CHAPTER 9
GENERAL CAPITAL ASSETS;
LONG-TERM LIABILITIES;
PERMANENT FUNDS
Introduction to InterfundGCA-GLTL Accounting
© Prentice Hall Publishing – Governmental and NonProfit Accounting 7e 1-1 Freeman / Shoulders
9-1
OVERVIEW
Concludes general government accounting of
the text
Discusses the relationship of and accounting for
– General capital assets (GCA) and
– General long-term liabilities (GLTL)
to the governmental fund types
Introduces “Permanent Funds” (not common)
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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LEARNING OBJECTIVES
For General Capital Assets and General
Long-Term Liabilities
– To maintain information needed for
government-wide reporting purposes
– To account for various types of transactions
– To understand relationships and accounting
for transactions with governmental funds
– To understand reporting and note disclosure
requirements
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
9-3
LEARNING OBJECTIVES
For Infrastructure
– To account for and report general
infrastructure capital assets properly
– To understand and apply the modified
approach for accounting for infrastructure
capital assets
For Permanent Funds
– To understand the nature and use of
Permanent Funds
– To account for and report Permanent Funds
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GCA & GLTL ACCOUNTS
OVERVIEW & ACCOUNTING
 GASB specifies only reporting GCA
and GLTL in the government-wide
financial statements
 Accounting procedures will vary as
GASB provides none
 See Figure 9-1 as it
1. Summarizes the relationships of these
accounts with the governmental funds and
2. Accumulates reporting information for
government-wide financial statements
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GCA & GLTL ACCOUNTS
 General capital assets
– Book value of governmental (not
enterprise) funds capital assets
– Classified by type (land, buildings, etc.)
 General long-term liabilities
– Capital asset-related debt (bonds, notes)
– Vacation and sick leave, claims and
judgments, and non-capital debt
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GCA & GLTL ACCOUNTS
NET ASSETS
 Invested in capital assets, net of related debt
– Increases (Entries in Figure 9-1)
(1) Cost of GCA acquired
(5) Capital asset-related debt retired
– Decreases (Entries in Figure 9-1)
(2) Capital asset-related debt incurred
(3) Depreciation expense
(4) Net value of GCA dispositions
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GCA & GLTL ACCOUNTS
NET ASSETS
 Restricted
–
Difference between restricted assets and noncapital asset-related liabilities
 Unrestricted
–
Difference between remaining assets & liabilities
 Increases (Entry in Figure 9-1)
(7) Non-capital GLTL retired
 Decreases (Entry in Figure 9-1)
(6) Non-capital GLTL incurred
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
9-8
GENERAL CAPITAL ASSETS
Examples
–
–
–
–
Land
Buildings and improvements
Infrastructure
Equipment
Asset lives extend beyond single reporting
period
The assets are not physically consumed by
use, but economic use declines over time
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
9-9
GENERAL CAPITAL ASSETS
Defined as “all capital assets other than those
accounted for in proprietary or trust funds”
Acquisition of general capital assets recorded
in governmental funds as expendable
financial resources are used
However, capital assets are not recorded as
governmental fund assets (since the assets are
not financial resources)
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Acquisition means by governments
1.
2.
3.
4.
5.
6.
Purchase
Construction (own forces or contracted)
Capital lease
Gift
Foreclosure (taking of property for non-payment of taxes)
Eminent domain (power of government to seize property,
and compensate owner, for public use)
7. Escheat (reversion of property to a government in absence
of legal claimants)
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Initial valuation for assets acquired
– Cost
Value of consideration given or received
All outlays incurred to bring asset to readiness
– Estimated original cost
Allowed by GASB standards, if cost not
available
– Gift
Fair value when received
(Continued)
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Initial valuation for assets acquired
– Under foreclosure; lower of
1. Amount due for taxes / assessments, penalties
and interest or
2. Appraised fair value
– By eminent domain
 Same manner as a purchase
 Compensation determined by the courts
– Through escheat process
 Fair value when acquired
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Classification for financial reporting
–
–
No set GASB standard for reporting
Most governments follow GFOA
recommendation as follows:

Land (and improvements preparing it for use)

Buildings (and improvements made part of building)

Infrastructure (bridges, roads, sidewalks, dams)

Machinery and equipment (automotive, office)

Construction in progress (Incomplete construction)
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Infrastructure
– Long-lived stationary (immovable) asset
systems
 Examples; roads, bridges, tunnels, drainage,
water, sewer and lighting systems, dams
– Capitalization of major infrastructure
assets required under GASB 34, whereas it
was previously optional
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Infrastructure
–
Capitalization (under GASB 34):


Now required, whereas it was previously optional
Retroactive recording not required for small
governments under $10 million in 1999 revenues)
1. Permits estimated cost for recording infrastructure
back to fiscal years ending after June 30, 1980 at
implementation transition
2. Requires capitalization of only major asset systems
acquired or significantly reconstructed or improved
in fiscal years ending after June 30, 1980
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Infrastructure – initial capitalization
–
–
Criteria to define major infrastructure assets
requiring reporting under GASB 34 in first
fiscal years ending after June 15, 1999
Determination of major general infrastructure
assets should be at network or subsystem level
1.
2.
–
Asset subsystems – at least 5% of the total cost of all
general capital assets or
Asset networks – at least 10% of the total cost of all
general capital assets
Reporting of non-major networks encouraged,
but not required
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Capitalization policy
– GAAP only applies to material and
significant items in the circumstances
– However, governments should consider
– Legal compliance
– Materiality and control considerations
when developing a capitalization policy
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Capitalization policy
– Legal compliance
 Threshold levels ($1,500, $1,000, $500, $100)
may not address
–
–
Materiality or
Different asset (buildings vs. equipment) classes
 However, dollar threshold must comply with
state and local laws and regulations
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Capitalization policy
– Materiality
 Item considered material if:
1. Dollar value significant to financial statements
2. Proper accounting required regardless of magnitude
 Important because:
–
–
Material items must conform with GAAP
Immaterial items need not conform to GAAP
 Governments can set policy by asset class with
different capitalization policies for each class
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Capitalization policy
– Control considerations
May dictate capitalization of certain asset types
Cost could be less than legal or materiality
thresholds for items such as
– Personal computers
– Guns
– Communication devices
Immaterial items need not conform to GAAP
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Recording and reporting works of
art/historical treasures
– Record at cost or fair value at donation date
– Not required to capitalize if the collection
meets all three of the following criteria
1.Held for exhibition, education, or research
2.Protected, unencumbered, cared for, and preserved
3.Policy requiring the proceeds of collection item sales
to be used to acquire other collection items
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Recording and reporting works of
art/historical treasures
– Report donations as revenues in governmentwide Statement of Activities
Whether or not capitalized
If not capitalized, also shown as an expense equal
to the revenue amount recognized
– Report depreciation if capitalized and items
are exhaustible; otherwise not depreciated
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Depreciation / accumulated depreciation
– Recorded in the GCA accounts
– Depreciation expense
Reported in the governmental activities column of the
government-wide Statement of Activities
Not an expenditure, so
Not recorded in the governmental funds
– Accumulated depreciation
Reported in the governmental activities column of the
government-wide Statement of Net Assets
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Modified approach – infrastructure
– Infrastructure depreciation not required
if government meets two requirements:
1. Uses an asset management system
2. Documents that infrastructure being
preserved at a disclosed condition level
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Modified approach – infrastructure
– The asset management system for eligible
infrastructure should
 Have an up-to-date inventory of eligible assets
 Perform condition assessments
 Estimate annually the amount to maintain
and preserve the assets at the established
condition level
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Modified approach – infrastructure
–
Documentary evidence requires professional
judgment to meet the second requirement
that asset is being preserved
1. Complete condition assessments performed
consistently at least every three years
2. Results of the three most recent condition
assessments provide reasonable assurance that
the assets are being preserved approximately at or
above the condition level established and
disclosed by the government
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
 Modified approach – infrastructure
– If eligible assets meet requirements
 Assets are not depreciated
 Expenditures incurred related to the assets
are –
–
Expended, if for repair and replacement
Capitalized, if increasing capacity or efficiency
– Once requirements are no longer met,
assets should be depreciated in
subsequent reporting periods
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Assets financed from GF or SRFs
– Entry in General Fund
Expenditure recorded
– Dr Expenditures – Capital outlay - $29,100
– Cr Vouchers payable - $29,100
– Entry in General Capital Assets Accounts
Asset capitalized
– Dr Equipment - $29,100
– Cr Net assets – Invested in capital assets - $29,100
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Assets financed by capital lease
– Entry in General Fund
– Dr Expenditures – Capital outlay - $900,000
– Cr Other financing sources – Capital lease - $850,000
– Cr Cash - $50,000
– Entry in General Capital Assets Accounts
– Dr Land – Under capital lease - $100,000
– Dr Buildings – Under capital lease - $800,000
– Cr Net assets – Invested in capital assets - $900,000
– Entry in General Long-Term Liabilities Accounts
– Dr Net assets – Invested in capital assets - $850,000
– Cr Capital lease liabilities - $850,000
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Assets financed from CPFs
– Entry in Capital Projects Fund
Expenditure recorded
– Dr Expenditures – Capital outlay - $1,270,000
– Cr Vouchers payable - $1,270,000
– Entry in General Capital Assets Accounts
Asset capitalized
– Dr Construction in progress - $1,270,000
– Cr Net assets – Invested in capital assets - $1,270,000
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Asset (land with an estimated value of $2,000)
acquired through foreclosure for taxes,
penalties and interest owed of $1,000
– Entry in Special Revenue Fund
Expenditure recorded / tax lien written off
– Dr Expenditures – Capital outlay - $1,100
– Cr Tax lien receivable - $1,000
– Entry in General Capital Assets Accounts
Asset capitalized
– Dr Land - $1,100
– Cr Net assets – Invested in capital assets - $1,100
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Assets acquired through gifts
– No entry in governmental funds as no
financial resources were received/expended
– However, a $1,500 capital contribution
revenue will be reported in the
government-wide Statement of Activities
– Entry in General Capital Assets Accounts
Asset capitalized at its fair value
– Dr Land - $1,500
– Cr Net assets – Invested in capital assets - $1,500
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Sale, retirement or replacement accounting
– General Capital Assets Accounts
1. Remove the asset-carrying value by
– Debiting the related accumulated depreciation account(s) and
– Crediting the asset account(s)
– Reducing the Net Assets—Invested in Capital Assets account
– Fund receiving proceeds of sale
2. Record any proceeds as “other financing sources” in
the accounts of the recipient governmental fund
– Government-wide Statement of Activities
Report a gain or loss on disposal in the amount of the
difference between items 1 and 2
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Intragovernmental sale
– Enterprise Fund sells equipment at book value
to the GF - public works department
– Enterprise Fund entry
 Dr Due from General Fund - $15,000
 Dr Accumulated depreciation - Equipment - $1,000
 Cr Equipment - $16,000
– General Fund entry
 Dr Expenditures - Capital outlay - $15,000
 Cr Due to Enterprise Fund - $15,000
– General Capital Assets Accounts entry
 Dr Equipment - $15,000
 Cr Net assets – Invested in capital assets - $15,000
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Reporting and Note Disclosures
– Report in the governmental activities
column of the government-wide
Statement of Net Assets
– Provide detailed capital assets
information in the notes to the basic
financial statements
– Distinguish those assets associated with
governmental activities from those
associated with business-type activities
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL CAPITAL ASSETS
Reporting and Note Disclosures
– Notes should disclose (Figure 9-3)
GCA information by major classes of assets
Any GCA that are not being depreciated
Beginning- and end-of-year balances
Accumulated depreciation presented
separately from historical cost
Acquisitions of capital assets
Sales or other dispositions
Current-period depreciation expense, with
disclosure of the amounts charged to each of
the functions in the Statement of Activities
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL LONG-TERM LIABILITIES
Definition
– Unmatured principal of general government
long-term debt
– Excludes –
Matured debt of governmental funds
All debt of proprietary funds or trust funds
– Not a liability of any specific fund
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL LONG-TERM LIABILITIES
Examples
– Bond issues
– Special assessment debt
(If government obligated in some manner)
– Long-term notes
– Claims and judgments
– Compensated absences
– Capital lease liabilities
– Unfunded pension contributions
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL LONG-TERM LIABILITIES
Relationship CPFs and GLTL accounts
– Issuance of debt for Capital Projects Fund
– CPF entry
Dr Cash $1,000,000
 Cr Other Financing Sources – Bond proceeds - $1,000,000
– GLTL entry
Dr Net assets – Invested in capital projects - $1,000,000
 Cr Serial bonds payable - $1,000,000
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL LONG-TERM LIABILITIES
Relationship DSFs and GLTL accounts
– Maturity of debt payable from DSF
– DSF entry
Dr Expenditures - $160,000
 Cr Matured Bonds Payable - $100,000
 Cr Matured Interest Payable - $50,000
 Cr Fiscal Agent Fees Payable - $10,000
– GLTL entry
Dr Serial bonds payable - $100,000
 Cr Net assets – Invested in capital projects - $100,000
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL LONG-TERM LIABILITIES
Defaulted bonds
– No specific GASB guidance
– Authors preferred approach
Remove from General Long-Term Liabilities
Report in DSF or GF
Disclose default in notes to financial
statements
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL LONG-TERM LIABILITIES
In-substance defeasance
– When all conditions are met
Remove defeased debt from GLTL accounts
Record advance refunding bonds in GLTL accounts
– If defeasance requirements are not met
Old debt remains in GLTL accounts
Proceeds from advance refunding bonds recorded in
DSF to service the old debt
New advance refunding bonds recorded and reported
in GLTL accounts
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL LONG-TERM LIABILITIES
Reporting and Note Disclosures
– Report in the governmental activities
column of the government-wide Statement
of Net Assets
– Report the GLTL by type
– Annual CAFR often includes added
schedules
– Provide detailed information in the notes to
the basic financial statements
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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GENERAL LONG-TERM LIABILITIES
Reporting and Note Disclosures
– Notes should disclose (Figure 9-4)
Beginning and end-of-year balances
Increases and decreases (separately presented)
Portions of each item due within one year
Funds used to liquidate other long-term
liabilities (such as compensated absences and
pension liabilities) in prior years
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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PERMANENT FUNDS
Account for resources held in trust by the
government for the benefit of the
government (or its citizenry)
Principal of the trust is to be maintained
intact (nonexpendable)
Exceptions:
– Expendable trust funds benefiting the
government reported as Special Revenue Funds
– Trust funds benefiting others reported as
Private-Purpose Trust Funds
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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PERMANENT FUNDS
Examples requiring use
– Receiving gift or bequest with the stipulation that
(a) Principal is to be kept intact and
(b) Earnings are to be used for certain purposes
– Establishing an employee loan fund
Both principal and earnings may be maintained intact
Costs might be chargeable to principal
– Entering other trust agreements
Maintain cemeteries, landmark buildings in perpetuity
Earnings are expendable only for repairs/maintenance
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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PERMANENT FUNDS
 Financial reporting same as other
governmental funds with following required
– Balance sheet (Figure 9-5)
– Statement of revenues, expenditures, and changes in
fund balance
 If Permanent Fund includes both
– Nonexpendable principal amounts and
– Expendable earnings
the fund balance may need classification between
– “Fund Balance - Expendable” and
– “Fund Balance - Nonexpendable’’
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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PERMANENT FUNDS
Sample transactions
– (1) Accepting gift to maintain baseball field
Dr Cash - $210,000
 Cr Revenue (donations) - $210,000
– (2) Purchasing investments
Dr Investments - $203,000
Dr Accrued Interest receivable - $400
 Cr Cash - $203,400
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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PERMANENT FUNDS
Sample transactions
– (3) Recognizing investment income
Dr Cash - $3,000
 Cr Accrued interest receivable - $400
 Cr Interest revenues - $2,600
– (4) Selling investments at a gain (*)
Dr Cash - $3,090
 Cr Investments - $3,042
 Cr Interest revenues - $35
 Cr Gain on sale of investments - $13 (*)
(*) Gain added to trust corpus – See entry (9)
© 2003 Prentice Hall Publishing – Governmental and NonProfit Accounting 7e Freeman / Shoulders
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PERMANENT FUNDS
Sample transactions
– (6) (a) PF-Transfer of earnings to GF (*)
Dr OFU, Transfer to GF - $5,000
 Cr Cash - $5,000
– (6) (b) GF-Receipt of earnings from PF
Dr Cash - $5,000
 Cr OFS, Transfer from PF - $5,000
(*) Earnings usually transferred to Special Revenue funds
when restricted for specific use
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