asset inventory, controlled assets must be identified and recorded, but, since they will not be reported as fixed assets on the financial statements, original or estimated historical cost figures need not be identified or calculated.

Items meeting the fixed asset criteria are classified by major categories such as land, buildings, improvements other than buildings, furniture and fixtures, machinery and equipment, and construction-in-progress. Other categories may be identified and reported by the district if considered significant.

One of the first and most important decisions that must be made before a fixed asset system can be established is the identification by management of the purposes that the fixed asset system's information will be expected to accomplish. These purposes may include financial statement information, insurable values, control and accountability, maintenance scheduling and cost analysis, accounting for depreciation, preparation of capital and operating budgets, and debt management.

3.1 Financial Statement Information

The Governmental Accounting Standards Board requires fixed asset reporting in order for a governmental entity to be in conformity with generally accepted accounting principles. A primary objective in the development of any fixed asset system for governmental entities planning to prepare their financial statements according to generally accepted accounting principles is the ability to meet the various requirements for correct and complete presentation of fixed asset financial information.

Governmental entities offering securities must meet fixed asset disclosure requirements.

3.2 Insurable Values

Complete fixed asset identification and valuation may prevent the local government from being over or under insured. In the event of a loss, property valuations, descriptions, and locations are necessary to insure full recovery under the policy. Insured losses are normally settled on the basis of reproduction cost new, less depreciation, less exclusions. Specific supportable insurable values are defined in the insurance policy in effect and should be reviewed. In some instances, an in-house estimate of cost or insurable value may not be sufficient to substantiate the amount of a loss. Rather, an appraisal by an independent third party may be required.

3.3 Control and Accountability

The fixed asset system can be used to maintain information regarding the location, responsible party and condition of public property. The system permits loss, theft, or damage to property to be identified by a comparison of the assets on hand and their present condition to the information found in the fixed asset records.

3.4 Maintenance Scheduling and Cost Analysis

By maintaining records of maintenance costs and frequency of necessary repairs, decision relating to major overhauls or replacement can be made. By budgeting time and money for maintaining assets, the governmental entity may move from emergency maintenance to preventive maintenance.

3.5 Accounting for Depreciation

Depreciation of fixed assets must be recorded to determine total expenses, net income and changes in fund equity of proprietary and nonexpendable trust funds. The amount of accumulated depreciation plus the amount of depreciation expense for the current period must be maintained for reporting purposes.

3.6 Preparation of Capital and Operating Budgets

Fixed asset information regarding asset condition, scheduled maintenance, useful life and repair costs permits management to prepare long-term capital budgets, make informed repair or replace decisions, and generate reasonable estimates of repair and maintenance costs for the current operating budget.

3.7 Debt Management

Being able to prepare a long-term capital budget allows management to identify both long and short term financing needs and to prepare to meet those needs.

The purpose(s) selected by the governmental entity's management determines the information that must be maintained within the fixed asset system, and should be determined before a system is implemented. This is because the data to be developed will differ depending on the uses or purposes selected; if the uses or purposes were to be identified after the data gathering process has been completed, the data may prove to be insufficient, thereby necessitating duplication of some of the work.

Based upon the identified purposes of the fixed asset system, management decisions on certain major issues must be documented if the fixed asset system is to be properly established and maintained. This documentation informs employees and other interested parties of management's expectations. Management's decisions on major fixed asset issues are referred to as fixed asset policies. The following are representative areas in which fixed asset policies and procedures could be established and, where applicable, questions that must or should be addressed in each:

FIXED ASSET POLICY - an overall statement indicating that the legislative authority and the management of the governmental entity want a fixed asset system established and maintained.

CAPITALIZATION CRITERIA - what criteria must be met before an asset will be accounted for as a fixed asset.

FIXED ASSETS UNDER CONSTRUCTION - what costs are to be included in the cost of constructing the fixed asset and when is the fixed asset to be recognized.

ADDITIONS - what constitutes an addition to a fixed asset (as opposed to routine maintenance and repairs) and when and how is it to be recorded in the financial records.

TRANSFER OF ASSETS - is the transfer of assets permitted and, if so, under what conditions, with whose approval, and which report forms are required.

RETIREMENTS - who is responsible for disposing of a fixed asset, under what conditions, and who must provide prior approval.

CAPITAL LEASES - under what conditions will the governmental entity report a leased asset as a fixed asset of the entity with a corresponding liability for the lease payments.

ASSET NUMBER - a policy stating that asset numbers will be assigned and recorded (where practical) to insure that specific assets can be identified. This policy may require tagging assets if an alternative, such as a serial number, is not available or cannot be used by the system.

DEPARTMENT - each asset will be assigned to a specific organizational unit which will be responsible for the asset's location, condition and safekeeping.

BASIS OF ASSETS - how will the cost of a fixed asset be determined i.e., what costs associated with the acquisition of the asset will be included in the recorded cost.

REPLACEMENT COST - whether the cost of replacing a fixed asset should be maintained by the system, how it should be determined, how often it should be revised, and by whom.

SALVAGE VALUE - when salvage value is to be maintained, how it is to be determined and by whom.

ACCUMULATED DEPRECIATION - when is accumulated depreciation to be calculated, how it is to be computed and reported.

MAINTENANCE AGREEMENT COST - is the existence of a maintenance agreement to be included in the fixed asset information.

INSURABLE COST - is the fixed asset value for insurance purposes to be maintained and who is responsible for maintaining the information.

ASSET TYPE - how are the major classes of fixed assets to be categorized (land, building, improvements other than buildings, etc.)

DESCRIPTION - an indication that each of these attributes will be maintained for each asset entered into the system.

VENDOR HISTORY - is the identity of the vendor to be maintained by the system.

ACCOUNT NUMBER - what information is to be maintained that identifies the source of the money used to acquire the asset.

INFRASTRUCTURE FIXED ASSETS - are infrastructure fixed assets to be identified and costed within the system or are they to be omitted.

JOINTLY OWNED PROPERTY - how is jointly owned property to be identified, and at what cost will it be recorded in the fixed asset records.

FORECLOSED FIXED ASSETS - how fixed assets that come into the governmental entity's possession are to be accounted for if the entity decides to keep the fixed asset or if the fixed asset is to be sold. This list may vary depending on the purposes(s) that the fixed asset system is intended to accomplish.

Once policies have been established, procedures must be defined to insure that each policy is implemented. For example, if policies regarding fixed asset disposal state that the asset is not to be sold without the approval of both the responsible department manager and the principal/superintendent and, further, that the treasurer must be notified of the disposition, then a form should be designed and circulated to accomplish the recording of the approvals and the notification of the treasurer. In this example, the procedures would direct the reader to the fact that the form was to be completed, the approvals of the department head and the principal/superintendent obtained, and then a copy sent to the treasurer. Other procedures could inform the reader how to proceed when disposing of an asset. For example, if there is to be a public auction to dispose of the fixed asset(s), the procedure could state who is to be responsible for placing the public notice of the auction in the newspaper, how many times it is to be run, and how far in advance of the auction it is to be run.

Once the fixed asset policies and procedures have been established and documented, the remainder of the fixed asset system can be developed and implemented.

The appropriate accounting treatment for the acquisition of a fixed asset is governed by the fund type from which the fixed asset was purchased and the ultimate use of the asset.

5.1 Fund Categories

There are three categories of funds employed in governmental accounting which are Governmental, Proprietary and Fiduciary funds.

1. Governmental Funds

Often called "source and disposition" funds, governmental funds are those funds through which most governmental functions typically are financed. A government's expendable financial resources and related liabilities, except those accounted for in proprietary funds, are accounted for through governmental funds. The four governmental fund types are: general, special revenue, capital projects and debt service.

2. Proprietary Funds

Sometimes called "commercial-type" funds, proprietary funds are used to account for a government's ongoing organizations and activities that are similar to those found in the private sector. All assets, liabilities, equities, revenues, expenses and transfers relating to the government's business activities are accounted for through proprietary funds. Proprietary fund are of two types: enterprise and internal service funds.

1. Enterprise Funds account for operations that are financed and operated in a manner similar to private business enterprises, i.e., where the intent is that the costs of providing goods or services to the general public on a continuing basis be financed through user charges.
2. Internal Service Funds account for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit, or to other governmental units, on a cost reimbursement basis.

3. Fiduciary Funds

Fiduciary Funds are of two types, trust funds and agency funds. They are used to account for assets held by governmental unit in a trustee capacity and/or as an agent for individuals, private organizations, other governmental units or other funds.

5.2 Fixed Asset Categories

Fixed assets may be classified in three categories: general fixed assets, fund fixed assets and infrastructure, depending on whether the asset is associated with a governmental or proprietary fund type operation.

1. General Fixed Assets

Fixed assets associated with governmental functions are known as general fixed assets. General fixed assets are not included in the balance sheet of governmental funds, but rather are reported as historical cost in a separate, self-balancing account group called the General Fixed Assets Account Group. The cost of general fixed assets is summarized in the General Fixed Assets Account Group by categories such as Land, Buildings, Machinery and Equipment, and Construction in Progress. The source of the money used to acquire general fixed assets is recorded in an account known as "Investment in General Fixed Assets". Sources may include individual funds, federal or state grants, taxes, debt proceeds, etc. Source disclosure for general fixed assets is only required if a comprehensive annual financial report is prepared. If the governmental entity is unable to identify sources from prior years, source disclosure may begin with the year for which the statements are prepared.

2. Fund Fixed Assets

Fixed assets utilized in proprietary (Enterprise and Internal Service) fund activities or in trust funds are accounted for in the appropriate fund, and are referred to as fund fixed assets.

Enterprise fund fixed assets are capitalized (recorded) in the fund because the fixed assets are used in the production of the goods or services provided and sold. In order to determine profit or loss, the expense of using these assets (depreciation) must be included as an operating cost.

Internal Service fund fixed assets are recorded in the fund accounts for similar reasons. These assets are also directly related to fund operations, as in the case with enterprise fund fixed assets. Depreciation must be recorded to determine fund expenses, charges to departments, and changes in fund equity.

The identification of the source of fixed assets associated with an enterprise or internal service fund is required in order for the entity to be able to properly prepare financial statements in accordance with generally accepted accounting principals. Sources may include federal grants, special assessments, property taxed, contributions from other funds or developers, and purchase or construction by the enterprise or internal service fund itself.

Fixed assets associated with trust funds are also accounted for in those funds. This requirement assists in assuring compliance with the terms of the trust instrument, provides a deterrent to mismanagement of trust assets, and facilitates accounting for depreciation where the trust principal must be maintained intact.

3. Infrastructure

According to the "Codification of Governmental Accounting and Financial Reporting Standards" section 1400.109, "Reporting public domain or 'infrastructure' fixed assets - roads, bridges, curbs and gutters, streets and sidewalks, drainage systems, lighting systems, and similar assets that are immovable and of value only to the governmental unit - is optional." Therefore, an early determination of the treatment of infrastructure fixed assets needs to be made by the management of the governmental entity.

Those fixed assets belonging to an enterprise, internal service or trust fund must be recorded and reported within the fund, and this is not optional. As an example, if the governmental entity had a sewer enterprise fund, then the underground sewer lines are to be considered fund fixed assets and must be identified and reported. If an entity does not have a sewer fund, then the reporting would be optional.

Once the determination whether or not to report infrastructure has been made, the specific asset classes to be recorded and reported can be determined.

4. Leased Assets

A review of each lease is necessary to determine whether the lease should be classified as an operating lease or a capital lease. There are four criteria used to make this classification, the underlying issue being whether the benefits and risks of ownership are transferred from the lessor to the lessee.

The purpose of the criteria is to establish the substance of the transaction and determine whether the lease is merely an extended rental agreement or actually an installment purchase in the form of a capital lease.

If a lease is classified as a capital lease, the asset and a corresponding liability for the lease payments will be reported on the financial statements of the lessee. A further discussion of leases is beyond the scope of this manual.