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HomeMy WebLinkAbout4.03 PolicyRecordFixedAssets ,,~ "-"(. CITY CLERK File # n~~01-[Z]lm. . AGENDA STATEMENT CITY COUNCIL MEETING DATE: (January 23,1996) SUBJECT: IILO ~ Establishing A Policy On The Recording Of Fixed Assets In The ~ City Financial Records (General Fixed Asset Account Group) Report Prepared by: Paul S. Rankin, Assistant City Manager EXHIBITS ATTACHED: Resolution RECOMMENDATION: I~?V:'-dopt Resol~tion and authorize Staff to proceed with V lIDplementation. FINANCIAL STATEMENT: None DESCRIPTION: Included in the adopted City Council Goals and Objectives was a Finance Department goal to develop a policy related to the recording of General Fixed Assets. As the City has matured the burden of tracking and reporting on assets has increased. 1ms goal also relates to a phase in the 1995/96 CIP Data Processing Project. The City is scheduled to procure automated Fix~d Asset software. 1ms will assist with the record keeping required to maintain the City Financial records in . _ conformance with Generally Accepted Accounting Principles (GAAP). - Background The City Financial records currently disclose as part of the Comprehensive Annual Financial Report (CAFR) certain values related to fixed assets. The information maintained differs depending on the fund where the asset is recorded, or capitalized at year end. The proposed policy is intended to only focus on those assets which are not recorded in a "proprietary fund". The City has two funds which are referred to as "proprietary funds", because they function similar to private enterprises. The Civic Center project was capitalized within the Dublin Information Inc. Enterprise Fund. A calculation based on an established depreciation schedule is recorded each year within this fund. The second fund is the Equipment Replacement Fund which is utilized to collect on.going operating charges to all departments for the replacement of vehicles and major equipment. Once again depreciation entries are made on an annual basis. This method of funding equipment replacement helps avoid major fluctuations in departmental operating costs at the time replacement equipment is acquired. As of June 30, 1995 the original cost of assets recorded in the Equipment Replacement Fund was approximately $575,448. Assets procured in other funds are recorded at year end, in the General Fixed Asset Account Group (GFAAG). Governmental Accounting differentiates an "Account Group" from a "Fund". The fmancial information typically presented about a "fund," will focus on resources which can be appropriated or . spent. The Fixed Assets are not a liquid asset and do not convey !be same level of infurmation to users of ~R______W"~_~._____~~_~._____W_____________________~~~_____~__ __-.-_....._________liIoollt COPIES TO: ITEM NO.AJ- governmental financial reports. The "Account Group" is merely a memorandum list of certain asS_ related to governmental funds, but not reported within the fund. If> In accordance with Governmental Accounting Standards, assets in the Account Group are also treated differently than those in proprietary funds. First, no depreciation is recorded over the life of the asset. Items are shown at their purchase cost and ifdonated the current fair market value is to be recorded. Infrastructure such as roads, sidewalks, bridges, and street lights, are not recorded in the General Pixed Asset Account Group. e As of June 30, 1995 the City of Dublin General Fixed Asset Account Group reported total assets of approximately $496,513. The breakdown indicated Machinery and Equipment at a cost of $375,513 and Land at a cost of $120,000. It appears that in the .past entries have not been updated to include buildings. This would include the City Corporation Yard as well as facilities acquired in 1988 from the Dublin San Ramon Services District. As part of implementation of the adopted policy Staffwill be reviewing City records to account for these items. - Need For Formal Policy As the City matures and moves towards an automated reporting of fixed assets it is important to have a comprehensive policy in place. As with most public entities the City has maintained lists of various assets purchased OVer the years. In addition, any items disposed of in recent years have be~n removed from the reported value reported in the General Fixed Asset Account Group. However, the current lists are voluminous and they include many small value items offumiture and equipment. In the most recent three years Staffhas attempted to only record items which have a cost which exceeds $100. The Accounting Standards do not establish a capitalization threshold, as to when an agency should capitalize an asset and disclose it as part of the GFAAG. Typically, this detennination varies according to e:',' the size of the agency. Staff contacted several surrounding agencies to identify policies and procedures ... which were currently in use. Of those agencies with written policies the range of thresholds went from $500 to $3,000. One of the agencies with a $500 limit was looking to increase the limit to $1,000. The establishment of a limit must be made in a manner which will address two important issues. 1) The assets are primarily purchased with public monies, and it is important to have adequate control and responsibility for items acquired. 2) In the event that items are capitalized in the GF AAG a burden is imposed to assure that records are maintained which substantiate the amount disclosed. It also becomes appropriate to conduct periodic inventories to validate the information. Obviously a judgment must be made as to the benefit derived from establishing different levels of capitalization. This also requires consideration of the personnel resources required to maintain and substantiate accurate records. Recommended Policy Although in recent years Staffhas recorded those items with a cost over $100, the existing background listings include numerous items which had a lower cost. In some cases these items have been effectively retired due to the fact that they are no longer in a useable condition. The proposed policy provides that Fixed Asset purchases will be capitalized when items have a cost of at least $1,000. 1ms will assist in keeping the listing required to support the Financial entries manageable without severely impacting the workload of the small Finance Department Staff. ~t is important to noteFthat the capitalization tm:shold of $1 ,000 applies only to the GP AAG and not the .._.' : proprietary funds". or example, those assets In the Equipment Replacement Fund will continue to be accounted for regardless of their original cost. For example, the recently purchased Auto Cad monitor has a cost of approximately $620 and this equipment will be recorded in the Equipment Replacement Fund. The Staff will maintain a separate list of assets in this fund as they are depreciated over their ~. .. estimated life, and charges are made annually to the operating department to build up a reserve for the eventual replacement of the equipment. . Staff also recognizes the importance of controlling property purchased with public monies. In order to address this issue the proposed policy establishes a category for tracking assets with a cost of less than $1,000. The purpose of these records would be for management control and they would not be recorded in the annual CAFR. These items will be recorded in a category to be referred to as Expendable Assets. Staff intends to utilize a different sequence of numbers to differentiate between the different category of assets. The exact sequence will be determined following procurement of the new software. Including some sort of an inventory sticker on the Expendable Assets will also clearly mark the items as City Property . Staff Recommendation It is recommended that the City Council adopt the Resolution establishing the policy and authorize Staff to develop all necessary operating procedures to implement the policy. It is anticipated that the full implementation will not occur until the City has purchased the inventory tracking software, which is intended to occur prior to June 30, 1996. The actual selection of a software will be presented to the City Council at a future meeting. The change in the reported Fixed Assets due to the adoption of this policy will be summarized in the notes to the Financial Statements at the time of the next audit. . . RESOLUTION NO. . 96 e A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF DUBLIN ********* ESTABLISIDNG A POLICY ON THE CAPITALIZATION OF FIXED ASSETS IN THE GENERAL FIXED ASSET ACCOUNT GROUP OF THE CITY FINANCIAL RECORDS WHEREAS, Generally Accepted Accounting Principles (GAAP) require complete and accurate reporting of fixed assets; and WHEREAS, The exact capitalization threshold for fixed assets is not mandated and the entity is encouraged to use its specific conditions in establishing a threshold; and WHEREAS, Staff has developed a policy with a reasonable threshold which records items with a cost of at least $1,000; and WHEREAS, the policy also contains an additional control feature for items ofless than $1,000 by maintaining management records of these items; and WHEREAS, the proposed policy is intended to assure that the City resources continue to be controlled and managed in an efficient manner. e. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Dublin does hereby . adopt the attached policy for the Capitalization of Fixed Assets in the General Fixed Asset Account Group. (Exhibit A). BE IT FURTHER RESOL VED that Staff is hereby authorized to proceed with any necessary adjustments to the City Financial records to implement this policy. Items of a material nature shall be disclosed as part of the notes to the financial statements included as part of the Comprehensive Annual Financial Report. PASSED, APPROVED AND ADOPTED this 23rd day of January, 1996. AYES: NOES: ABSENT: ABSTAIN: e. ATTEST: Mayor City Clerk CITY OF DUBLIN POLICY ON THE CAPITALIZATION AND RECORDING OF FIXED ASSETS (proposed January 23, 1996) . General Purpose Complete and accurate reporting of fixed assets is required by generally accepted accounting principles. Also, there is a public trust involved in the collection and expenditure of public funds. A well maintained system of fixed assets demonstrates the govenunent's responsibility for assets that have been acquired with taxpayer's dollars. There is also a recognition that resources are limited and the investment in measures to control resources must be reasonably related to an ability to an overall policy. The focus of this policy is on the treatment of assets which are not recorded within a "proprietary fund" in the accounting records of the City. Staff responsible for the implementation of this policy shall interpret and implement the policy in a manner consistent with the stated purpose. Capitalization Threshold For purposes of this policy, the term "capitalize" means to add a long-term tangible asset to the City's inventory of fixed assets which are recorded in the General Fixed Asset Account Group (GFAAG). To be classified as a fixed asset which will be capitalized, a specific piece of property must possess the following three attributes: (1). It must be tangible nature; (2) It must have a useful life of at least three years; and (3) It must have an original cost of at least one thousand dollars ($1,000). Public domain or infrastructure assets are not required to be reported in the GFAAG. The City of Dublin does not capitalize the costs of infrastructure assets. . Categories of General Fixed Assets The following are the categories of General Fixed Assets to be recorded in the City Financial Records supporting entries in the General Fixed Asset Account Group: Land (excluding that related to infrastructure such as street right of way) Buildings Machinery & Equipment Furniture and Fixtures General Fixed Asset Account Group The General Fixed Assets Account Group (GF AAG) is used to maintain control and cost information for all fixed assets other than those accounted for in the proprietary funds. General fixed assets are recorded as expenditures in govenunental funds at the time the assets are acquired and the liability is incurred. These assets are capitalized at cost in the general fixed assets account group. .-:- EXHIBIT A . Determination of Cost All general fixed assets which meet the capitalization threshold, and are acquired either by purchase or a donation to the City, will be recorded in the General Fixed Assets Account Group. Purchased fixed assets are valued at cost of the item. Cost includes purchase price, sales tax, freight, installation and any other costs associated with placing the asset into service. Donated fixed assets are recorded at their fair value at the time received by the City. All Fixed assets owned by the City should be substantiated with adequate records. Expendable Asset Record Keepin~ This category is established to provide control of assets purchased with public funds, which may not otherwise meet the established capitalization threshold limit of items with a cost of less than $1,000. For management purposes a listing shall be maintained of items with an initial cost of less than one thousand dollars (<$1,000), but would otherwise meet the criteria for a capitalized fixed asset. Typically this will include equipment and furniture used in operations. Items shall be marked as property of the City of Dublin, however, the value will not be capitalized in the General Fix~d Asset Account Group. Disposal of items shall be reported to and approved by the Assistant City Manager / Administrative Services Director or his/her designee. . .