Checklist for Capital

Purpose Local governments can use this internal control checklist as a resource to develop policies and procedures that align with guidance in the State Auditor’s Office Budgeting, and Reporting Systems (BARS) under Generally Accepted Accounting Principles (GAAP) Manual. Information related to capital assets within the BARS Manual has been updated to reflect additional guidance for governments related to capital reporting under GAAP and can be found here.

Disclaimer This checklist does not include all items that should be considered when accounting for capital assets. The suggested best practice procedure will vary by government depending upon the unique circumstances of internal control systems and information technology systems. It is not intended to replace management’s internal controls relevant to ensuring capital assets are properly reported. Management is responsible for ensuring that the reporting of capital assets complies with the BARS Manual and GAAP.

Instructions Assigned personnel could complete this checklist during the year-end preparation process at a minimum but it is also designed to be used throughout the year as assets are acquired or constructed. This checklist is designed to supplement the local government’s current process for confirming that capital assets are being reported properly at end.

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Additional information on checklist questions

Best practices for internal controls related to checklist questions

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This capital asset internal control checklist can be used by governments to develop or evaluate control activities that address areas of deficiencies most often found in the reporting of capital assets on the financial statements.

Best practice procedure Completed? Reviewer notes Objective: Ensure all capital asset additions are recorded in the general .

Compare information about purchases to additions to capital asset records. Consider options such as: • Review accounts used to record purchases of assets to ensure all purchases are accounted for in the capital asset system. For example, reconcile capital outlay expenditures (BARS 594) to capital asset additions. • Review accounts payable information for vendors that may have been used to purchase or construct a capital asset, and compare with capital asset additions. • Review capital grant and capital project accounts and compare to capital asset additions. • Compare additions per operational records (such as public works or risk management for insurance purposes) to capital asset additions. • Consider use of GIS data about assets and compare information about additions.

Some governments have specific general ledger codes to record capital expenditures so they can easily evaluate potential additions.

Objective: Ensure all donated assets (such as contributed infrastructure or other) are recorded completely and accurately in the general ledger.

Compare source records for donated assets to additions to capital asset records: • Ensure that the source records provided to finance are up to the date. • Ensure values are acquisition value, supported and consistently calculated, and follow policy and procedures.

GASB 72 established that donated assets should be recorded at acquisition value. This standard took effect for periods beginning after June 15, 2015.

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Best practice procedure Completed? Reviewer notes Objective: Ensure the capital assets records reflect all disposals and deletions that occurred during the period.

Compare known disposal or abandonments of assets to deletions from capital asset records. For example, review: • General ledger accounts used to record losses/gains on assets • Proceeds from insurance claims for possible disposals and compare to deletions • Sales or auction lists for possible disposals and compare to deletions • Surplus lists approved by the governing body for possible disposals and compare to deletions • New additions and consider whether they replaced an older asset that must be removed • Results of capital asset inventories and information from departments that assets may no longer be in use

Open communication channels between operations and finance are critical to ensuring all disposals and deletions are known.

Objective: Ensure capital assets are appropriately classified in the financial statements among funds or governmental/business type activities.

Evaluate whether transfers of capital assets between funds or component units or to other entities are reflected on the capital asset list.

Consider using the capital asset inventory process to gather information about potential transfers.

Ensure the transfers within a reporting entity are recorded at carrying value.

GASB 48 provides guidance on transfers of capital assets within a reporting entity; transfers are done at carrying value.

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Best practice procedure Completed? Reviewer notes Objective: Ensure the ending balance for “Construction in Progress” (CIP) reports only capitalizable costs for assets that are not yet placed into service.

Evaluate project costs reported in the CIP account, considering: • Are these repair projects? Repairs should be expensed and removed from CIP (for example, chip seals and pot hole repairs for roads). • If a betterment or improvement, does it extend the useful life or improve the capacity or efficiency? If not, it should not be capitalized. • Is the work substantially complete? If the project is substantially complete/being used in operations (for example, a school is being used by students), the project should be capitalized and moved out of CIP. • Is it an asset being built that will be owned or transferred to someone else? If so, this may not qualify as a capital asset and additional should be done. • Do these represent costs that should be capitalized? Consider special guidance for feasibility studies, internally generated software and intangible assets.

Ensure adequate oversight over the costs in the CIP account. This is a frequent area of misunderstandings and issues, and oversight may be beneficial. Objective: Ensure new capital assets are properly capitalized into the correct accounts and accurately classified on the financial statements.

Consider whether all relevant components of an asset are recorded accurately: • If componentizing assets, ensure each component is broken out on the asset list so that each is separately identifiable and depreciated appropriately. • Ensure land is being recorded separately from buildings and infrastructure assets that sit on top of the land. • If a large group purchase is being made, ensure the makeup of the purchase has been evaluated to ensure it is being properly capitalized (meets capitalization thresholds on a unit basis and recorded in adequate detail to the proper account(s)).

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Best practice procedure Completed? Reviewer notes Objective: Ensure the government reports only assets that it owns.

Check assets for ownership. Is the title that is held on all assets recorded?

Consider other possible actions: • Reconcile land assets to County land records. • Reconcile infrastructure assets to reports provided to oversight agencies. • Consider unusual situations that may have arisen and whether research has been done to determine the accurate reporting (for example, two governments are involved in the joint construction of an asset and each is capitalizing their costs expended without regard to who will own and/or maintain the asset).

Only one government should report a capital asset; see additional guidance in the BARS Manual about determining the ownership of capital assets.

Objective: Ensure all new additions meet recognition criteria under accounting standards and entity policy.

Evaluate the capital asset list additions for items that may not meet capitalization criteria, by looking for additions that: • Do not meet capitalization criteria, such as feasibility or other studies, or repairs/ maintenance items • Duplicate another asset, such as a new roof when the original building and roof are still being depreciated • Are below the capitalization thresholds and should not have been capitalized • Represent costs where a phase was capitalized, but the government has abandoned the full project or placed it on permanent hold • Group purchases that individually would not meet capitalization thresholds and should be expensed

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Best practice procedure Completed? Reviewer notes Objective: To obtain information about the existence and completeness of capital assets as well as potential transfers between funds. Perform a physical inventory and/or condition assessment of capital assets periodically. Employees/departments should also periodically review a list of all assets assigned to them to ensure the assets still exist, are in use and have not been transferred to another fund/department. Follow up on any discrepancies and make necessary adjustments to the capital asset listing. For some types of local governments, statutes contain specific requirements for demonstrating stewardship of public property.

Objective: Ensure costs of capital assets are being appropriately allocated over the period it will benefit. Consider potential red flags that may indicate useful life is not appropriate and requires further evaluation: • Asset groups that appear to be depreciating too quickly based on general knowledge • Many assets of similar types are fully depreciated (or nearly fully depreciated) • Useful lives appear unreasonable based on a cursory review (example – sidewalks at 10 years) • There are several different useful lives for the same type of asset • Useful lives have not been re-evaluated in several years • Documentation does not exist to support how the useful lives were determined To re-evaluate useful lives, consult with departments using or managing the assets about whether estimated useful lives align with the actual usage, considering: • The asset’s present condition, use, and how long it will meet service and technology demands • The planned replacement schedule per operational records or capital improvement plans • The government’s intention and ability to maintain the assets and potential impact to current estimated useful lives • Any adjustment to the government’s experience Make adjustments to useful lives of all affected assets in each class prospectively. Aligning operational plans for replacement with useful lives used for accounting purposes leads to more accurate financial reporting.

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Best practice procedure Completed? Reviewer notes Objective: Ensure federal regulations are adhered to when capital assets have been purchased with federal funds.

Evaluate capital assets purchased with federal funds. For example: • Are these being tracked in accordance with federal guidelines? For example, capital asset records must include specific information such as the percentage of federal participation in the project costs and source of funding for the property. • If assets were sold or surplused during the year they were purchased with federal funds, were federal requirements followed? • Has a physical inventory been completed (a physical inventory of the property must be taken and the results reconciled with the property records at least once every two years)?

The 2 CFR 200.310-316 gives specific requirements related to real property, equipment, supplies and intangible property purchased with federal grant funds.

Objective: Ensure capital asset policies are complete, clear and kept up to date to ensure accurate and consistent reporting.

Evaluate capital asset policies based on experience. • Consider whether policy is complete and whether updates are needed based on current best practices and guidance for such policies. • Policies should be periodically updated and re- evaluated.

Some examples of policy topics that would benefit from re-evaluation are: • Capitalization thresholds. Consider whether these are too low and causing undue burden for capital asset accounting. • Useful life ranges. These can change depending on funding ability and maintenance plans, as well as an entity’s experience.

Some examples of evolving areas your policy may not address are: • Componentization practices. For example, does a government capitalize a building or a road in its entirety or record significant components separately?

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Best practice procedure Completed? Reviewer notes • Defining maintenance versus capital expenditure and providing clear examples (for example, road overlays and chip seals are large expenditures, but whether these are capital assets or maintenance can be confusing)

Guidance on capital asset financial policies can be found at mrsc.org and in the GAAP BARS Manual.

Objective: Ensure intangible assets are propertly reported and amortized correctly.

Consider reporting of intangible assets: • Has there been any change to contractual relationships that might suggest a need to revise the period or to re-evaluate accounting and reporting? • Have there been any legal, regulatory or contractual provisions that may limit the length of the asset's useful life? • Are all intangibles reported that meet capitalization thresholds? • For any internally developed software (includes purchased software that required more than minimal effort before it was put in operation), did capitalization of costs only occur after funding is authorized and preliminary project phase completed?

GASB 51 established guidance over intangible assets for periods beginning after June 15, 2009. It requires retroactive reporting of all intangible assets in existence at that time.

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Best practice procedure Completed? Reviewer notes Objective: Ensure the capital asset records reflect unusual or infrequent events affecting capital assets.

Ensure the capital asset records account for unusual or infrequent events that may affect capital assets: • Annexations or loss of infrastructure assets due to another government’s annexation • Street vacations • Abandonment of utility lines • Transfers, acquisitions, or mergers of operations involving capital assets

GASB 69 established guidance over transfers, mergers, and acquisitions effective for periods beginning after December 15, 2013. It also covers recording of annexations that should be recorded at the carrying value of the transferring government.

Objective: Ensure the government has accounted for potential impairments that may affect asset values, and require adjustments in the records.

Evaluate assets for potential impairment: Have there been any events or changes in circumstances to suggest that the service utility of the capital asset may have significantly and unexpectedly declined?

Some examples include: • Evidence of physical damage (for example, damage due to a flood) • Enactment or approval of laws or regulations or other changes in environmental factors (such as new water quality standards that a water treatment plant does not meet and cannot be modified to meet) • Technological development or obsolescence (equipment no longer used because new technology is available) • Change in expected duration of use (closure of a school before useful life is finished) • Construction stoppage (for example, a project stopped due to lack of funding)

GASB 42 established guidance on how to test for and record impairments. See this standard for futher information.

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