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HomeMy WebLinkAboutReso 59-19 Financial Policies related to Capital AssetsRESOLUTION NO. 59-19 RESOLUTION OF THE CITY COUNCIL OF THE CITY OF MORRO BAY, CALIFORNIA, ESTABLISHING THE CITY OF MORRO BAY'S ACCOUNTING AND FINANCIAL REPORTING POLICIES RELATED TO CAPITAL ASSETS THE CITY COUNCIL City of Morro Bay, California WHEREAS, the City of Morro Bay wishes to establish Financial policies to direct staff and provide transparency to the Council and Community; and WHEREAS, those policies include a policy regarding Capital Asset recording; and WHEREAS, staff recommends the City Council adopt the proposed Capital Assets Policy, which demonstrates the City's commitment to fiscal responsibility and prudent management and is consistent with Government Accounting Standards, NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Morro Bay, California, the "Capital Assets Policy," as set forth in Exhibit A, attached hereto and incorporated herein, is hereby approved. PASSED AND ADOPTED by the City Council of the City of Morro Bay at a regular meeting thereof held on the 25H day of June 20191 by the following vote: AYES: NOES: ABSENT ATTEST: Headding, Addis, None Heller �S ANA SWANSON, City Clerk Davis, McPherson 01181.0001/480959.1 COUNCIL POLICY CAPITAL ASSETS POLICY Policy Statement Resolution No, 59-19 Exhibit A The City of Morro Bay (City) is afull-service City, providing essential services to over 10,000 residents related to public safety, planning, building, public works and recreation. In addition, the City has a vibrant tourism industry, attracting thousands of visitors annually, all of whom utilize city services in some fashion. As such, it is prudent for the City to establish sound financial management policies that conform with generally accepted accounting principles and state regulations. Government Accounting Standards Board (GASB) statement 34 defines capital assets. Purpose The City will maintain a capital asset management system that will meet external financial reporting requirements and the needs of the City in line with these policies. Capital assets are recorded as expenditures in governmental funds at the time the assets are received, and the liability is incurred. These assets will be capitalized at cost on the government wide financial statements. Note: Governmental Accounting Standards Board Statement No. 34 (GASB 34) changed Generally Accepted Accounting Principles (GAAP) for capital assets fiscal year ending June 30, 2004, pursuant to GASB 34, t eliminated and the City will report these assets by function statements. Per GASB 34: reporting for governmentafuns. Beginning he l din General Fixed Asset Account Group will be and activity on the government -wide financial Capital Assets are defined as land, improvements to land, easements, buildings, building improvements, vehiclesI machinery, equipment, works of art and historical treasures, infrastructure, and all other tangible or intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period. Infrastructure Assets are defined as long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets. Examples include roads, bridges, tunnels, drainage systems, water and sewer systems, dams and lighting systems. Buildings that are an ancillary part of a network of infrastructure assets are included. The City's Capital Assets Policy follows the recommended practices of the GFOA (Government Finance Officers Association) and the accounting standards of GASB 34. Page 1 Resolution No. 59-19 Exhibit A Capitalization Policy Generally, the capitalization threshold for capital assets will be an original cost of $5,000 or more (recorded as an asset on the balance sheet versus expensing the item). Specific capitalization requirements are described as follows: a. All land and art will be capitalized regardless of cost. b. Buildings, land improvements and infrastructure will be recorded if cost exceeds $25,000. c. Infrastructure will be recorded on a prospective basis only, beginning with fiscal year 2018- 19. d. All other assets must cost $5,000 or more and have a useful life of two (2) or more years. e. The capitalization threshold is applied to individual units of capital assets rather than groups. For example, ten desks purchased for $1,000 each will not be capitalized even though the total ($10,000) exceeds the threshold of $5,000, f. For purposes of capitalization, the threshold will generally not be applied to components of capital assets. For example, a keyboard, monitor and central processing unit purchased as components of a computer system will not be evaluated individually against the capitalization threshold. The entire computer system will be treated as a single asset. The capitalization threshold will be applied to a network if all component parts are required to make the asset functional. g. Repairs to existing capital assets will generally not be subject to capitalization unless the repair extends the useful life of the asset. In this case the repair represents an improvement and is subject to the requirements described in item "h" below. h. Improvements to existing capital assets will be presumed by definition to extend the useful life of the related capital asset and therefore will be subject to capitalization if the cost exceeds $5,000, As a result of the above capitalization policies, the following infrastructure items will not be capitalized: street trees, street signs. Additionally, the following capital equipment will also not be capitalized: personal computers, handheld radios, telephones. Leased Assets Operating leased assets are usually short term and cancelable at any time. The recording of an operating lease as a fixed asset is not required because the item is not purchased. However, operating leases will be capitalized if one or more of the following criteria are met and the chance of cancellation is low: a. Ownership is transferred by the end of the lease term b. The lease contains a bargain purchase option c. The lease term is greater than or equal to 75 percent of the asset's service life d. The present value of the minimum lease payment is greater than or equal to ninety percent (90%) of the fair market value of the asset at the inception of the lease. Capital lease items are capitalized at the beginning of the lease period, regardless of when the title transfers. Capital leases are. recorded at net present value of lease payments. Special studies If a special study or evaluation is budgeted for as a Capital Project and completed in a fiscal year, it will not be capitalized at year end nor added to the fixed asset inventory listing, unless a major capital asset addition is acquired as a result. If so the cost of the study will be added in the same fiscal year as the fixed asset addition. Examples of a study not capitalized is the ADA Transition Plan and the Short Range Transit Plan. Resolution No. 59-19 Exhibit A Construction In Progress For projects that require multiple fiscal years to complete, the capital expenditures for the current fiscal year will be categorized as Construction In Progress on the general ledger and Fixed Asset Listing and no depreciation will be taken, until the project is finalized. Depreciation expense will start as of the date placed into service. Capital Asset Recording The City will keep appropriate records in order to monitor and accurately inventory all fixed assets. Measuring the Cost and/or Value Capital assets are recorded at their "historical cost," which is the original cost of the assets. Donations accepted by the City will be valued at the fair market value at the time of donation. Costs include purchase price (less discounts) and any other reasonable and necessary costs incurred to place the asset in its intended location and prepare it for service. Costs could include the following: • Sales Tax • Freight Charges • Legal and title fees • Closing costs • Appraisal and negotiation fees • Surveying fees • Land -preparation costs • Demolition costs • Relocation costs • Architect and accounting fees • Insurance premiums and interest costs during construction. • Emergency/Safety Equipment, Light Bars, and Signage added to vehicles According to GASB 34, an estimate of the original cost is allowable in the absence of historical records. Standard costing is one method of estimating historical cost using a known average installed cost for a like unit at the estimated date of acquisition. Another recognized method is normal costing wherein an estimate of historical cost is based on current cost of reproduction new, indexed by a reciprocal factor of the price increase of a specific item or classification from the appraisal date to the estimated date acquired. When necessary the City will use whichever method gives the most reasonable amount based on available information. Recording Costs Incurred After Acquisition Expenditures/expenses for replacing a component part of an asset are not capitalized. However, expenditures/expenses that either enhance a capital asset's functionality (effectiveness or efficiency), or that extend a capital asset's expected useful life are capitalized. For example, periodically slurry sealing a street would be treated as a repair (the cost would not be capitalized), while an overlay or reconstruction would be capitalized. Adding a new lane constitutes an addition and would therefore also be capitalized. Disposition or Retirement of Capital Assets It is the City's policy that disposition of surplus, damaged or inoperative equipment will be at the discretion of the City Manager, who will make all efforts to sell, donate or recycle such items. The asset will be removed from the inventory of fixed assets as of the date of sale. Proceeds from the sale will be recorded as revenue to the benefit of the fund/department where the asset was used, or specifically designated at the discretion of the City Manager. Resolution No, 59-19 Exhibit A Depreciation The City will record depreciation expense on all capital assets, except for land and art. The City will use straight-line depreciation using the prorated months remaining in the fiscal year convention. As an example, depreciation will be calculated for 8 months in the year of acquisition if placed in service during October and for 4 months in the year of disposition. Depreciation will be calculated over the estimated useful life of the asset. Recommended Lives The City follows GFOA Recommended Practices when establishing recommended lives for capitalizable assets. If the life of a particular asset is estimated to be different than these guidelines, it may be changed. Following is a summary of the estimated useful lives: Asset Class Buildings Building Improvements Improvements other than Buildings Infrastructure Equipment and Machinery Useful Life 20 years 20 years 5 to 20 years 50 to 75 years 5 to 20 years Control of Assets The City will exercise control over the noncapitalized tangible capital -type items by establishing and maintaining adequate control procedures. The City's capitalization threshold of $5,000 meets financial reporting needs. Works of Art and Historical Treasures GASB 34 encourages but does not require the capitalization of art that meets all of the following conditions: • Held for public exhibition, education, or research in furtherance of public service, rather than financial gain • Protected, kept unencumbered, cared for, and preserved • Subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections It is the City's policy that proceeds from the sale of art be used to acquire other works of art. That being the case, the City's works of art and historical treasures will not be capitalized. Inventorying The City will perform a physical inventory of its capitalized assets, either simultaneously or on a rotating basis, so that all capital assets are physically accounted for at least once every five years.