Tangible Capital Assets for Aboriginal Communities: Time to Get Ready
Armand Capisciolto, C.A., CPA
National Accounting Standards Partner
BDO Dunwoody LLP
March, 2008
Beginning in 2009, to comply with Public Sector accounting requirements, First Nations must recognize all tangible capital assets as assets on the statement of financial position. The assets will be amortized over their useful lives, with the related deprecation expense recorded as an expense on the statement of operations.
The main steps in the initial implementation of Section PS 3150 include:
1. Creating a Tangible Capital Asset Inventory
2. Valuing the Tangible Capital Assets
3. Depreciating the Tangible Capital Assets
Although many First Nations have already recognized certain capital assets as a result of following INAC Year-end Reporting Handbook, these steps should still be followed, as what was previously recognized may not comply with the PSAB requirements.
The first year-end impacted by this standard for First Nations with a March 31st year end date will be March 31, 2010.
Creating a Tangible Capital Asset Inventory
Definition of Tangible Capital Asset
PS 3150, Tangible Capital Assets, defines tangible capital assets as non-financial assets having physical substance that:
- are held for use in the production or supply of goods and services, for rental to others, for administrative purposes or for the development, construction, maintenance or repair of other tangible capital assets;
- have useful economic lives extending beyond an accounting period;
- are to be used on a continuing basis; and
- are not for sale in the ordinary course of operations.
Therefore, examples of tangible capital assets include land and buildings, vehicles and machinery, information technology, transportation, water and sewage systems, etc… Please note that intangible assets, natural resources and Crown lands that have not been purchased by the government are specifically scoped out of PS 3150 and are therefore not recognized as assets on the statement of financial position.
Tangible Asset Classification
To begin the inventory process, the government should develop asset classifications. Major asset categories can be defined as follows:
- Land
- Buildings
- Infrastructure
- Vehicles & machinery
- Furniture, computers & office equipment
These major categories would then be broken down into the appropriate subcategories.
Capitalization Thresholds
It is also important to create threshold values prior to beginning the inventory process. PS 3150 does not provide any guidance on minimum dollar thresholds to determine what you will include as a capital asset. When deciding on this threshold, it is important that the government consult with its auditors and consider the impact of financial statement materiality on the capitalization thresholds.
Compiling the Tangible Asset Inventory
Once decisions have been made on classification and capitalization thresholds, you can begin compiling the tangible capital asset inventory.
When completing the inventory, the following information is needed for each tangible capital asset:
- Description of the asset
- Year of acquisition
- Expected useful life at the time of acquisition
- Significant improvements made to the asset from the time of acquisition to the inventory date and the date of the improvement and the estimated useful life of the improvement
- Service hours, production or mileage to date (if applicable)
- Estimated residual value, if any, on disposal
This information will be important in determining the value and the depreciation of the asset.
Valuing the Tangible Capital Assets
Determining Cost
Tangible capital assets are required to be recorded at cost. It is important to note, that the cost to be recognized in the statement of financial position is the gross cost - capital grants would not be netted against the cost of the related tangible capital asset.
The Ontario Municipal Benchmarking Initiative (OMBI) suggests three methods to approximate the historical cost of a tangible capital asset, if historical information is not available:
Discounted Reproduction Cost – The current cost of reproducing the asset in the same physical form is discounted to the cost at the time of acquisition using an inflation index. The inflation index used should be consistent with the asset being valued.
Discounted Replacement Cost – The current cost of replacing the asset in a different physical form but with the same productive capacity is discounted to the cost at the time of acquisition using an appropriate inflation index.
Appraisal – A professional assessment of what an asset is worth based on its current age and condition. This value is then discounted to the cost at the time of acquisition using an appropriate inflation index.
Bear in mind that the values determined will become part of the government’s financial records and are therefore subject to audit.
Contributed Tangible Capital Assets
Governments may receive contributions of tangible capital assets. The cost of a contributed asset is considered equal to its fair value at the date of contribution. Fair value of a contributed tangible capital asset may be estimated using market or appraisal values.
Betterments
When valuing the assets, you must also consider if there have been any betterments since the asset was originally acquired or constructed. Costs of betterments are considered to be part of the cost of a tangible capital asset and would be added to the cost of the related asset. A betterment is a cost incurred to enhance the service potential of a tangible capital asset.
Depreciating the Tangible Capital Assets
Now that all the tangible capital assets have been inventoried and valued, they must be depreciated. PS 3150 requires the cost, less any residual value, to be amortized over its useful life in a rational and systematic manner appropriate to its nature and use. This will ultimately impact the amount of depreciation expense recorded in future years.
The amount of depreciation for any given asset depends on three factors: the method of depreciation, the useful life and the residual value.
Depreciation Method
The method must be appropriate given the asset’s nature and use.
Useful Life
The useful life of a tangible capital asset depends on its expected use by the government. When estimating the useful life of a tangible capital asset consider the following:
- expected future usage
- effects of technological obsolescence
- expected wear and tear from use or the passage of time
- the maintenance program
- studies of similar items retired
- the condition of existing comparable items
Land is the only asset that has an infinite useful life and therefore is not subject to amortization.
Residual Value
The residual value is the value expected to be received on disposal of the asset. This amount is to be deducted from the initial cost in the determination of the annual depreciation.
Once the accumulated depreciation has been determined, the net book value can be calculated as the initial cost less accumulated depreciation. At this time, consideration should be given to whether the net book value of the tangible capital asset is in excess of the future economic benefits expected from its use and, therefore, whether a write-down is required to establish more appropriate cost and accumulated amortization amounts for the asset.
Required Disclosures
Although, PS 3150 does not become applicable until March 31, 2010, certain disclosures will be required related to tangible capital assets at March 31, 2008. PSG-7 - Tangible Capital Assets of Local Governments requires the following disclosure of information on tangible capital assets for each major category of tangible capital assets and in total. It is not expected that this information be available for all tangible capital assets at December 31, 2007. This disclosure is only required for categories of assets for which this information is available. Once PS 3150 becomes effective in 2009, the above disclosure would be required for all categories of tangible capital assets.
Conclusion
The first step to implementing PS 3150 is to gain knowledge of the requirements and educate those that will be involved in this project.
At this point in time, we feel that creating the initial tangible capital asset inventory, completing the initial valuation and calculating the initial accumulated depreciation will be the most time consuming tasks and therefore should be made a priority.
If you require further information, please contact your local BDO Dunwoody LLP office.
Armand Capisciolto is BDO Dunwoody LLP's National Accounting Standards Partner, he knowledgeable in the area of assurance and accounting, and works out of the Sault Ste. Marie office. Armand's responsibilities as part of the National A&A Team include developing BDO's courses and tools related to accounting and financial reporting, writing internal and external accounting and financial reporting publications.
This material is general in nature and should not be relied upon to replace the requirement for specific professional advice.
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