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FIN-6.11 - Capital Assets

Administrative Rule Adopted by Council

These administrative rules establish minimum standards for capital assets applicable to all City bureaus. Bureaus may maintain their own capital asset inventory systems, with additional detail or supporting documentation, as long as the minimum standards are maintained.

Authority for this administrative rule is established in the City Charter and the City Code.  This administrative rule has been approved by the City Council.

The Accounting Division of the Bureau of Financial Services of the Office of Management and Finance (Accounting Division) will periodically monitor bureaus to assess compliance with the minimum standards of this rule.  As instances of non-compliance are identified, bureaus will be required to develop and implement a corrective action plan.  The Accounting Division will provide assistance to bureaus, if requested, to develop this plan.  The Controller will report all instances of non-compliance annually to the Chief Financial Officer (CFO) and City Council.

“Ancillary charges” mean incidental costs necessary to place a capital asset into its intended location, condition, or use.  Examples include title fees, attorney or architect fees, freight charges, taxes, and site preparation costs. Ancillary charges are capitalized in addition to the purchase price and/or construction cost of capital assets.
“Building” means a relatively permanent structure used to house persons or property.  Buildings may be purchased or constructed by the City.  Major components may be capitalized separately.  Also classified as buildings are fixtures that are permanently attached to and made part of buildings in such a manner that removal is not possible without damage to the building.
“Capital Asset” means a tangible or intangible asset having significant value that is used in operations and has an initial useful life that benefits more than a single CAFR reporting period.  Capital assets include land, land improvements, buildings, infrastructure, equipment, leasehold improvements, and construction in progress. 
“Capital Lease” means a lease which transfers the benefits and risks inherent in the ownership of facilities and/or equipment to the lessee, who in turn capitalizes the leased assets and records the capital lease as a liability.  See Accounting Administrative Rule FIN-6.07 – Leases. 
“Construction in progress” means costs incurred for buildings, improvements, infrastructure, software, or other projects which remain incomplete and as a result, have not yet been placed into service.  Construction in progress is not depreciated.
“Depreciation” means the systematic allocation of the cost of a capital asset, less any salvage value, over the estimated useful life of the capital asset.  The City calculates and records depreciation expense using the straight-line method. 
“Easement” means the right to a specific limited use of land or other property, though it does not transfer actual ownership of the land.  An easement is classified as land, and is not depreciated.
“Equipment” means property with a useful life greater than one year that does not lose its identity when removed from its location and is not changed materially or expended in use.  Equipment does not include the cost of internally developed software.
“Fair value” means the amount paid, or that would be paid, between a willing seller and willing buyer.  Fair value may be estimated using catalogs, price lists, historical records, or recent sales or purchases of comparable assets.
“Historical cost” means the purchase price or construction cost of a capital asset including any ancillary charges. 
“Improvement” means an addition or change to a capital asset, other than maintenance and repairs, which extends its useful life and/or improves its efficiency, capacity, or usability.   Improvements to land such as retaining walls, swimming pools, or picnic facilities that have identifiable useful lives, shall be capitalized as Improvements.  Improvements to buildings shall be capitalized as Buildings and improvements to equipment as Equipment.  Leasehold improvements are classified separately as defined below.    
“Infrastructure” means long-lived capital assets that are normally stationary and can be preserved for a significantly greater number of years than most capital assets.  Examples are bridges, roads, street lighting, water mains, and sewer systems.  Land associated with infrastructure should be reported as land rather than infrastructure.  Buildings may be classified as infrastructure if they represent components of an infrastructure subsystem or network. 
“Intangible asset” means an asset lacking physical substance that has a useful life greater than a single CAFR reporting period, for example, computer software.  See also Accounting Administrative Rule FIN-6.09 - Capitalization of Computer Software Developed or Obtained for Internal Use.
“Land” means real estate held for productive use.  The cost of land shall include any ancillary charges necessary to ready the land for its intended use such as draining, filling, and grading.  Land is not depreciated.  
“Leasehold Improvement” pertains to leased property for which ownership does not transfer to the lessee at the end of the lease and includes additions or changes to prepare leased assets for initial or continued use.  Ownership of such improvementsreverts to the lessor upon expiration of the lease.
“Maintenance and repairs” mean periodic expenditures that sustain an asset in good working order throughout its estimated useful life. Maintenance and repairs do not expand the capacity or extend the useful life of the asset and are therefore not capitalized.
“Minor equipment” means tools and equipment with a unit cost of less than $5,000.  Minor equipment is expensed at acquisition and is not capitalized.
“Network” means a group of assets that provide a particular service, for example, a water distribution system or a sewage treatment plant.
“New component” means the addition of an item, structure, or function to an existing asset for which no such item, structure, or function previously existed.  A new component shall be treated as a separate asset. 
“Salvage Value” means the expected residual value of a capital asset at the end of its useful life.  Salvage value is deducted from cost in calculating depreciation.
“Subsystem” means all assets that comprise an identifiable segment of a network or system of assets.  For example, within a water distribution network are subsystems of pumping stations, storage facilities, and water mains.
“Useful Life” means the typical estimated life of a capital asset placed into service at the purpose for which the asset was acquired. 
“Works of art and historical treasures” mean visual creations and artifacts sited where accessible to the public.

Responsibilities and Accounting for Capital Assets
1.      Bureaus shall maintain assets in working condition.  
2.      Bureaus shall maintain effective internal controls to safeguard capital assets, including: 
a.      Separation of duties among personnel -
i.       Authorizing purchase of capital assets;
ii.      Accepting deliveries of  assets purchased;
iii.      Preparing payment vouchers for such purchases;
iv.      Authorizing vouchers for payment;
v.      Serving as custodian for the assets; and
vi.      Conducting physical inventories of the capital assets. 
vii.     Alternative compensating controls may be used where limited staff size precludes full segregation of duties. 
b.      Measures to physically safeguard assets, such as asset tags, locks, passwords, and other security devices deemed appropriate by the circumstances.
3.      Bureaus acquiring capital assets shall promptly and accurately record such expenditures throughout the fiscal year as items are placed into service.  Supporting documentation for each asset recorded shall include an Asset Acquisition Form completed in accordance with instructions provided by the Accounting Division.
4.      Bureaus accepting donated capital assets shall do so in compliance with City Code 5.36.090 and shall promptly and accurately record such assets upon receipt.    Supporting documentation shall include an Asset Acquisition Form completed in accordance with instructions provided by the Accounting Division.
5.      Bureaus shall attach asset tags to equipment items whenever practical.  As assets are acquired and Asset Acquisitions Forms received, the Accounting Division shall provide bureaus with official pre-numbered asset tags.
6.      Capital asset and depreciation records shall be maintained in accordance with Generally Accepted Accounting Principles (GAAP) under the direction of the Accounting Division.
7.      Capital asset acquisition records shall be retained, even after an item becomes obsolete or is no longer in service, in accordance with City policies and retention schedules published by theCity Auditor.
8.      Original titles for real property shall be presented to the City Auditor’s office for permanent retention.
9.      Title to works of art and historical treasures shall vest in the City; however, the Regional Arts and Culture Council shall select, maintain, and make decisions regarding deaccessioning per City Code section 5.74, “Acquisition of Art.”

Capitalization Thresholds
1.      Asset capitalization thresholds shall be established and maintained by the Accounting Division.
2.      Thresholds by asset category have been established as follows:
a.      Land – none.
b.      Buildings – none.
c.       Improvements – $10,000.
d.      Infrastructure – $10,000.
e.      Leasehold Improvements – $10,000.
f.        Equipment – $5,000.
3.      Asset capitalization thresholds shall be applied consistently by all bureaus.  
4.      Thresholds for assets acquired by donation shall be the same as their purchased capital asset counterparts.
5.      Thresholds for assets acquired by capital lease shall be the same as their purchased capital asset counterparts.
6.      At the acquiring bureau’s discretion, capitalization thresholds may be applied at the following levels:
a.      Individual assets;
b.      Similar types of assets grouped together in a class;
c.       A subsystem of assets, which make up a segment of a network; or
d.      A network of assets.

Valuation of Capital Assets
1.      Capital assets shall be recorded at original historical cost.
2.      Historical cost shall include purchase price, constructions cost, value of donated goods and/or services, and ancillary charges.
3.      If historical cost is unknown, estimated cost may be calculated or otherwise determined based on a documented valuation methodology. 
4.      Ancillary charges shall be reduced by any proceeds from the sale of salvaged materials.
5.      Interest costs may be capitalized, where appropriate, in accordance with GAAP.   Consult the Accounting Division for guidance regarding the propriety of capitalizing interest.
6.      Donated capital assets shall be recorded at fair value on the date of transfer plus any required ancillary charges.
7.      Assets acquired by capital lease shall be recorded at the lower of fair value or present value of minimum lease payments in accordance with Accounting Administrative Rule FIN-6.07 – Leases.
8.      In accordance with GAAP, the City does not capitalize works of art and historical treasures as long as:
a.      Collections are held for public exhibition rather than financial gain;
b.      Such items are protected, unencumbered, cared for, and preserved; and
c.       Proceeds from any sales are used by the City to acquire other works of art and historical treasures.

1.      The cost of capital assets less estimated salvage values, if appropriate, shall be depreciated over the estimated useful life of the assets.
a.      Land is considered inexhaustible and is, therefore, not depreciated.
b.      Construction in progress by definition has not yet been placed into service and is, therefore, not depreciated.
2.      Assets may be depreciated individually, by class grouping, as a subsystem, or as a network (see Capitalization Thresholds above).
3.      Capital asset useful lives shall be applied consistently by all bureaus in accordance with City useful life tables established and maintained by the Accounting Division.
4.      Leasehold improvements shall be depreciated over the lesser of useful life or the remaining term of the lease term. 
5.      Depreciation shall be calculated using the straight-line method with a convention of zero depreciation during the fiscal year of acquisition and a full year’s depreciation in the fiscal year of retirement.
6.      Residual or salvage value of 10% shall be associated with Buildings, Improvements, and Equipment except for those classes or groupings specifically identified as retaining no economic value beyond the end of their depreciable lives. These classes or groupings are to be assigned a residual value of zero.

Physical Inventories of Capital Assets
1.      The Accounting Division shall annually provide capital assets listings to the bureaus to serve as the basis for physical inventory counts.
2.      Bureau management shall be responsible for completing annual physical inventories of capital assets.
3.      Physical inventory counts shall be conducted or observed by bureau personnel having no direct custodial responsibility for the assets being counted.
4.      Physical inventory discrepancies shall also include items counted that are not listed on inventory records.
5.      Physical inventory discrepancies shall be accounted for and resolved by completing and forwarding to the Accounting Division either an Equipment Transfer and Disposal Report or an Asset Acquisition Form, whichever is appropriate.
6.      Documentation of physical inventories shall be submitted to the Accounting Division for review.
7.      Disposal of capital assets shall be in accordance with Accounting Administrative Rule FIN-6.12 - Disposal of Capital Assets.

Transfer of Assets
1.      Capital assets may be transferred between bureaus and between funds. 
2.      The bureau transferring assets shall properly document the transfer by the completion of a Transfer and Disposal Report and by prompt submittal of the form to the Accounting Division. 
3.      Historical cost of transferred assets, along with any related accumulated depreciation, shall be removed from the transferring owner’s balance sheet and added to that of the new owner.

Shared Assets           
1.      Ownership and the related accounting treatment shall be arranged in advance of purchase or construction for capital assets acquired by one bureau for use by another bureau. 
2.      A formal interagency agreement shall be prepared to clearly delineate each bureau’s responsibilities and ensure that capital assets are properly recorded by the parties involved. 
3.      Unless otherwise specified in the interagency agreement, the bureau with primary responsibility for managing the asset shall capitalize it.

Grant-funded Assets
1.      Capital assets purchased with grant funds shall adhere to the provisions of each grant. 
2.      Federal grants often include specific requirements and instructions relating to recordkeeping, frequency of physical inventories, maintaining of physical controls to safeguard the property, and restrictions or conditions relating to disposition of the property.
3.      Such requirements may attach to the property acquired under the grant and may extend beyond the life of the grant. 

Minor Equipment
1.      Minor Equipment is not capitalized.
2.      Bureaus may, however, independently track these items.
3.      Disposal of minor equipment shall be subject to the General Guidelines for Disposal of Capital Assets included in the Accounting Administrative Rule FIN-6.12 - Disposal of Capital Assets.

Resolution No. 36435, adopted by Council September 6, 2006.