RSM Resources

Save time - centralize information with a capital asset plan

If you take a quick look at the Statement of Net Assets, you’ll notice that a vast number of local governments significantly invest in capital assets. Since they’re obligated to report these (including infrastructure assets) in their governmentwide net assets statement, local governments must also claim corresponding depreciation expense in the activities statement.

However, capital assets can be either tangible or intangible; are used in operations; have an initial useful life extending beyond a single reporting period; and must be recorded at their original (historical) cost. Examples of required capital assets reporting include:

• Land and easements
• Buildings and improvements
• Equipment
• Machinery
• Vehicles
• Historical treasures
• Infrastructure (e.g., roads, sidewalks, bridges, water and sewer systems, dams and tunnels)

When was the last time your entity took a physical inventory of these assets? Inventory management is vital as is internal control of the supply chain and spending cycle. Unfortunately, keeping tabs on this is something many entities take for granted.

The requirements

Although the requisite for reporting under Generally Accepted Accounting Principles may give substantial latitude on capitalization thresholds and assets lives, Governmental Accounting Standards Board No. 34 requires fixed asset records to be maintained by local governments in a complete, accurate and detailed method. In addition, all capital assets — including infrastructure — with the consideration of depreciation, must be recorded. 

When capital assets are acquired with federal funds, organizations are subject to “Equipment and Real Property Management” requirements which states “equipment records shall be maintained, a physical inventory of equipment shall be taken at least once every two years and reconciled to the equipment records, an appropriate control system shall be used to safeguard equipment, and equipment shall be adequately maintained.”

Now, GASB 42 Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries advocates that a capital asset is considered impaired when its service utility has declined significantly and unexpectedly. But, before a government unit can implement GASB 42 it needs to know what capital assets they have.

The Government Finance Officers Association has rereleased its recommended practice of The Need for Periodic Inventories of Tangible Capital Assets, which suggests that every government entity periodically inventory capital assets, at least on a test basis, no less than every five years.
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In order to comply with the capital assets recording and reporting requirement, the federal government needs more than a fixed asset listing of the acquisition date and cost, asset lives and depreciation method for all capital asset classifications. They’ll also need a capital asset policy. 

The plan

The first step to a successful plan is to identify all parties involved. Once participants have been recognized and responsibility assigned, schedule a meeting. Next, develop and implement an inventory policy and procedures. This includes a perpetual inventory system that maintains effective control over all capital assets, which can then be scrutinized for replacement prospects and used for better asset replacement forecasting and budgeting. Lastly, make sure your plan is rolling and multiyear. This will allow the federal government to prioritize projects and investigate future funding options.

The benefits

Outside the obvious — that your assets make excellent business sense — additional benefits can be gleaned from a proper capital asset plan, such as:

• A physical inventory — the best way to ensure information in the detailed listings and the valuation of fixed assets is as precise as possible.
• Compliance with regulatory initiatives — OMB circulars, state statutes, GAAP, Sarbanes-Oxley, Health Insurance Portability and Accounting Act, for example, require government units to keep an accurate accounting of there capital assets.
• Resource management — permits sufficient time to arrange appropriate financing method through
  bonds, leases, tax agenda or establishing reserve for pay-as-you go.
• Reduced insurance premiums — oversight of assets corresponds to higher premiums. Tracking your capital assets allows the government to readily advise their insurance company of necessary changes.
• Enhanced project planning and budgeting — weighing the cost and benefit of your fixed asset purchase augments decision making. Likewise, it helps maximize return on investment by knowing where capital has been invested in assets.
• Lower tax liability (for those entities subject to property or income taxes)
• Improved financial results — save money by not purchasing or maintaining unnecessary assets and reducing equipment costs through predictive maintenance.
• Improved efficiency — sanctions most effective allocation of assets and eliminates duplication.
• Reduced risks and exposures – by effectively tracking service-level agreements, warranty and maintenance information, contract end dates and entitlements.
• Prerequisite for a meticulous system of internal controls
• Proper safeguarding of the capital assets

All in all, a capital asset plan subsidizes precise and complete information in a centralized location, saves time and increases a government unit’s ability to make rational decisions concerning its investments.

John Gilberto is a director with RSM McGladrey. For more information, contact him at john.gilberto@rsmi.com.