POLICY NUMBER: CS – 031 – Formerly F – 012
RESPONSIBILITY: Finance Department
APPROVAL: Mayor and Council
APPROVAL DATE: June 22, 2020
DATE OF NEXT REVIEW: June 2025 (5 Years)
The purpose of this policy is to prescribe the accounting treatment for tangible capital assets. The principal issues in accounting for tangible capital assets are the recognition of the assets, the determination of their carrying amounts and amortization charges, the proper disposal of assets, and the recognition of any related impairment losses.
2.0 Policy Statement
The Canadian Institute of Chartered Accountants has approved Public Sector Accounting Board (PSAB) Handbook Section 3150 relating to the accounting treatment of a municipality’s tangible capital assets. Beginning on January 1, 2009 all municipalities in Canada must record and report their tangible capital assets on their financial statements. These assets must be valued at historical cost and amortized over their expected useful life. This policy has been developed to provide a framework for the implementation and subsequent maintenance of the City’s Tangible Capital Asset Reporting System.
All tangible property acquired by the City, either through donation, construction, or purchase, that qualifies as a tangible capital asset is included in the scope of this policy.
Tangible Capital Assets (TCA) are non-financial assets having physical substance that:
- are held for use in the production or supply of goods and services, for rental to others, for administrative purposes, or for the development, construction, maintenance or repair of other tangible capital assets;
- have useful economic lives extending beyond an accounting period;
- are to be used on a continuing basis
- are not for sale in the ordinary course of business.
The following will not be recognized as tangible capital assets:
- Crown land;
- Intangible assets such as goodwill and easements;
- Assets that do not meet capitalization thresholds;
- Natural resources including trees and woodlots;
- Works of art, historical treasures (disclosed in notes to the financial statements);
- Cost of studies such as the Official Plan and Development Charge study;
- Inventories and supplies;
- Interest expense related to financing costs incurred during the time an asset is under construction; and
- Assets held for sale.
“Amortization” means the allocation of the cost of a TCA to operating periods as an expense over its useful life. Also referred to as depreciation.
“Betterment” means a cost incurred which enhances the service potential of a TCA by doing one of the following:
- extending its useful life
- increasing the service capacity
- lowering operating costs
- improving quality of output
“Capitalization Threshold” means the value above which an individual TCA or a group of similar TCAs (pooled assets) are capitalized and reported in the financial statements.
“Capital Work-In-Progress” means the cost of a TCA under construction or in an uncompleted process of acquisition and that are not yet in service. Amortization is not applied to work-in-progress.
“Complex Assets” means a physical asset capable of disaggregation into significant components.
“Contributed / Donated Assets” means TCA received at no or nominal cost. The value of a contributed TCA (except a road allowance) is its fair value at the date of contribution. The value of a contributed road allowance is nominal; therefore, the cost value given to a contributed road allowance will be $1 per segment (usually intersection to intersection).
“Disposal” means the reduction in the investment in TCAs by was of sale, demolition, loss or abandonment.
“General Asset Class” means tangible capital assets that are not part of the Infrastructure asset class.
“Fair Value” means the amount of the consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act.
“Historical Cost” means the gross amount of consideration originally given up to acquire, construct, develop or better a tangible capital asset and includes all costs directly attributable to the asset’s acquisition, construction, development or betterment, including installing the asset at the location and in the condition necessary for its intended use.
“Infrastructure Asset Class” means linear assets and their associated components, generally constructed or arranged in a continuous and connected network. This class includes but is not limited to: Road Network (including sidewalks, Multi Use Trails within the road allowance, street lighting and traffic signals), Bridges, Storm Water Network, Water and Wastewater Networks, as well as assets used in the operation or maintenance of these Infrastructure assets.
“Net Book Value” means cost of a TCA, less both accumulated amortization and any write-down.
“Replacement Cost” means the current cost of similar new property having the nearest equivalent utility as the property being appraised as of a specific date.
“Residual Value” means the estimated net realizable value of a TCA at the end of its useful life, also referred to as salvage value.
“Write-Down” means a reduction in the cost of a tangible capital asset to reflect the decline in the asset’s value due to a permanent impairment.
- Purchased assets must be recorded at cost and donated assets must be recorded at fair value at the date of contribution. Fair value is the amount of the consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties, who are under no compulsion to act.
- Any significant new elements added (acquired, constructed, developed or betterment) to an original asset should be treated as an acquisition
- Significant lease agreements must be reviewed by Finance to determine if they should be accounted for as capital leases or operating leases.
- When a capital lease is recorded, the asset is treated as an acquisition of a capital asset and thereby setting up a liability. A lease may be recorded as an operating lease when the net present value of the future minimum lease payments or fair value, whichever is less.
- Betterments are expenditures on tangible
capital assets that occur subsequent to the acquisition/construction and:
- Increase previously assessed physical output or service capacity;
- Lower associated operating costs;
- Extend the useful life of the asset; or
- Improve the quality of the output.
A betterment should be capitalized. Any other expenditure would be considered a repair or maintenance and should be expensed in the period.
- Leasehold improvements are a betterment made to a leased property.
- The financial statements disclose information for major asset categories. These categories are determined by asset types such as land and road allowances, land improvements, buildings, machinery & equipment, linear assets, roads (including curbs and gutters), sidewalks, sanitary and storm sewers, manholes and catch basins, water mains/water distribution, fire hydrants, water meters, bridges & culverts, street lighting, traffic lights, paths and trails, marine infrastructure, office furniture and equipment, computer hardware, computer software, licensed vehicles, unlicensed mobile vehicles and capital works in progress.
- Works of art and historical treasures are not recognized as tangible capital assets in financial statements but the existence of such property must be disclosed and reported.
- Capitalization shall be deemed to occur at the time of transfer of ownership from the vendor to the City.
- All tangible assets must be depreciated over their useful life, taking into consideration any residual value. Residual value is defined as the estimated net realizable value of a tangible capital asset at the end of its useful life.
- Straight-line amortization method will be used for all depreciable asset classifications except when it would be deemed more appropriate to use a different method.
- Capitalization thresholds and expected useful lives for the various asset classes are set out in Schedule A to this policy.
- Pooled Assets are assets that have a unit value below the capitalization threshold but have a material value as a group. They are recorded as a single asset with one combined value.
- The estimated useful life and residual values of all assets should be reviewed and approved by Finance on a regular basis and revised where appropriate.
- Finance will approve the amortization term, useful life and residual value of new classes of assets.
- The cost of a constructed asset would normally include direct construction or development costs (such as materials and labour costs), and overhead costs directly attributable to the construction or development activity.
- The capitalization of assets will be reported to Council in the annual audited Financial Statements.
WORK IN PROGRESS
- Work or construction in progress represents the costs incurred to date on a project in which the City has not issued the certificate of initial acceptance or received notice of substantial completion. Examples might include road, water and sewer infrastructure, new buildings, or custom-developed computer software systems. It may also include assets that have not yet been placed into use.
- Work in progress for assets under development or construction must be recorded on the financial statements for the accounting period. All costs associated with these assets that are in the construction phase are to be capitalized. Work in progress is not amortized.
DISPOSALS AND WRITE DOWNS
- When an asset is sold outright the difference between the proceeds from the sale of the asset and the remaining net book value should be charged to the current year operation as either revenue or expense.
- When a capital asset is reused in some other service capacity it is necessary to review its value to determine whether the residual value related to the previous use needs to be adjusted. The cost will not be increased but a change in service life may occur, or components of the asset may have to be written off if they are not reused. Note that current accounting standards require consideration of the permanency of the impairment before recognizing a write down.
- When tangible capital assets are taken out of service, destroyed or replaced due to obsolescence, scrapping or dismantling, the department head or designate must notify the Director of Finance of the asset description and effective date. The Finance staff is responsible for adjusting the asset registers and accounting records when recording a loss/gain on disposal and write-downs.
The value given for a trade-in of an asset is the net proceeds on disposal.
- When conditions indicate that a tangible capital asset no longer contributes to the ability to provide goods and services, or that the value of future economic benefits associated with the asset is less than its net book value, the cost of the asset should be reduced to reflect the decline in the asset’s value. The net write-downs of assets should be accounted for as expenses in the statement of operations. A write-down should not be reversed.
- A write down of the cost of an asset would be when it can be demonstrated that the reduction in future economic benefits is expected to be permanent. Conditions that may indicate that the future economic benefits associated with an asset have been reduced and a write-down is appropriate include:
- a change in the extent to which the asset is used
- a change in the manner in which the asset is used
- significant technological developments
- physical damage
- removal of the asset from service
- a decline in or cessation of, the need for the services provided by the asset
- a decision to halt construction of the asset before it is complete or in usable or saleable condition
- a change in the law or environment affecting the extent to which the asset can be used.
The persistence of such conditions over several successive years increases the probability that a write-down is required unless there is persuasive evidence to the contrary. Regardless of any change in circumstance, a write-down would not be reversed.
- Transfers of tangible capital assets between departments shall be at the net book value of the asset. The receiving department would record the asset at its original historical cost and accumulated amortization.
- Transfers will only occur between departments with different funds.
6.0 Roles and Responsibilities
- Approve by resolution this policy and any amendments.
- Consider the allocation of resources for successful implementation of this policy in the annual budget process.
Chief Administrative Officer
- Implement this policy and approve procedures.
- Ensure policy and procedure reviews occur and verify the implementation of policies and procedures.
Director of Finance
- Ensure implementation of this policy and procedure.
- Ensure that this policy and procedure is reviewed every five (5) years.
- Make recommendations to the Chief Administrative Officer of necessary policy or procedure amendments.
Directors, Managers and Supervisors
- Understand and adhere to this policy and procedure.
- Ensure employees are aware of and adhere to this policy and procedure.