Chapter

7
Long-Lived Assets and
Investments in
Marketable Securities
 What are General Capital Assets?

 Long-lived assets used by activities accounted for by

governmental fund types.
 Accounting is done at the Government-wide level
 Distinguished from capital assets that are specifically
associated with activities reported in proprietary and
fiduciary funds.
 Typical Classifications of
General Capital Assets

 Land
 Buildings
 Improvements other than Buildings
 Machinery and Equipment
 Construction Work in Progress
 Infrastructure (e.g., roads, streets, bridges)
 Typical Financing Sources
for General Capital Assets

 Tax-supported bonds
 Grants from other governmental units (e.g., Federal
or state grants )
 Transfers from other funds
 Gifts from individuals or organizations
 Special assessment bonds or taxes
 Capital leases
Accounting for General Capital Assets

 General capital assets are:

 Capitalized in the governmental activities
accounts at the government-wide level

 Depreciated at the government-wide level

 Debited to Expenditures in the appropriate

governmental fund.
 Acquiring Capital Assets

From expenditures of
General Fund
Special revenue funds

Capital project funds

Note: If money received from governmental units,

individuals, or organizations is restricted for the
purchase or construction of specified capital assets – it is
recommended that a Capital Projects Fund be used.
Assigning Costs to General Capital Assets

 Follow Cost Principle (all cost necessary to bring

asset to serviceable condition)
 Invoice cost or historical cost
 All other necessary and reasonable costs:
(transportation, installation, title, closing fees)
 Capitalize interest on constructed assets
 Record donated assets at fair value on date of gift
(unless received from another fund, in which case
use historical costs – to avoid recognizing a gain in
the funds which would have to be eliminated at the
government-wide level)
Accounting for Acquisition of Capital Assets

Example: Purchased office equipment for the Mayor’s

office and paid $50,000 cash from the General Fund.

Governmental Activities: Dr. Cr.

Equipment 50,000
Cash 50,000

General Fund:
Expenditures 50,000
Cash
50,000
Depreciation Accounting and Reporting

 Depreciation on general capital assets, (except

occasionally infrastructure) is required at the
government-wide level.
 Depreciation is not recorded on inexhaustible
assets, such as land and noncapitalized
collections of art.
 The government can elect not to depreciate
certain eligible infrastructure assets, under the
modified approach (see next slide).
Election to use the Modified Approach for
Infrastructure Assets

The government can elect not to depreciate certain

“eligible” infrastructure assets if
 An asset management system is in place that
includes
 an up-to-date inventory of eligible assets,
 condition assessments of the assets and summary of results
using a measurement scale
 estimates each year of the annual amount needed to maintain
and preserve the assets at the established condition level
 The government documents that these assets are
being preserved at or above established levels of
condition.
Election to use the Modified Approach for
Infrastructure Assets

If the government elects not to depreciate certain

“eligible” infrastructure assets they must expense
all repairs when incurred.
 Accounting for Collectibles

Collectible are not required to be capitalized

if the following criteria is meet
Must be held for public exhibit, education,
or research
Must be protected, cared for, and preserved

They are subject to organizational policy

(proceeds from any sale must be used to
purchase other items of collection)
 Accounting for Capital Leases

 Follow SFAS No. 13 criteria to determine if the lease

is a capital lease, rather than an operating lease

 Recordcapital assets in the government-wide

statements in the amount of the present value of
minimum lease payments or fair value, if lower

 Record an expenditure in the governmental fund that

is using the asset and making the payments.
 Accounting for Capital Leases (Cont’d)

Example: Capital lease with present value of minimum

lease payments of $50,000
Governmental Activities: Dr. Cr.
Equipment 50,000
Capital Lease Obligations Payable
50,000

Special Revenue Fund:

Expenditures 50,000
Other Financing Source-
Capital Lease Agreements
50,000
Required Disclosures about Capital Assets

 Capitalization policy
 Policy for estimating useful lives of assets
 Beginning and end of the year balances,
including accumulated depreciation
 Acquisitions during the year
 Sales or other dispositions during the year
 Depreciation expense for the current period
 Why collections (e.g., works of art or historical
treasurers) are not capitalized
 Costs Incurred After Acquisition

 Additions/betterments vs. replacements/

maintenance
 Capitalize costs of additions and betterments;
don't capitalize replacements and maintenance
expenditures
 Some replacements might be partly additions or
betterments; if so, capitalize as appropriate but
remove cost of old asset
 Requires judgment to determine whether an asset
has been enhanced
 Marketable Securities

 Why do Governments and Not-for-proftits have

marketable securities
 Receive large amounts of cash at one time
 Maintain a “rainy” day fund
 Maintain pension assets
 Maintain endowment funds
 Bond sinking funds

 Marketable securities are acquired to

provide income on these funds
 Miscellaneous topics

 Repurchase agreements:
 Reverse repurchase agreements
 Risks & rewards – “Orange County Disaster”
 Government Disclosures
 Credit risk on invested securities
 Interest rate risk
 Foreign currency risk
****All governments and not-for-profit
organizations should have an investment
resolution which is evaluated periodically.