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Capital Asset Policy 111003CITY OF SHOREWOOD, MN CAPITAL ASSET POLICY November 10, 2003 INTRODUCTION The City of Shorewood is required to implement Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial State»zents and Marzagenze~at's Disctiission and Analysis for State and Local Governments, for fiscal-year ending December 31, 2004. Statement No. 34 establishes new financial reporting requirements for state and local governments throughout the United States. When implemented, it will create new information and will restructure much of the information that the City of Shorewood has presented in its annual reports in the past. The intent of these new requirements is to make annual reports more comprehensive and easier to understand and use. Two key components of Statement No. 34 require governments to report capital assets and that the capital assets depreciate over their estimated useful lives. The City of Shorewood currently reports and depreciates capital assets for the Enterprise Funds. The exception is infrastructure reporting. The City of Shorewood, (like most cities) does not provide infrastructure reporting (streets, roads, bridges). Therefore, it is necessary for the City to develop and implement a Capital Asset Policy that provides for infrastructure reporting needs and meets the new fmanciai statement reporting requirements. The proposed Capital Asset Policy will provide guidance to implementing the new reporting requirements, i.e., meeting the primary objective of financial reporting as it pertains to valuation, allocation, presentation and disclosure. TABLE OF CONTENTS SECTION I Define Capital Assets and Capitalization Thresholds 3 SECTION II Reporting Capital Assets SECTION III Depreciation Capital Assets 3 SECTION IV Capital Asset Definitions and Categories 4 SECTION V Capital Assets Estimated Useful Life 8 2 CITY OF SHOREWOOD CAPITAL ASSET POLICY PURPOSE It is the policy of the City of Shorewood to maintain appropriate procedures regarding the procurement, management, and disposal of all capital assets. The Capital Assets Policy addresses classes of assets, determination of useful lives, and calculation of depreciation. SECTION I DEFINE CAPITAL ASSETS AND CAPITALIZATION THRESHOLDS A capital asset is real or personal property used in operations and having a value equal to or greater than the capitalization threshold set forth by the City, for that specific asset classification, and has an estimated useful life greater than one year. For financial reporting purposes only, the City will classify and establish capitalization thresholds for each asset class as follows: CAPITAL ASSET CLASSIFICATION CAPITALIZATION THRESHOLD Land and land im rovements; $10,000 Other improvements $25,000 Buildings and building im rovements; $25,000 Machiner and e ui ment; $ 5,000 Vehicles; $ 5,000 Infrastructure; and $100,000 Construction-in-progress. Accumulate all costs and capitalize if over $100,000 when cam fete. Other assets $ 5,000 Another criterion for recording capital assets is capital-related debt. Capital assets purchased with debt proceeds should be capitalized and depreciated over their estimated useful life. Capitalizing these assets will minimize the potential of reporting negative net assets in the statement of net assets. In most cases, these assets will meet the thresholds and guidelines for recording as a capital asset. SECTION II REPORTING CAPITAL ASSETS Report and record capital assets at their historical costs, which include most costs necessary to placing a capital asset into its intended use or state of operation. Historical cost includes the vendor's invoice, the value of any trade-in or allowance, sales tax, initial installation cost (excluding in-house labor), modifications, attachments, accessories or apparatus; and ancillary charges such as freight and transportation charges, site preparation costs, and professional fees. When the historical cost of a capital asset is not practicably determinable, the estimated historical cost of the asset should be determined and recorded using alternative methods. Alternative methods include standard costing and normal costing. Standard costing estimates the historical cost of a capital asset by establishing the average cost of obtaining the same or a similar asset at the time of acquisition. Normal costing estimates historical cost based on the current cost to either reproduce or replace the capital asset, indexed by a reciprocal factor from the estimated 3 acquisition date, i.e., taking the value of acquiring the asset new today and then discounting that amount by an appropriate inflation factor back to the date of acquisition. Capital assets donated to the City shall be reported at fair value. Fair value is the amount at which an asset could be exchanged in a current transfer at arm's length between willing parties, other than in a forced or liquidation sale. Donations are defined as voluntary contributions of resources to the City by anon-governmental entity. A voluntary contribution of resources between governmental entities is not a donation. SECTION III DEPRECIATING CAPITAL ASSETS Depreciation is the process of allocating the cost of an asset over the periods that asset is used for its intended purpose. Capital assets shall be depreciated over their estimated useful live with exception of the following: • Inexhaustible assets, i.e., Land, and land improvements that do not require maintenance or replacement, certain works of art, and historical treasures; • Infrastructure assets reported using the modified approach; and • Construction work-in-progress. For financial purposes the City will use the straight-line method of depreciation, which allocates the cost evenly over the life of the asset. The same amount of depreciation is taken each year. Generally, at the end of an asset's life, the sum of the amounts charged for depreciation in each accounting period, or accumulated depreciation, will equal the original cost less salvage value. Improvements vs. Repairs/Maintenance A significant issue when recording capital assets is the question of when is expenditure capitalized as an improvement versus recorded as repairs or maintenance expense. The key consideration for determining whether to capitalize expenditures depends on whether the cost incurred, significantly extends the asset's useful life, increases its capacity, or improves its efficiency. Therefore, capitalize capital asset improvement costs if: The costs exceeds the capitalization thresholds; and One of the following criteria is met: ^ The value of the asset or estimated life is increased by 25% of the original cost or life period; ^ The cost results in an increase in capacity of the asset; or ^ The efficiency of the asset is increased by more than 10%. Otherwise, the cost should be recorded as a repair and maintenance expense within the appropriate expense function. SECTION IV CAPITAL ASSET DEFINITIONS AND CATEGORIES Land is the surface or crust of the earth, which can be used to support structures, and may be used to grow crops, grass, shrubs, and trees; and is characterized as having an unlimited life, i.e., indefinite. Land is an inexhaustible asset and not depreciable. 4 Land improvements consist of betterments, site preparation, and site improvements (other than buildings) that ready land for its intended use. The costs associated with improvements to land are added to the cost of the land. Land improvements can be further categorized as inexhaustible, not requiring maintenance or replacement; or exhaustible, e.g., parking lots, landscaping and fencing. Examples of items to be capitalized as land and land improvements include: • Purchase price or fair value at time of gift; • Commissions; • Professional fees, includes title searches, architect, legal, engineering, appraisal, surveying, environmental assessments; • Land excavation, fill, grading, and drainage; • Demolition of existing buildings and improvements, less salvage; • Removal, relocation, or reconstruction of property owned by others, i.e., power, telephone and railroad lines; • Interest on mortgages accrued at date of purchase; • Accrued and unpaid taxes at date of purchase; • Other costs incurred in acquiring the land; • Water wells, including initial cost for drilling, the pump and its casing; and • Permanent right-of-way. Other Improvements include assets built, installed, or established to enhance the quality or facilitate the use of land for a specific purpose. Examples of items to capitalize as other improvements include: • Fencing and gates; • Landscaping; • Parking lost, driveways, and parking barriers; • Outdoor sprinkler and irrigation systems; • Recreation areas and athletic fields, including bleachers; • Golf courses; • Paths and trails; • Septic systems; • Stadiums; • Swimming pools, tennis courts, basketball courts, skate parks; • Fountains, • Plazas and pavilions; and • Retaining walls. Buildings refer to a structure that is permanently attached to the land, has a roof, is partially ox completely enclosed by walls, and is not intended to be transportable or moveable. Certain buildings or structures that are ancillary parts of infrastructure networks, such as well houses and pumping stations will report as infrastructure rather than as buildings. Examples of items to be capitalized as building: Purchased Buildings • Original purchase price; • Expenses for remodeling, reconditioning, or altering a purchased building to make it ready for its intended purpose; 5 • Environmental compliance (i.e., asbestos abatement); • Professional fees (legal, architect, engineer, management fees for design and supervision; • Cancellation or buyout of existing leases; and • Other costs required to place or render the asset into operation. Constructed Buildings • Completed project costs; • Cost of excavation or grading or filling of land for a specific building; • Expenses incurred for the preparation of plans, specifications, blueprints; • Cost of building pernuts; • Professional fees (architect, engineer, management fees, Legal) • Costs of temporary buildings used during construction; • Unanticipated costs such as rock blasting or piling; • Permanently attached fixtures or machinery that cannot be removed without impairing the use of the building; • Additions to buildings, i.e., expansions, extensions, or enlargements. Building improvements include capitalized costs that materially extend the useful life of a building or increase the value of a building, or both, beyond one year. Building improvements should not include maintenance and repairs done in the normal course of business. Examples of items to be capitalized as building improvements include: • Installation or upgrade of heating and cooling systems, including ceiling fans and attic fans; • Original installation or upgrade of wall or ceiling covering such as carpeting, tiles, paneling, or parquet; • Structural changes such as reinforcement of floors or walls, installation or replacement of beams, rafters, joists, steel grids, or other interior framing; • Installation or upgrade of window or door-frames, upgrading windows or doors, built-in closet and cabinets; • Exterior renovation such as installation or replacement of siding, roofing, masonry; • Interior renovation of casings, baseboards„ light fixtures, ceiling trim; • Installation or upgrade of plumbing and electrical wiring; and • Installation or upgrade of telecommunication systems. Examples of items considered repairs or maintenance in nature and should not be capitalized as buildings or building improvements include: • Adding, removing and/or moving of walls relating to renovation projects that are not considered major rehabilitation projects and do not increase the value of the building; • Improvement projects of minimal or no added life expectancy and/or value to the building; • Plumbing or electrical repairs; • Cleaning, pest extermination, or other periodic maintenance; • Interior decoration, i.e., draperies, blinds, curtain roads, wallpaper; • Exterior decoration, i.e., detachable awnings, uncovered porches, decorative fences; • Maintenance-type interior renovation including repainting, touch-up plastering, replacement of carpet, tile, or pane sections, and refinishing of sinks and fixtures; 6 • Replacement of a part or component of a building with a new part of the same type and performance capabilities, e.g., replacement of an old boiler with a new one of the same type and performance capabilities; • Any other maintenance-related expenditure, which does not increase the value of the building. Equipment, Machinery and Vehicles refer to fixed or movable tangible assets used for operations, the benefits of which extend beyond one year from date of receipt. Examples of expenditures to be capitalized as equipment, machinery, and vehicles include: • Original contract or invoice price; • Freight charges; • Handling and storage charges; • In-transit insurance charges; • Sales, use and other taxes imposed on the acquisition; • Installation charges; • Charges for testing and preparation for use; • Cost of reconditioning used items when purchased; and • Parts and labor associated with the construction of equipment, machinery, or vehicle. The cost of extended warranties and/or maintenance agreements, which can be separately identified from the cost of the equipment, machinery, or vehicle, shall not be capitalized. Infrastructure Assets are long-lived capital assets that are stationary in nature, often linear and continuous in nature, and can be preserved for a significantly greater number of years than most capital assets. Examples of infrastructure assets include: • Roads, streets, curbs, gutters, sidewalks; • Highways and rest areas; • Bridges; • Water and sanitary sewer systems; • Dams, drainage and storm water systems; • Electric and gas main lines and distribution lines; • Street light systems; and • Signage. Infrastructure assets shall be capitalized and depreciated unless the modified approach is used. The modified approach is an alternative to reporting depreciation for infrastructure assets that meet the following criteria: • The assets are managed using a qualifying asset management system; and • It is documented that the assets are being preserved at or above a condition level established by the City. Under the modified approach the infrastructure, assets are not depreciated, and only the costs that increase the capacity or efficiency of the asset are capitalized, while all other expenditures that preserve the useful life of the assets are expensed. Only infrastructure assets that comprise a network or subsystem of a network can be reported using the modified approach. 7 Other Capital Assets includes computer software that is either purchased or developed for internal use, which should be capitalized, if the cost of the software exceeds the capitalization threshold and depreciated over the software's estimated useful Life. Capitalization of computer software includes software license fees if the total dollar amount of the fee divided by the number of units or terminals exceeds the threshold. Examples of expenditures to be capitalized as computer software include: • External direct costs of materials and services, i.e., third-party fees for services; • Costs to obtain software from third parties; • Travel costs incurred by employees in their duties directly associated with development; • Payroll and payroll-related costs of employees directly associated with or devoting time to encoding, installing or testing; and • Costs to develop or obtain software that allows for access or conversion of old data by new information systems. Note that upgrades and enhancements should only be capitalized to the extent that they increase the functionality of the product. Capital Leased Property includes leased real or personal property, for which ownership of the asset substantially transfers to the lessee; therefore meeting the criteria for capitalizing as an asset. Capitalize the cost of the asset if the lease agreement meets any one of four conditions: • It transfers ownership of the property to the lessee at the end of the lease term; • The lease contains a "bargain purchase" option-an option that gives the lessee the right to purchase the asset for a future price less than the fair market value; • The lease term is equal to at least 75% of the asset's estimated economic life; or • The present value of the minimum lease payments at the inception of the lease, excluding executory costs, equals at least 90% of the fair market value of the leased asset at the time the lessee signs the lease. Leases that do not meet any of the above conditions shall be recorded as an operating lease and reported in the notes of the financial statements. SECTION V CAPITAL ASSETS ESTIMATED USEFUL LIFE VALUES Land im rovements Fencin and ates; 20 ears Landsca in 20 ears Parkin lost, drivewa s, and arkin bamers; 15 ears Outdoors rinkler and irri ation s stems; 20 ears Recreation areas and athletic fields, including bleachers; 15 years Golf courses; 20 ears Paths and trails; 15 ears Se tic systems; 15 years Swimming pools, tennis courts, basketball courts, skate arks; 20 years Fountains, 20 ears Retainin walls. 20 ears Outdoor li htin 20 years Rn,trlinac anri hnilrlina imnrnvements Buildin s 40 ears Tem orary and ortable buildin s 25 ears Roof 20 ears HVAC (heatin ,ventilation, air conditionin) 20 ears Electrical 20 years Plumbin 20 ears S rinkler s stem 20 ears Securit and fire alarms stem 10 ears Cablin 10 ears Floor coverin other than ca et 15 ears Ca etin 7 ears Interior construction 15 ears Interior renovation 10 ears Elevators 20 ears Rm,inment_ machinery and vehicles Athletic e ui ment 10 ears Audio visual e ui ment 6 ears Business machines and office e ui ment 7 ears Telecommunications e ui ment 10 ears Com uter e ui ment and software 5 ears Fire De artment e ui ment 10 ears Furniture and fixtures, excluding structural com onents of a buildin 10 years Grounds e ui ment (mowers, tractors, bobcats) 10 ears Kitchen e ui ment (a liances) 10 ears Labe ui ment 10 ears Law enforcement e ui ment 10 ears Machiner ,tools and other e ui ment 5 ears Outdoor e ui ment ( la ounds, scoreboards) 15 ears Custodial e ui ment 10 ears Photoco iers 5 ears Cars, light general purpose trucks (actual weight less than 13,000 ounds) 5 years Heavy general purpose truck and equipment e.g., front loaders, graders (actual weight greater than 13,000 ounds) 6 years Firefi htin trucks 15 ears Tnfrastructure Roads, streets, curb and utter 20 ears Parkin lots 15 years Sidewalks 20 years Water, sanita sewer, storm sewers stems 40 ears Brid es 20 ears