A. Introduction
All assets must be physically identified and tagged, their location recorded and the responsibility for their custody assigned.
A control number should be assigned to each asset. It is suggested that the control number system be designed in such a manner that, at a minimum, the control numbers relate to the chart of account numbers for the asset class. Furthermore, control numbers should include identifiers that indicate the location, department or other significant information about the asset. This will facilitate controlling assets by asset classification as well as location and manager assigned responsibility for custody of the asset. Additionally, it should be noted that GASB Statement No. 34 requires that “(d)epreciation expense for capital assets that can specifically be identified with a function should be included in its direct expenses.” It will also facilitate the physical inventory of the capital assets. Control numbers should be carefully designed to meet all these purposes. For internal control, capital assets such as buildings, improvements other than to buildings, and land are assigned appropriate capital assets control numbers in the accounting records but are not physically tagged.
Asset control for financial reporting purposes should not be confused with safeguarding the assets. A local government unit may purchase many different items in order to meet the needs of the citizenry. In some local units, the cost of pistols, shotguns and other weapons used by the law enforcement officers may be below the capitalization threshold. While they may not be capitalized and depreciated on the financial records, law enforcement officials must ensure that all weapons are accounted for and strictly controlled. Similarly, the public grounds department should routinely inventory all the lawn mowers and weed trimmers. By their portable nature, this equipment may easily be misappropriated.
B. Internal Control Over Capital Assets
It is essential that all capital assets be adequately controlled to prevent misuse.
Critical internal control procedures for capital asset management include the following:
Adequate accounting records should be maintained that identify and classify all capital assets. OMB Circular A-102 and the common rule specify the data that the grantee's property records shall include for capital assets acquired with federal funds.
Adequate guidelines should be established and followed to distinguish between expensed items and capital additions; items acquired with federal or state funds as well as other special revenue purchased items; and betterments or improvements to assets.
Physical inventories of capital assets should be taken on an annual basis by independent parties. Inventory counts should be taken "from scratch" – not using the previous year's count lists. Count sheets should be initialed by the person(s) taking the inventory. The count should be reconciled to the accounting records, with written evidence of the reconciliation maintained. In small units, the inventory should be taken
Department of State Treasurer – Policy Manual for Local Governments Section 20: Capital Assets
Part IV – Internal Control and Financial Reporting
LGC Page 26 of 36 Pages. Revision Issued: August 2014
by a board member if there is only one accounting or finance staff member. If there are two accounting or finance staff members, the finance officer may take the inventory.
All capital assets should be tagged or identified in the accounting records by a control number, as applicable. Tags should be prenumbered, with all numbers accounted for, and should identify the assets as belonging to the unit. Tags should be affixed in a permanent manner.
All property, buildings, titled equipment and vehicles, and other items should be held in the name of the unit. All deeds on real property should be properly recorded and stored in a secure place.
All capital assets purchased, transferred, sold, scrapped, or destroyed should be recorded as such in a timely manner in the accounting system. This facilitates proper valuing of assets and helps to prevent loss or misuse.
All sales of surplus property should be conducted in accordance with G.S.
Chapter 160A, Article 12 (municipalities) or G.S. 153A-176 (counties).
Capital assets records are often used to help determine adequate insurance coverage on all real and personal property. An independent review of insurance coverage should be conducted at least every three years.
Adequate procedures should be in place to assure compliance with the uniform standards governing the utilization and disposal of property furnished by the federal government or acquired in whole or in part with federal funds by nonfederal political subdivisions set out in the common rule to OMB Circular A-102.
See the Policy Manual for Local Governments, Section 80 – Internal Controls for an additional discussion of policies and procedures related to internal control.
C. Financial Reporting Considerations
For audited financial statement purposes, additions to capital assets and the related financial liabilities must be disclosed in accordance with generally accepted accounting principles. Capital assets that are being or have been depreciated are reported net of accumulated depreciation in the statement of net position with related accumulated depreciation reported on the face of the statement or disclosed in the notes. Greater detail may be provided in reporting capital assets, such as by major class of asset, e.g.
infrastructure, buildings and improvements, vehicles, machinery and equipment, etc.
Governments should disclose information about their works of art and historical collections as required by GASB Statement 34, paragraph 118. The standards of financial accounting and reporting for leases by lessees are set forth in paragraphs 211 – 271 of GASB Statement No. 62.
GASB Statement 34, paragraph 117 contains the following disclosure requirements for capital assets and depreciation:
1. Beginning and end of year balances, with accumulated depreciation separately presented from historical cost,
2. Capital acquisitions,
3. Sales or other dispositions, and
Department of State Treasurer – Policy Manual for Local Governments Section 20: Capital Assets
Part IV – Internal Control and Financial Reporting
LGC Page 27 of 36 Pages. Revision Issued: August 2014
4. Current-period depreciation expense, with disclosure of the amounts charged to each of the functions in the statement of activities.
Detail information should be included in the notes to the financial statements about capital assets of the primary government reported in the statement of net position. The disclosure should be divided into major classes of capital assets as well as between those associated with governmental activities and those associated with business-type activities.
Furthermore, nondepreciable capital assets, such as land or infrastructure assets reported using the modified approach, should be disclosed separately from those that are being depreciated. Additionally, the notes should include disclosure regarding the policy for capitalizing assets and for estimating the useful lives of those assets. The unit's accounting policy on capitalization of interest costs incurred during construction should be disclosed and applied consistently. In a period in which some interest is capitalized, the disclosure should include both the amount of interest incurred during the period as well as the amount of interest cost that has been capitalized. Units electing the modified approach for reporting eligible infrastructure assets should describe their approach. Currently, the LGC staff is recommending against the use of the modified approach.
According to paragraph 5 of GASB Statement No. 51, all intangible assets subject to this Statement should be classified as capital assets and disclosed as such. Intangible assets should be grouped with those of a similar nature and usage (i.e., right-of-way easements, water rights, and software.)
The component of net position – net investment in capital assets – includes capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Interfund borrowings are not considered to be capital-related for purposes of this calculation. An Excel© worksheet is provided to assist in the calculation of net investment in capital assets and is available at www.nctreasurer.com.
Department of State Treasurer – Policy Manual for Local Governments Section 20: Capital Assets
Part IV – Internal Control and Financial Reporting
LGC Page 28 of 36 Pages. Revision Issued: August 2014
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Department of State Treasurer – Policy Manual for Local Governments Section 20: Capital Assets
LGC Page 29 of 36 Pages. Revision Issued: August 2014