JACQUELINE L.

RECK
SUZANNE L. LOWENSOHN
Accounting for
Governmental
& Nonprofit
Entities 17/e

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education. 5-1
 C
H
A
Accounting for P
General Capital Assets
T
and Capital Projects
E
R

5
5-2
 Learning Objectives

5-1 Describe the nature and characteristics of

general capital assets.
5-2 Account for general capital assets, including:
acquisition, maintenance, depreciation, impairment,
and disposition.
5-3 Explain the purpose, characteristics, and typical
financing sources of a capital projects fund.

5-3
 Learning Objectives

5-4 Prepare journal entries for a typical capital project,

both at the fund level and within the governmental
activities category at the government-wide level.
5-5 Prepare financial statements for capital projects
funds.

5-4
 Capital Assets

Capital assets include land, buildings, land and building

improvements, construction work in progress, vehicles, machinery,
equipment, works of art and historical treasures, infrastructure assets,
and intangible assets.

They are commonly financed by issuance of long-term debt to be

repaid from tax revenues, special assessments against property
deemed to be particularly benefited by the long-lived asset, grants
from other governments, transfers from other funds, gifts from
individuals or organizations, capital leases, or a combination of these
resources.

5-5
Accounting for General Capital Assets

General Fund and/or Special Revenue

Funds
• Account for capital outlay expenditures from budget
appropriations

Capital Projects Fund

• Account for construction and major capital expenditures

Government-wide governmental activities

• Account for cost and depreciation of general capital

assets
5-6
Accounting for General Capital Assets

Recorded at
Expenditure in
historical cost,
governmental
estimated cost, or
fund
fair value

Depreciation
Capitalized in
expense reported
governmental
in governmental
activities
activities only
5-7
 Required Disclosures for Capital Assets
• Capital assets not being depreciated are disclosed separately from
assets that are being depreciated
• General policy for capitalizing assets and for estimating the useful
lives of depreciable assets
• Beginning-of-year and end-of-year balances showing accumulated
depreciation separate from historical cost
• Capital acquisitions during the year
• Sales or other dispositions during the year
• Depreciation expense for the current period with disclosure of the
amounts charged to each function in the statement of activities
• Disclosures describing works of art or historical treasures that are
not capitalized and explaining why they are not capitalized. If
capitalized, include in the disclosures described above.
5-8
 Land

Land is an inexhaustible asset, and as such, is not

depreciated. The recorded value depends on how
the asset is acquired.

• Purchase Contract price and all related costs

• Forfeiture Total amount of all taxes, liens, and
other claims surrendered plus all other costs incidental
to acquiring ownership and perfecting title
• Donation Appraised value on date of acquisition

5-9
Buildings and Improvements Other
than Buildings

This category includes

buildings, building
improvements, and land
improvements. All are
depreciated, except land
improvements that are
inexhaustible and provide
permanent benefits. The
recorded value depends on
how the asset is acquired.

5-10
Buildings and Improvements Other
than Buildings

• Purchased Contract price and related costs

• Constructed
• Outside contractors: Contract price and related
costs
• Self constructed : All direct and indirect expenditures
of the fund providing the construction but also
materials and services furnished by other funds
• Donated Appraisal as of date of acquisition

5-11
Machinery and Equipment

Machinery and equipment are

generally purchased, but may
also be acquired through
construction or donation. The
valuation rules applied to
buildings also apply to machinery
and equipment. Machinery and
equipment are depreciated.

5-12
 Construction Work in Progress
Ththe
In e governmental
account isacreported ti v iti es
general
on j ournal , the ac count
Ththe
In
Cons
etheaccountsta tement
governmental
truc ti on Work i nac ti v of
is Progres iti esnet
reported s is
po
onedsition
general
us the with
to jcournal
sta
apital e other
, the
tement
iz theac ac
count
cof a ssets
net
umulated
Cons
cnoos ts truc
of ati on
cg Work
ons i n Progres
truction proj ecst.i .s
po
us edtsition
bein with
to c apital depreciated
iz e other a ssets
the ac c umulated
cno
os ts of a c g
t bein onsdepreciated
truction proj ec t. .

Wh
Wh
en
con
stru
ctio
ctio
n is
co
mpl
ete,
ete,
the
ass
et
is
recl
recl
ass
ifie
d
d to
to
the
the
app
rop
riat
riat
e
cat
ego
ry
ry
and
and
dep
reci
atio
n
n
beg
ins.

5-13
 Infrastructure Assets

• Infrastructure assets include highways, streets,

sidewalks, storm drainage systems, and lighting
systems, that are stationary in nature and normally
can be preserved for a longer life than most other
capital assets.
• Infrastructure assets are depreciated unless the
government adopts the modified approach.

5-14
 Modified Approach
• Under the modified approach, a government may elect not to
depreciate certain eligible infrastructure assets, provided that
two requirements are met. The two requirements are:
(1) The government manages the eligible infrastructure assets
using an asset management system that includes: (a) an up-to-
date inventory of eligible assets, (b) condition assessments of
the assets and summary of results using a measurement scale,
and (c) estimates each year of the annual amount needed to
maintain and preserve the eligible assets at the condition level
established and disclosed by the government, and
(2) The government documents that the eligible infrastructure
assets are being preserved approximately at (or above) the
condition level established and disclosed (see item 1, (c)
above).
5-15
 Modified Approach

• At a minimum, adequate documentation must include

(1) complete condition assessments at least every three years and
(2) the three most recent condition assessments must provide
reasonable assurance that the eligible infrastructure assets are
being preserved at or above the established condition level.
• If requirements are met and adequate documentation is
maintained, all expenditures incurred to preserve the eligible
infrastructure assets should be expensed in the period
incurred.

5-16
 Intangible Assets

Intangible assets

Have a useful
Capital assets
life of more than Nonfinancial in
that lack physical
one reporting nature
substance
period

5-17
General Capital Assets Acquired under
Capital Lease Agreements

If a particular lease meets any one of the following

classification criteria, it is a capital lease.
1. The lease transfers ownership of the property to the lessee
by the end of the lease term.
2. The lease contains an option to purchase the leased
property at a bargain price.
3. The lease term is equal to or greater than 75 percent of
the estimated economic life of the leased property.
4. The present value of rental or other minimum lease
payments equals or exceeds 90 percent of the fair value of the
leased property less any investment tax credit retained by the
lessor.
5-18
 Operating Leases

Rental payments
under an operating
If none of the
lease for assets
criteria are met, the
used by
lease is classified
governmental
as an operating
funds are recorded
lease by the lessee.
as expenditures of
the period.

5-19
Costs Incurred After Acquisition

Outlays that clearly add to the utility or

function of a capital asset or enhance
the value of an integral part of it may
be capitalized as part of the asset.

Special difficulty arises in the case

of large-scale outlays that are
partly replacements and partly
additions or betterments.

5-20
Reduction of Cost or Asset Disposal

When an asset is disposed of, the cost of the asset

and its accumulated depreciation should be removed
from the governmental activities general ledger, and
any gain or loss on disposal recognized.

A partial reduction of cost may occur when only a part

of an asset is sold, disposed of, or destroyed. The
entries to record a partial reduction mirror those of a
disposal.

5-21
 Asset Impairments and Insurance
Recoveries

An asset impairment is defined as a significant,

unexpected decline in the service utility of a capital
asset. Impairments occur as a result of unexpected
circumstances or events, such as physical damage,
obsolescence, enactment of laws or regulations or
other environmental factors, or change in the
manner or duration of the asset’s use.
Asset impairments result in a write-down of the
asset’s carrying value.

5-22
Asset Impairments and Insurance
Recoveries

Value of
impairment

Restoration
Cost Approach

Deflated
Service Units Depreciated
Replacement Cost
Approach Approach

5-23
 Service Concession Arrangements

Under a Service Concession Arrangement, a government transfers

the rights and obligations of an asset to another legally separate
governmental or private sector entity. This external entity provides
public services through the use of the asset, collecting related fees
in return for an up-front payment to the transferring government.
In general, standards require that the transferring government
continue reporting the transferred asset as a capital asset and any
related contractual obligations as liabilities.

5-24
 Ensure re venues and other
financing sources dedica te d
to a certain purpose are
use d for that p urpose and
no o ther

debt incurred to
Do not record any
finance the project
Funds
Capital Projects
Capital Projects Funds

recommended
use of encumbrances is
estim ated revenues, but
appropriations or
No need for
is completed
until the project
Continue to exist

5-25
 Capital Projects Funds: Illustrative
Transactions
Debits Credits
Fire Station Capital Projects Fund and Governmental Activities:
1. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Short-Term Notes Payable . . . . . . . . . . . . . . . . . . . 50,000

Fire Station Capital Projects Fund:

2. Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443,000
Encumbrances Outstanding . . . . . . . . . . . . . . . . . . 443,000

Fire Station Capital Projects Fund:

3. Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,005,000
Encumbrances Outstanding . . . . . . . . . . . . . . . . . . . 1,005,000

5-26
 Capital Projects Funds: Illustrative
Transactions
Debits Credits
Fire Station Capital Projects Fund:
4a. Construction Expenditures. . . . . . . . . . . . . . . . . . . . . 48,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000
Governmental Activities:
4b. Construction Work in Progress . . . . . . . . . . . . . . . . . 48,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000
Fire Station Capital Projects Fund:
5a. Encumbrances Outstanding. . . . . . . . . . . . . . . . . . . . 495,000
Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495,000
5b. Construction Expenditures. . . . . . . . . . . . . . . . . . . . . 495,000
Contracts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . 495,000
Governmental Activities:
5c. Construction Work in Progress . . . . . . . . . . . . . . . . . 495,000
Contracts Payable . . . . . . . . . . . . . . . . . . . . . . . . . 495,000
5-27
 Capital Projects Funds: Illustrative
Transactions
Debits Credits
Fire Station Capital Projects Fund:
6a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000

Governmental Activities:
6b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Program Revenues—Public Safety—
Capital Grants and Contributions . . . . . . . . . . . . . 300,000

5-28
 Capital Projects Funds: Illustrative
Transactions
Debits Credits
Fire Station Capital Projects Fund:
7a. Interest Expenditures . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Short-Term Notes Payable . . . . . . . . . . . . . . . . . . . . 50,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,000
Governmental Activities:
7b. Expenses—Interest on Notes Payable . . . . . . . . . . . 1,000
Short-Term Notes Payable . . . . . . . . . . . . . . . . . . . . 50,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,000
Fire Station Capital Projects Fund:
8a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000
Other Financing Sources—Proceeds of Bonds . . . 1,200,000
Governmental Activities:
8b. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000
Bonds Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000
5-29
 Capital Projects Funds: Illustrative
Transactions
Debits Credits
Fire Station Capital Projects Fund and Governmental Activities:
9. Contracts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 495,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495,000
Fire Station Capital Projects Fund:
10a. Encumbrances Outstanding. . . . . . . . . . . . . . . . . . 443,000
Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . 443,000
10b. Construction Expenditures. . . . . . . . . . . . . . . . . . . 440,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440,000
Governmental Activities:
10c. Construction Work in Progress . . . . . . . . . . . . . . . . 440,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440,000

5-30
 Capital Projects Funds: Illustrative
Transactions
Debits Credits
Fire Station Capital Projects Fund:
11a. Encumbrances Outstanding. . . . . . . . . . . . . . . . . . . . 510,000
Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510,000
11b. Construction Expenditures. . . . . . . . . . . . . . . . . . . . . 510,000
Contracts Payable . . . . . . . . . . . . . . . . . . . . . . . . . 510,000
Governmental Activities:
11c. Construction Work in Progress . . . . . . . . . . . . . . . . . 510,000
Contracts Payable . . . . . . . . . . . . . . . . . . . . . . . . . 510,000
Fire Station Capital Projects Fund and Governmental Activities:
12. Contracts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510,000

5-31
 Capital Projects Funds: Illustrative
Transactions
Debits Credits
Fire Station Capital Projects Fund:
13. Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Other Financing Sources—Proceeds of Bonds . . . . 1,200,000
Construction Expenditures . . . . . . . . . . . . . . . . . . 1,493,000
Interest Expenditures . . . . . . . . . . . . . . . . . . . . . 1,000
Fund Balance—Restricted. . . . . . . . . . . . . . . . . . 6,000
Fire Station Capital Projects Fund:
14a. Other Financing Uses—Interfund Transfers Out . . . 6,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
14b. Fund Balance—Restricted . . . . . . . . . . . . . . . . . . . . 6,000
Other Financing Uses—Interfund Transfers Out . . 6,000
Governmental Activities:
15. Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,493,000
Construction Work in Progress . . . . . . . . . . . . . . . 1,493,000
5-32
 Bond Premium, Discount, and
Accrued Interest on Bonds Sold
Bonds may be sold at a pr em ium,
Government
and if not pr ohibited,
issues bonds,
may also be
Bonds
sold
typi cal may
at lya sellbe
ingsold
discount. at
solad
theIfenti prbetween
re em ium,
issue to
Government
and
an if notpayment
interest
under priter
wr ohibited,
issues
w ho bonds,
may
dates,
sel alsobonds
ls the be
typiindividuals
sold
to
pur cal
at lya sell
chaser discount.
ing
s alsoor the Ifenti
ipay sol d
rebetween
nstitutions.
accrued issue to
an underpayment
interest
interest. wr iter w ho dates,
sel ls the bonds
to individuals
pur chaser s also or ipay
nstitutions.
accrued
interest.

Proce
Proce
eds
eds
are
are
recor
recor
ded
ded
in
in the
the
capita
capita
ll
proje
proje
cts
cts
fund,
fund,
while
while
the
the
liabilit
liabilit
y is
y is
recor
recor
ded
ded
at
at the
the
gover
gover
nmen
nmen
t-wide
t-wide
level.
level.
Princi
Princi
pal
pal
and
and
intere
intere
st
st
paym
paym
ents
ents
are
are
made
made
from
from
the
the
debt
debt
servic
servic
e
e
fund
fund
or
or
Gene
Gene
ral
ral
Fund.
Fund.

5-33
 Retained Percentages
• It is common for a government to hold a portion of
a contractor’s fee to cover any construction issues
that may arise.
• The holdback is recorded as Contracts Payable –
Retained Percentage when the billing is paid.
• The payable is reduced when the remaining
percentage is either paid to the contractor or used
to satisfy issues with the construction.

5-34
 Bond Anticipation Notes Payable

Since the issuance of bonds is complex, and delays in

final funding may occur, governments often issue Bond
Anticipation Notes Payable, a form of temporary funding.

Although the funding is temporary, Bond Anticipation

Notes Payable may be reported as long-term if the
following two conditions are met:

All legal steps have been taken to refinance the bond anticipation notes.

The intent is supported by an ability to consummate refinancing the short-

term notes on a long-term basis.

5-35
 Bond Anticipation Notes:
The Problem of Interest Expenditures
• As with most borrowed funds, interest is generally required on
Bond Anticipation Notes Payable.
• Since the Capital Projects Fund’s available funding would be
reduced by the payment of interest, managers of that fund would
prefer the interest be paid by any other fund.
• Although the debt service fund is a logical fund to assume the
payment of interest, it is unlikely to have funds available to make
the payment.
• Another choice is the General Fund, which may not have
appropriated for the interest. If it did not, there may need to be
an authorization by the legislative body to allow this expenditure.

5-36
 Capital Projects Financial Reporting
• If the Capital Projects Fund meets the definition of a
major fund, it is presented in a separate column in the
governmental funds financial reports.
• Nonmajor funds would be included in an aggregate
column with other nonmajor funds.
• If the fund is nonmajor, details about the fund can be
disclosed in the combining financial statements as a
part of the recommended supplementary information.
• It is a part of the Governmental Activities column in
the government-wide statements.

5-37
 Looking Forward

This chapter presented an in-depth discussion of several

types of general capital assets and accounting for capital
projects, as well as special issues such as leases,
impairment and a discussion of Bond Anticipation Notes
Payable.

In Chapter 6, we will examine in detail General Long-term

Liabilities and Debt Service Funds.

5-38