FOCUS: FINANCE AND BUDGETING Managing and Accounting for Fixed Assets William C. Rivenbark ixed assets represent a signifi- at their original historical cost and cant investment of public dol- remain at that value throughout Flars for local governments and their life. Fixed assets purchased by public authorities. Items that consti- “proprietary funds” (business-like tute fixed assets are tangible in na- funds, such as public utilities) are ture and normally have a useful life capitalized at their original histori- of at least two years. Commonly cal cost and depreciated over their used classifications of fixed assets are useful life. Items of insignificant land, buildings, equipment, and ve- value are simply expensed in their hicles. year of purchase. Maintaining control of fixed assets is Localities tend to capi- a function of the entire organization, talize assets at dollar values not just the accounting department. To much lower than needed, maintain financial control of fixed as- ✓ setting policy primarily to sets from an accounting perspective, a satisfy the internal control locality must properly report their value FIXED function rather than the fi- on its annual financial statements. To portant to staff, managers, ASSET nancial reporting function.2 They maintain internal control from a man- council members, investors, and should set the dollar value for capi- agement perspective (that is, to ensure creditors. External auditors issue a talization of assets with the objective of use of the assets for authorized pur- “qualified audit opinion” if they find accurately reporting the value of fixed poses and to prevent their misuse or that the financial statements are inad- assets on their annual financial state- theft), the locality must assign custodial equate in a material respect. Lack of ments. Internal control of fixed assets responsibility for fixed assets to the de- control over fixed assets is one of the should be addressed in the fixed assets partment and division managers who primary causes for receiving a qualified policy by more effective means than the employ them for service delivery. A audit opinion. For localities that receive capitalization threshold. fixed assets policy based on the recom- a qualified opinion concerning their ac- mended practices of the Government counting for fixed assets, the LGC will Legal, Administrative, and Finance Officers Association (GFOA) no longer authorize the issuance of GAAP Requirements and the Local Government Commis- long-term debt (bonds).1 sion (LGC) is essential to obtaining The purpose of this article is to en- The North Carolina General Statutes both types of control. courage localities to review their fixed (hereinafter G.S.) do not address the External auditors review fixed assets assets policies and to establish capitali- management of fixed assets in detail, records and internal controls during the zation thresholds based on criteria pro- providing flexibility for local govern- annual audit. They issue an “unquali- posed by the GFOA and the LGC. A ments. G.S. 159-26(a) states that “each fied audit opinion” if the general- “capitalization threshold” is the dollar local government or public authority purpose financial statements present value at which assets are “capitalized” shall establish and maintain an ac- fairly, in all material respects, the finan- (carried on the general ledger) rather counting system designed to show in cial position of the organization. This than “expensed” (shown on the general detail its assets, liabilities, equities, rev- type of audit opinion is extremely im- ledger as a decrease in cash and an in- enues, and expenditures.” Additionally, crease in expenditures). Fixed assets G.S. 159-26(b)(8) requires that an ac- The author is an Institute of Government purchased by “governmental funds” counting system be designed to provide faculty member who specializes in local (public-purpose funds, such as public for “a ledger or group of accounts in government administration. safety and public works) are capitalized which to record the details relating to spring 2000, popular government 35 the general fixed assets of the unit or External auditors zation threshold is likely to be lower public authority.” than needed, and fixed assets records The North Carolina Department of move toward a become difficult to manage. The finan- State Treasurer Policies Manual ex- qualified audit opinion cial reporting goal is to record the nec- pounds on G.S. 159-26(a) and G.S. essary information accurately when a 159-26(b)(8), providing detailed in- when fixed assets fixed asset is acquired, maintain the in- structions on fixed assets management, records do not formation during the life of the asset, including the capitalization threshold. and delete the information after dis- It concludes that the dollar amount set materially reflect the posal of the asset. Localities can de- for capitalizing assets is a policy deci- value of fixed assets or crease the probability of a qualified au- sion of the governing board. dit opinion by following the recommen- Three of the twelve generally ac- when proper internal dations of the GFOA and the LGC. cepted accounting principles (GAAP) controls are not in place deal directly with managing and ac- to safeguard the assets. Capitalization Threshold counting for fixed assets.3 None of the principles, however, address what is a An effective fixed assets policy must be proper capitalization threshold, again guard the assets. Therefore, in develop- tailored to the individual needs of an leaving that to each locality to decide ing a fixed assets policy, local officials organization. Therefore the organiza- on the basis of its individual needs. should understand the audit process tion must reconcile the recommenda- and likely sources of problems. tions offered by the GFOA and the Fixed Assets Records The external auditors begin with an LGC with its own demands. examination of the organization’s fixed Estimating the useful life of assets. A and Audit Findings assets policy and procedures. At this fixed assets policy should begin by stat- point the auditors are determining ing its purpose and effective date. It Fixed assets records are used for a vari- whether adequate controls are in place then should define fixed assets. The ety of reasons and should be accurate and whether the organization is follow- LGC maintains that “fixed assets are and complete. They are periodically ing its policy and procedures. Auditors tangible in nature and have a useful life reconciled with departments’ actual typically intensify their examination of longer than one year. They are classified fixed assets to ensure fulfillment of the fixed assets records when they uncover as land, improvements other than departments’ custodial responsibility. problems during this initial review. buildings, buildings, operating plants, Risk management personnel use them Problems tend to emanate primarily equipment, and construction in prog- to ensure that the organization is prop- from one of the following areas: ress.”6 The GFOA promotes a similar erly protected with insurance cover- definition but states that “fixed assets age.4 Analysts often need fixed assets 1. Fixed assets already disposed of should be capitalized only if they have records when completing special as- still appear on the fixed assets list. an estimated useful life of at least two signments, and they are used to report This is the most common source of years following the date of acquisi- the beginning value, additions, dispos- audit problems. tion.”7 Normally a locality capitalizes als, and ending value of an entity’s fixed 2. Fixed assets recently purchased by assets with a useful life of at least two assets on the annual financial state- the organization are not listed on years unless special circumstances dic- ments. the fixed assets list. tate otherwise. External auditors move toward a 3. Fixed assets that appear on the Determining the threshold. The next qualified audit opinion when fixed as- fixed assets list are not valued cor- step is to establish the capitalization sets records do not materially reflect the rectly. threshold. In practice, land and build- value of fixed assets or when proper in- For audits at the end of fiscal year ings always are capitalized, so the capi- ternal controls are not in place to safe- 1998, external auditors identified fixed talization threshold primarily applies to assets weaknesses as problems for ap- equipment and vehicles. The GFOA proximately 12.5 percent of North maintains that “as a general rule, capi- Carolina local governments and public talization thresholds should be de- authorities.5 If not corrected, these signed to encompass approximately problems can force an external auditor 80 percent of a government’s total FIXED to issue a qualified opinion for a lo- noninfrastructure assets”—that is, as- ASSET✗ cality’s financial statements. sets other than items like roads, bridges, One key to avoiding the major prob- and sidewalks.8 In addition, the GFOA lem areas is to avoid basing a capitaliza- recommends that a government never tion threshold solely on the in- use a capitalization threshold of less ternal control function. When than $1,000 for any individual item.9 concerns about internal control The LGC states that “equipment and dictate the dollar value for vehicles costing $500 or more should capitalizing assets, the capitali- be recorded as fixed assets.”10 To rec- 36 popular government, spring 2000 Internal Control Function tag and track these assets. This form of control can be more effective in pre- Although the capitalization threshold is venting misuse than a control mecha- primarily a financial reporting issue, a nism located in the accounting area. locality should address the internal con- The organization therefore should as- trol function during the development of sign custodial responsibility to indi- its fixed assets policy. Localities often viduals who can immediately detect need to track certain assets regardless of problems associated with fixed assets.