(A) Purpose. The purpose of this section is to establish capitalization thresholds for capital assets; to establish responsibility for tracking controllable items that fall below the capitalization threshold; and, to provide guidance for future issuance of capital assets policies and procedures.
(B) Background. The term capital assets is used to describe assets that are used in operations and that have initial lives extending beyond a single reporting period. Capital assets may be either intangible (e.g., easements, water rights) or tangible (e.g., land, buildings, building improvements, vehicles, machinery, equipment and infrastructure). It is incumbent upon public-sector managers to maintain adequate control over all of a government's resources, including capital assets, to minimize the risk of loss or misuse. As a practical application of the materiality principle, not all tangible capital-type items with useful lives extending beyond a single reporting period are required to be reported in a government's statement of position. Items with extremely short useful lives (e.g., less than two years) or of small monetary value are properly reported as an “expense” or “expenditure” in the period in which they are acquired. When outlays for capital-type items are, in fact, reported on the statement of position, they are said to be capitalized. The monetary criterion used to determine whether a given capital asset should be reported on the balance sheet is known as the capitalization threshold. A government may establish a single capitalization threshold for all of its capital assets, or it may establish different capitalization thresholds for different classes of capital assets. Capitalization is, of its nature, primarily a financial reporting issue. That is, a government's principal concern in establishing specific capitalization thresholds ought to be the anticipated information needs of the users of the government's external financial reports. While it is essential to maintain control over all potentially capitalizable items, there exist much more efficient means than capitalization for accomplishing this objective in the case of a government's smaller tangible capital type items. Furthermore, practice has demonstrated that capital asset management systems that attempt to incorporate data on numerous smaller items are often costly and difficult to maintain and operate.
(C) Definitions. For the purpose of this section, the following definitions shall apply unless the context clearly indicates or requires a different meaning.
BUILDINGS. A capital asset class that includes all buildings that are owned by the city. Components of a building, not normally replaced, are considered part of the building. This class also includes building improvements such as subsequent additions of a new wing or extension, and also structural renovations and improvements.
CAPITAL ASSET. Tangible or intangible assets that meet all three of the following: (1) it must have an initial useful like that extends beyond a single reporting period, i.e., one year; (2) it must be used in the operations of the entity, (3) it must not be specifically excluded by policy, e.g., capitalization threshold.
CAPITALIZATION THRESHOLD. The dollar value at which a government elects to capitalize its capital assets for financial reporting.
CAPITALIZE. To report capital outlays as capital assets in the statement of net assets or balance sheets.
CONTROLLABLE ITEMS. Items that may require tracking due to one or more of the following: (1) ensure legal compliance, (2) to protect public safety and avoid potential liability, e.g. weapons; or (3) to reduce risk of loss.
FAIR (MARKET) VALUE. Estimated dollar amount at which an asset may exchange between a willing buyer and a willing seller, neither being under compulsion, each having reasonable knowledge of all relevant facts, and with equity to both. “Estimated fair value” at acquisition may be obtained from manufacturers' catalogs or price quotes in periodicals, from objective appraisals, or similar sources. Estimated fair values is used in valuing donations.
HISTORICAL COST. The original cost of an asset at the time of acquisition including all ancillary charges (e.g., freight, installation, site preparation, etc.) to bring the capital asset to its intended location and to get it ready for its intended use.
IMPROVEMENTS OTHER THAN BUILDINGS. The capital asset class that includes depreciable improvements to land other than those related to site preparation or conversion to a public road. This also includes “infrastructure”-type assets owned by enterprise funds (e.g. retaining walls, etc.)
INFRASTRUCTURE. Capital assets that are stationary or immovable in nature and that
have useful lives that can be preserved over a longer period than most capital assets.
LAND and LAND RIGHTS. The capital asset class which includes all land and rights to land acquired by the city of its own use. Land can be acquired as fee simple or land rights may be purchased without the transfer of title. The latter may include regular easements, road right-of-way, conservation easements, development rights, etc.
MACHINERY AND EQUIPMENT. The class of capital assets which generally includes all movable personal property but also includes plant and other fixed equipment.
SYSTEM SOFTWARE. Includes purchased special application software. This does not include general software applications that are needed for basic computer applications or performing routine office tasks, the cost of which are normally bundled with the hardware cost or expensed.
(D) Policies.
(1) (a) Capitalization thresholds for applicable capital asset classes are established as follows:
1. Machinery and equipment: $ 2,500.
2. System software: $ 2,500.
3. Buildings and building improvements: $ 2,500.
4. Improvements other than buildings: $ 2,500.
(b) The threshold amounts are to be applied to the historical cost of capital assets at the time of acquisition. Acquisition includes direct purchase, construction, donation or contribution, capital lease, or any other means by which rights or title to property transfer to the city. Land and governmental infrastructure are not subject to capitalization thresholds.
(2) The capitalization thresholds are generally applied to individual items (per unit basis) and not to the total cost of grouped or combined acquisitions.
(3) The change in capitalization threshold shall be applied to the cities existing capital assets inventory retrospectively. All capital assets having cost or assigned values that fall below the corresponding thresholds shall be removed from the capital asset inventory and the general ledger. All “controllable” equipment that falls below the threshold shall be moved to a non-capital inventory for alternative tracking.
(4) Adequate controls must still be maintained for non-capitalized but “controllable” items of personal property.
(E) Effective date. The effective date for capitalization thresholds for capital assets is 7-21-2014.
(Ord. passed - -)