A BY-LAW TO ADOPT THE TANGIBLE CAPITAL ASSET ...fr.russell.hosted.civiclive.com/UserFiles/Servers/Server...This policy should be read in conjunction with PSAB Handbook Section PS 3150

THE CORPORATION OF THE TOWNSHIP OF RUSSELL

By-law # 91-2008

A BY-LAW TO ADOPT THE TANGIBLE CAPITAL ASSET POLICIES

WHEREAS the Public Sector Accounting Board (PSAB) of the Canadian Institute of CharteredAccountants issues standards and guidance with respect to matters of accounting and financialreporting in the public sector ;

AND WHEREAS the Municipal Act stipulates that a municipality shall, for each fiscal year,prepare annual financial statements for the municipality in accordance with generally acceptedaccounting principles for local governments as recommended, from time to time, by the PublicSector Accounting Board of the Canadian Institute of Chartered Accountants ;

AND WHEREAS it is deemed necessary and desirable that the Council of the Corporation of theTownship of Russell enact a by-law to adopt a policy which outlines the accounting treatment fortangible capital assets ;

NOW THEREFORE, the Council of The Corporation of the Township of Russell hereby enacts as

1 . That the attached Scheduled "A" is hereby adopted as the Tangible Capital AssetTranakionPoiThiapoioyprooorbeathahanaitiona!proviskonofovthmaooounhngandfinancial reporting treatment of tangible capital assets owned on or before January 1,2008 .

2 . That the attached Schedule "B" is hereby adopted as the Tangible Capital Asset Policy .This policy prescribes the accounting and financial reporting treatment of tangible capitalassets for all departments, boards and agencies of the Township of Russell that areconsolidated for the purposes of financial statement presentation . This policy applies tofinancial results for fiscal years ending after January 1, 2009 .

READ a first and second time this 17 1h day of November 20O .

READ a third time and passed this 1 Wh day of Novem ter 2008 .

May6r or ApfAilvla~or- -

.11 Clerk or Acting Clerk

CORPORATION OF THE TOWNSHIP OF RUSSELL

POLICIES AND PROCEDURES

1 . POLICY CONTENT 12. AUTHORITY 23. DEFINITIONS 24. INTRODUCTION 25. ACCOUNTABILITY FRAMEWORK 36. GENERAL TRANSITION PROVISIONS FOR TANGIBLE CAPITAL ASSETS47. TANGIBLE CAPITAL ASSETS UNDER CONSTRUCTION/DEVELOPMENT68. DONATED TANGIBLE CAPITAL ASSETS 69. BETTERMENTS VS. MAINTENANCE 610. AMORTIZATION OF TANGIBLE CAPITAL ASSETS 611. IMPAIRMENT OF ASSETS (WRITE DOWNS OF TANGIBLE CAPITAL ASSETS)712. DISPOSALS 713. CAPITAL LEASES 7

POLICY CONT

This policy prescribes the trans Lion

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d inancial reportingtreatment of tangible capital assets owned on or be ore January 1, 2008 . This policy applies to alldepartments, boards and agencies of the Township of Russell (the Township) that areconsolidated for the purposes of financial statement presentation for the transition to full accrualbased accounting . This ooiicy should be read in conjunction with the Tangible Capital Asset

Number XXXXXXX

Page 1 of 8

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POLICY NUMBERPOLICY TYPE : FINANCIALSUBJECT: TANGIBLE CAPITAL ASSET POLICY

4.1 .3 .

To ensure consistent, transparent treatment of all tangible capital assets and thereporting of the financial results .

4.2 .

Application And Scope

4.2 .1 .

This policy applies to all Township departments, boards and commissions, agenciesand other organizations failing within the reporting entity of the Township .

4.2.2 .

This policy applies to all tangible capital assets owned, purchased, constructed bythe Township or donated to the Township by other governments and non-governmental governmental parties . Intangible assets are not covered by this policy .

This policy applies to existing tangible capital assets as of January 1, 2008 .

4.2.4 .

This policy should be read in conjunction with PSAB Handbook Section PS 3150 andPS Sections 1000- Financial Statement Concepts, PS 1100 - Financial Objectives,PS 1200 - Financial Statement Presentation, PS 2700 - Segment Reporting, PS3060- Government Partnerships and Public Sector Guideline 2(PG(3-2}-LeasedTangible Capital Assets .

4.3 .

Principles

The following princiWes are developed to establish opening gross and net book values fortangible capital assets on January 1, 2008 .tangible capital assets on January 1, 2008 .

4.3 .1 .

Where historical cost for tangible capital assets are readily available, historical costwill be utilized to establish the cost of the tangible capital asset .

4.3.2 .

Where historical cost is not readily available due to lack of records, the Township willutilize a consistent method to estimate historical costs .

5 .

ACCOUNTABILITY FRAMEWORK

5.1 .

Township Council Responsibilities

As per the Municipal Act, Township Council is responsible for setting and amending theTangible Capital Asset policy for the municipality .

5.2 .

Finance Department Responsibilities

The Finance Department (Treasurer) is responsible for

The Treasurer is responsible for the liaison with the Township appointed auditorsregarding accounting policy matters and providing appropriate documentation foraccounting estimates as required .

5 .2 .2 .

Ensure tangible capital asset accounting policies are applied conassisting with determination of accounting estimates ;

Page 3 of 8

e and


5 .2.3 .

Ensure that business transactions are conducted ethically and professionally withingenerally accepted accounting principles (GAAP) ;

5.2.4 . Produce the annual financial statements in accordance with GAAP and prepare auditpapers for the annual audit . In particular, provide sufficient audit evidence of openinggross and net book values for tangible capital assets on January 1, 2008 .

5.3 .

Township Staff Responsibilities

5.3 .1 .

Assist the Finance Department in developing ope gthe tangible capital assets on hand under their control at January 1, 2008 .

6 .

GENERAL TRANSITION PROVISIONS FOR TANGIBLE CAPITAL ASSETS

In 2009.the new PSAB standards become effective for municipalities . This policyoutlines the Township's approach to the transition to tangible capital asset accountingand determination of valuation for assets where historical costs are not available . Thetransitional provisions allow municipalities to utilize accounting estimates to determine theopening book values of the tangible capital asset. These opening balances must bedone in a consistent manner and documented . This is discussed below .

6.1 .

Valuation of Tangible

Assets on hand at JanuaryCapital

1,20D8

6 .1 .1 .

All tangible capital assets held by a department at January 1, 2008 must be identifiedand valued using an appropriate cost base . Considerations should includereasonableness and materiality in the approach . Specifically, in this regard :

Where practical and cost-effective, existing tangible capital assets will be valuedusing historical ooata, adjusted foxU1e proportion of the useful life of the assettat has already been consumed through the establishment of a provision foraccumulated amortization (see Tangible Capital Asset Policy for further

ii . When the Township does not have historical cost accounting records for itstangible capital assets, it vvill need to use other methods to estimate the cost andaccumulated amortization of the assets . The Township will apply a consistentmethod of estimating the cost of the tangible capital assets for which it does nothave historical cost records, except in circumstances where it can bedemonstrated that adi#enent method would provide a more accurate estimate ofthe cost of a particular type of tangible capital asset .

iii . Since there are many Township assets whereby historical costs do not existand/or it is not practical and cost-effective to establish a reasonable estimate ofan asset's historical cost the Township will utilize appraised or some appropriatemeasure of current value and extrapolate back to estimated historical cost usingthe consumer price index (CPI) or some other relevant price/cost index includingthose utilized by the federal government in the Book Value Calculator or theDeflator Study commissioned by the Municipal Finance Officers Association .

In particular, the Township will utilize the following estimates for historical costs :In particular, the Township will utilize the following estimates for historical costs :

s and net book values of

a . Reproduction cost, which ia . Reproduction cost, which iTownship currently owns . It is

Page 4 of 8Page 4 of 8

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TANGIBLE CAPITAL ASSETS UNDER CONSTRUCTION/DEVELOPM ENT7.

7.1 .1 .

Determining when a tangible capital asset, or a portion thereof, is ready forproductive use requires consideration of the circumstances in which it is to beoperated .

7.1 .2 .

Anaetaunde/ConeLnuctiona1January1 .2O08wiUbmrefleotedintheworkinprogreaainventory until it is determined that the asset has been placed in service .

7 .1 .3 .

Assets under Construction will not be a

DONATED TANGIBLE CAPITAL ASSETS8 .

8.1 .1 .

The cost of a contributed or donated tangible capital asset, including a tangiblecapital asset in lieu of a developer charge, is considered to be equal to its fair valueat the date of contribution . Donated tangible capital assets on hand at January 1,2008 will be recognized at fair market value on the date of donation .

8 .1 .2 .

Assets transfers from other governments will be accounted for in accordance withPS341 0 - Government Transfers .

9.

BETTERMENTS VS. MAINTENANCE

9.1 .1 .

Costs of betterments are considered to be part of the cost of a tangible capital assetand would be added to the recorded cost of the related asset . A betterment is a costincurred to enhance the service potential of a tangible capital asset .incurred to enhance the service potential of a tangible capital asset .

9.1 .2 .

Betterments are expenditures relating to the alteration or modernization of an assetthat appreciably prolong the itenTs period of usefulness or improve its functionality .

g] .3 . In general, for tangible capital assets other than complex network systems, servicepotential may be enhanced when there is an increase in the previously assessedphysical output or service capacity, where associated operating costs are lowered,the useful life of the property is extended or the quality of the output is improved .

9 .1 .4 .

Determination of betterments for tangible capital assets on hand at January 1 .2008will be a combination of historical cost, reproduction, replacement and fair valuebased upon the condition of the asset as of the last date of assessment .

10 .

AMORTIZATION OF TANGIBLE CAPITAL ASSETS

tion of tangible capithe tangible capital asset in p

0 d while in progress .

Page 6 of 8

cost to the munici '

10.!~ .

The cost of tangible capital assets on hand at January 1, 2008, as determined inaccordance with Sections 67 and 8 above, less any residual value, will be amortizedover the estimated useful life in a rational and systematic manner appropriate to itsnature and use by the municipality .

1 O.1~3 .

Land generally has an unlimited life and will not be amortiz


10.1 .4. The amortization of the costs of tangible capital assets is accounted for as expensesin the statement of operations . Amortization expense is an important part of the costassociated with providing government services, regardless of how the acquisition oftangible capital assets is funded .

10 .1 .5 .

Amortization for the period from purchase or construction of the tangible capital assetDecember 31, 2007 will be calculated based upon the estimated in serve date

up based upon the useful lives and remaining useful lives of the assets .

10.2 . Determination of Residual Value of a Tangible Capital Asset

Where e Department expects the residual value of a tangible capital asset to be significant, itwould be factored into the calculation of amortization for assets on hand January 1, 2008 .

10.3 . Determination of Useful Life of a Tangible Capital Asset

Useful life is the estimate of either the period over which a tangible capital asset is expected to beused by a municipality, or the number of production or similar units that can be obtained from thetangib!eoapitdaeaetbvagovennmentUaefu!!iveoofaaae1eonhandvviUbodetenninedinaccordance with the Tangible Capital Asset Policy .

10.4 . Amortization Methods

The Township will generally utilize straight line method of amortization for all its tangible capitalassets on hand January 1, 2008 .

11 .

IMPAIRMENT OF ASSETS (WRITE DOWNS OF TANGIBLE CAPITAL ASSETS)

11 .1 . PS 3150 - Tangible Capital Assets states that when

indicate that a tangiblecapital asset no longer contributes to a municipality's ability to provide goods andservices, or that the value of future economic benefits associated with the tangible capitalasset is less than is net book value, the cost of the tangible capital asset should bereduced to reflect the decline in the asset's value .

11 .2 . The net write-downs of the tangible capital asset will be accounted for and included in theopening gross and net book values at January 1, 2008 .

12 .

DISPOSALS

12 .1 . Under PS3150, the difference between the net proceeds on disposal of a tangible capitalasset and the net book value of the asset should be accounted for as a revenue orexpense in the statement of operations .

12.2 . Disposals of tangible capital assets in the fiscal year 2008 will be reflected on the booksof acconts for the year 2008andLe reflected in the closing book values at December31,2008 .

13 .

Page 7 of 8

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1 .

POLICY CONTENT 22.

AUTHORITY 23.

DEFINITIONS 24.

INTRODUCTION 35.

ACCOUNTABILITY FRAMEWORK 36.

PSAB STANDARDS 37.

TANGIBLE CAPITAL ASSETS8.

COST 39.

DONATED TANGIBLE CAPITAL ASSETS 310. FUTURE SITE RESTORATION COSTS 311 . BETTERMENTS VERSUS MAINTENANCE 312. AMORTIZATION OF TANGIBLE CAPITAL ASSETS 313. TRANSFERS OF TANGIBLE CAPITAL ASSETS 314. IMPAIRMENT OF ASSETS (WRITE DOWNS OF TANGIBLE CAPITAL ASSETS)315. DISPOSALS 316. CAPITAL LEASES 317. LEASEHOLD IMPROVEMENTS 3

Page 1 of 21

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"Department" means any department within the Township .

"Director" means the director or senior manager of a division/department with the Corporation ofthe Township of Russell .

"Fair Value" is the amount of consideration that would be agreed upon in an arm's lengthtranaaotionbetweenknow!edoaab/e .wiUingpertieowhoanoundernocompu!eionkzeot .

"Historical cost" means the sum of all costs that were incurred in the past to acquire or betteran asset .

"Net Book Value" means the historical cost of an asset less accumulated amortization to date .

"Residual Value" means the estimated net recoverable amount from disposal or trade-in of anasset at the end of its estimated useful life .

"Realizable value" is the amount that would be received by selling an asset. Market value maybe used to estimate realizable value when a market for an asset exists .

"Tangible capital assets" are assets containing physical substance that are purchased,constructed, developed or otherwise acquired and :(a)

Are held for use in the production or supply of goods, the delivery of services or toproduce program outputs ;(b)

Have a useful life extending beyond one fiscal year and are intended to be used on acontinuing bast; and(c)

An* not intended for resale in the ordinary course of operations .

"Service potential" is tangible capital asset's output or service capacity, normally determined byreference to attributes such as physical output

quality of output, associated operatingcosts and useful life .

"Useful life" is the estimate of either the period over which the Township expects to use atangib!euapitdaaaot .nrdhenumberofpruduoUonoraimi!arunhethadduanobtainfromthetangible capital asset. The life of a tangible uapital asset may extend beyond its useful life . Thelife of a tangible capital asset, other than land, is finite, and is normally the shortest of thephysical, technological, commercial and legal life .

"Write-down" is a reduction in the cost of a tangible capitall asset to reflect the decline iasset's value due to the permanent impairment of future economic benefits of the asset .

INTRODUCTION

4.1 .

TC1

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Page 3 of 21



T he objective of this policy is to outline the accounting treatment for tangible capital assets . Inparticular, this policy is intended to :

4.1 .1 . Establish accounting policies for tangible capital assets in accordance with PS 3150-tangible capital assets, PS 3060- Government Partnerships, Public Sector Guideline2 (PSG-2) - Leased Tangible Capital Assets s and their respective representation onthe financial statements of the Township effective January 1, 2009 .

4 .1 .2 .

Establish consistent approach to accounting estimates in areas where measurementuncertainty exists in accordance with CICA Section 1508 - Accounting for Estimates .

4.1 .3 .

To ensure consistent, transparent treatment of all tangible capital assets and thereporting of the financial results .

4.2 .

Application And Scope

4.2.1 .

This policy applies to all Township departments, boards and commissions, agenciesand other organizations failing within the consolidated reporting entity of theTownship .

4.2.2 .

This policy applies to all tangible capital assets owned, purchased, constructed bythe Township or donated to the Township by other governments and non-governmental governmental parties . Intangible assets are not covered by this policy .

This policy should be read in conjunction with PSAB Handbook Section PS 3150 andPS Sections 1000- Financial Statement Concepts, PS 1100 - Financial Objectives,PS 1200- Financial Statement Presentation, PS 2700 - Segment Reporting, PS3060- Government Partnerships and Public Sector Guideline 2 (PSG-2) -LeasedTangible Capital Assets .

4.3 .

Principles

The policy is designed to ensure that the generally accepted accounting principles are reflected ina/!accounUngprectin*awbhintheTownahipandhuooneo!idatednnhUeaondref!eobedindheTownship's annual financial statements.

The following principles and goals should be considered when dtreatment of tangible capital assets and during the procurement

ining the accounting

4.3 .1 .

Authority is to be delegated to the appropriate level to enablto meet service requirements while preserving the asset accounting policies and

4.3.2 .

Efficient, effective and quality service and product delivery through effective assetmanagement practices while meeting the generally accepted accounting principles asset out in the PSAB standards are the responsibility of all managers within theTownship .

Page 4 of 21

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5.3 .

Township Staff Responsibilities

5.3.1 .

Ensure that procurement activities and budget preparation of tangible capital assetswill provide the information required to afford the treatment of all tangible capitalassets is in accordance with this policy .

532~

Liaise with the Finance Department where required in order to ensure that financialinformationiouu#io!enifurtheTneaaunarLnxenderdeoiaionainocuondanmavviUlGAAP as it pertains to tangible capital assets .

5.3-3 .

Manage tangible capital assets with prudence and probity to ensure best value fortax dollars and appropriate long term capital planning .

6.

PSABSTANDARDS

PSAB Section 1000 -Finsnciml Statement Concepts, PS 1100 - Financial StatementObjectives and PS 1200- FFinancial Statement Presentation outline the design,accounting concepts and objectives under full accrual accounting for local governmentsincluding the recognition of tangible capital assets . These sections should be read inconjunction with this policy .

7 .

TANGIBLE CAPITAL ASSETS

T1 .

Aadefinad!nPS315O ' tongib!eoapitdaaaetaarnnon-financia!aoaetohavingphyaicasubstance that:

i .

Are held for use in the production or supply of goods and services, for rental toothers, for administrative purposes or for the development, construcbon,maintenance or repair of other tangible capital assets :

ii .

Have useful economic lives extending beyond an accounting period ;iii .

Are to be used on a continuing basis ; andiv .

Are not for sale in the ordinary course of operations .

7 .1 .1 .

For the Township, tangible capital assets have the following characteristics :i .

Beneficial ownership and control clearly rests with the Township, andii . The tangible capital asset is utilized to achieve Township plans, objectives and

services with the intention of being used on a continuous basis and is notintended for sale in the ordinary course of business .

7.1 .2 .

For further clarif ble capital assets :

Page 6 of 21

Include land, land improvements, buildings, leasehold improvements,infrastructure assets, vehicles, machinery and equipment including purchasedcomputer software, in-house developed software, computer hardware and assetsacquired by capital leases or by donations ;


POLICIES ANDPROCEDURES

ii . Do not include intangible assets such as copyrights, trademarks, patents andhuman capital ;

iii Include operational heritage

Heritage assets are those assets, usuallyirreplaceable, that are intended to be preserved in trust for future generations .Operational heritage assets are those assets used for purposes in addition to themaintenance of local and/or national heritage (e .g . heritage building with officespace, parkland) .

Non-operational heritage assets will not be capitalized . Non-operational heritageassets include : Museum and gallery collections, other works of art, monumentsand s4tues .

v . Spare parts, acquired as part of the same procurement as the original capitalasset, will be considered integral to the acquisition of the asset and form part ofthe total cost of the tangible capital asset .

Asset Classes

Tangible capital assets will be classified as follows :

7.3.

Capitalization Threshold

t alized if the following thresholds are met :

Page 7 of 21

General Capital Assets Infrastructure AssetsCapital Work in

ProgressLand Land

Asset sub-classes notapplicable

I

2

Land Improvements Land ImprovementsBuildings & BuildingImprovements

Buildings & BuildingImprovements

Leasehold Improvements Leasehold ImprovementsMachinery & Equipment Machinery & EquipmentComputer Hardware Computer HardwareComputer Software Com uter SoftwareLinear Assets Linear AssetsP~NlVehicles



Tangible Capital Assets,

meet the definition of a tangible capital asset, and havea useful life in excess of one year but the per item cost is less than the threshold, willbe expensed in the year of acquisition unless it is an asset that is included in anasset pool (refer to Section 7.4) . These assets may be tracked for assetmanagement purposes .

7.3.3 .

All land will be capitalized regardless of its cost .

7.4.

Pooled Tangible Capital Assets

7.41 .

Certain items such as tools, furniture and computers are generally below thecapitalization threshold individually but are typically purchased or held in largequantities so as to represent significant expenditures overall . In such cases, it wouldseem reasonable to capitalize all items acquired in a given asset class or pool andamortize the pool over a pre-determined amortization period,

7.4.2 .

Due to the large financial impact and large numbers purchased, there are certainassets that represent a material pooled asset. The Township will create pools ofassets "ten A believes that the pool of assets represent a significant pool of tangiblecapital assets that has or will have a significant financial impact on the Township .

7.4.3 .

Inventory disposal will be accounted for utuizing the First-in First-out (FIFO) method .

7.5 .

Bundling of assets (whole asset vs . component approach)

7.5 .1 .

Forpurpmaeeofoupbe!!zat!onandamorUzakion ' thetmomedhodoofdef!ningtamgibk*capital assets are Whole Asset and Component .

The Whole Asset approach considers an asset to be an assembly of connectedparts. Costs of all parts would be capitalized and amortized as one asset. Forexample, a computer network would be considered as one asset .

Page 8 of 21

Asset Class Asset Sub-Class ThresholdGeneral Capital&Infrastructure Assets Land zero

Land Improvements $50000BuH&ngs $50000Leasehold Improvements ~50,000Machinery & Equipment $5000Computer Hardware $1000Computer Software $5000Vehicles $10000Linear Assets $50000

lCapital Mark in Progress zero,



Under the Component

' different components are individuallycapitalized and amortized . Under this approach, the servers, routers, lines,software, etc . used in a network would all be individual assets .

7.5.2 .

Both the whole asset method and te component approach are equally acceptableunder GAAP. In certain circumstances, it is appropriate to allocate the totaldisbursement on an asset to its component parts and account for each componentseparately, This is the case when the component assets have different useful lives orprovide economic benefits or service potential to the entity in a different pattern, thusnecessitating use of different amortization rates and methods . For example, thepavements, formation, curbs, footpaths, bridges and lighting may need to be treatedas separate items within a road system to the extent that they have different usefullives. Additional factors influencing the choice of method include :

i .

Significance of amounts ;ii . Quantity of individual asset

(volume) ;iii . Availability of information with respect to specific components of the capital

expenditures; andiv. Specific information needs of management for decision making and asset control

purposes .

7.5.3 . Based upon materiality, the Township will utilize the Whole Asset approach for allassets with the following exceptions which will be accounted for on a Componentbast :

i

Linear infrastructure assetsii . Buildings >50OM 2

7.6 .

Assets Owned by Multiple Departments or Entities

7.6 .1 .

In certain cases, more than one department has some involvement with the use of anasset. The concept of "control" should be used in determining which departmentrecords and amortizes the asset in their financial statements .

7.6.2 .

"Control" in this context means the ability to obtain future economic benefits infulfillment of aims and objectives of the entity and to restrict the access to others .Legal terms and conditions, risks and liabilities also assist in determining theownership of an asset .

7.6.3 .

The Finance Department should be cshould record the asset .

7.7.

Tangible Capital Assets under Construction/Development

7.7 .1 .

Determining when a tangible capital asset, or a portion thereof, is ready forproductive use requires consideration of the circumstances in which it is to be

Page 9 of 21

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Township supplied labour will only be capitalized as part of the tangible capitalasset cost as directly attributable costs in situations where the documentation issatisfactory, provides sufficient detail and substantiates the cost for the capitalproject .

8.1 .5 .

The cost of each tangible capital asset acquired as part of a single purchase (forexample, the purchase of a building and land for a single amount) is determined byallocating the total price paid for all of the tangible capital assets acquired to eachasset class on the basis of its relative fair value at the time of acquisition .

9.

DONATED TANGIBLE CAPITAL ASSETS

9.1 .1 .

The cost of a contributed or donated tangible capital asset, including a tangiblecapital asset in lieu of a developer charge, is considered to be equal to its fair valueat the date of contribution .

0.1 .2 .

Assets transfers from other governments will be accounted for in accordance with PS3410 - Government Transfers .3410 - Government Transfers .

~1-3 .

In order to determine the fair value, an independent valuation of the tangible capitalasset will be undertaken such as an appraisal, professional opinions or quotes fromindependent sources . These accounting estimates must be documented andprovided to the Finance Department for the appropriate financial transactions .

9 .1 .4 .

In the case where a tangible capital asset is being constructed on behalf of theTownship or as part of a development, the responsible Director should attempt toacquire the fair value from the developer and include this as a requirement of thecontract .

9.1 .5 .

If the fair value cannot be determined by any means outlined above, the asset shouldbe recorded at a nominal value and disclosed in the notes to the financial statements .

10 .

FUTURE SITE RESTORATION COSTS

10.1 .1 . Futurecleaningbecausecan be reasonablas part of the caas part of the casite restoration cotakes place .

restoration costs encompass costs for dismantling, abandoning, and,oparty. TThese cost may be incurred as a result of a contract or

has established a policy to restore a site . When such costsestimated, they should be accrued (net of expected recoveries),I asset and amortized over its useful life . The provision for futurets is to be recorded as aHabi!ity until the future site restoration

101 .2 .

This policy applies in situations where the Township constructs an asset on leasedland, with the condition that it restores the site to its original condition at the end ofthe lease term . In this case, an estimate of the cost of demolishing the asset andcleaning-up the site should be capitalized as part of the cost of the asset and

Page 1 1 of 21



amortized to expense at the same rate as the asset .

10 .1 .3 . The rationale behind this accounting treatment is that the site restoration costs arelinked to the use of the asset and hence should be recognized over the years of userather than at the time the restoration work is performed .

10 .1 .4 .

Where future site restoration costs are expected to be significant but cannot bereasonably estimated, a contingent liability should be reported .

10.1 .5 .

Costs to be capitalized exclude costs related to environmental liabilities due tocontaminated sites and solid waste landfills .

1~ .

BETTERMENTS VERSUS MAINTENANCE

11 .1 .1 . Costs of betterments are considered to be part of the cost of a tangible capital assetand would be added to the recorded cost of the related asset . Abettennent is a costincurred to enhance the service potential of a tangible capital asset .

11 .1 .2 .

Betterments are expenditures relating to the alteration or modernization of an assetthat appreciably prolong the hem's period of usefulness or improve its functionality.

11 .1 .3 . In general, for tangible capital assets other than complex network systems, servicepotential may be enhanced when there is an increase in the previously assessedphysical output or service capacity, where associated operating costs are lowered,the useful life of the property is extended or the quality of the output is improved .

11 .1 .4 .

Therefore, for complex network systems, the following basic distinctions can be usedto identify maintenance and betterments :

Maintenance and repairs maintain the predetermined service potential of atangible capital asset for a given useful life . Such expenditures are charged in theaccounting period in which they are made .

ii . Betterments increase service potential (and may or may not increase theremaining useful life of the tangible capital asset) . Such expenditures would beincluded in the cost of the related asset .

11 .1 .5 .

Deter :7 eundertaken duhnas mucn as possible in order ' detenninoUle impact ot

11 .1 .6 .

Where a costt cannot easily be differentiated between a repair and betterment, thecost should be expensed in respecting the accounting principle of conservatism .Departments must provide the rationale to the Finance Department both at thebudget stage and following project completion .

12 .

AMORTIZATION OF TANGIBLE CAPITAL ASSETS

Page 1 2 of 21

uia .



12.1 . General

12.1 .1 . Amortization of tangible capital assets refleds the cost to the municipality of utilizingthe tangible capital asset in providing services . The cost of property, equipment andother capital assets is essentially a long-term prepayment of an expense in advanceof the use of the asset . As the economic service life of the asset expires, the cost ofthe asset is systematically allocated to operations as an expense called

12.1 .2. Periodic amortization expense should be an allocation of the historical cost of theasset less expected residual value, if applicable, to operations in proportion to theeconomic benefits received each period from the use of the asset .

12 .1 .3 . The cost of the tangible capital asset, less any residual value, is amortized over itsuseful life in a rational and systematic manner appropriate to its nature and use bythe municipality .

12 .1 .4 .

Land generally has an unlimited life and will not be amortized .

12.1 .5 . The amortization of the costs of tangible capital assets is accounted for as expensesin the statement of operations . Amortization expense is an important part of the costassociated with providing government services, regardless of how the acquisition oftangible capital assets is funded .

12.1 .6 . The service life of an asset should be determined on a basis that is linked with theexpiration of the economic benefits . For example, service life may be measured interms of years; total units of output ; or total hours of operating time . Vehicles mightuse hours of operation as the appropriate measure of service life.

12.1 .7 .

Amortization of constructed assets will commence starting the fiscal year followingthe year that the tangible capital asset is put in service .

12 .1 .8 . Amortization of minor purchased assets that meet the capitalization threshold shallbe recorded monthly commencing on the first day of the month following the monththat the asset was put into service .

12.1 .9 .

For pooled assets, where purchases and disposals affect the pool balancethroughout the year, the amortization calculation may be based on the estimated pool

than actual .

12.2. Determinati of Residual Value of a Tangible Capital Asset

12.2 .1 .

Where mDepertment expects the residual value of a tangible capital asset to beaignifioant, it would be factored into the calculation of amortization .

Page 1 3 of 21



12.2 .2 .

The Department in consultation with the Finance Department, will determine theappropriate residual value based upon market information and experience with theparticular tangible capital asset .

12.3 . Determination of Useful Life of a Tangible Capital Asset

12.3 .1 .

Useful life is the estimate of either the period over which a tangible capital asset isexpected to be used by a municipality, or the number of production or similar unitsthat can be obtained from the tangible capital asset by a government . The life of atangible capital asset may extend beyond the useful life of a tangible capital asset tothe Township. The life of atangib!e oupital asset, other than land, is finite, and isnormally the shortest of the physical, technological, commercial and legal life .

12.3.2 .

The useful life of otangible capital asset depends on its expected use by thegovernment. Factors to be considered in estimating the useful life of a tangible capitalasset include :

i .

experience with similar assets through use ;

ii .

expected future usage

iii . effects of technological obsolescence ;

iv . expected wear and tear from use or the passage of time ;

v. the maintenance program ;

vi . studies of similar items retired ; and

vii . the condition of existing comparable items .

12.3.3 .

Departments are in the best position to estimate the expected life of an asset .However, departmmntaahou!dvvorkvviththoFinoncaDepartmenttodekannineUleuseful lives within the range of useful lives outlined in Section 12 .3.5 .

12.3.4 .

Generally, the maximum amortization period should be limited to 40 years . However,the Township owns long life assets which provide service longer than 40 years . Inthese cases, useful lives exceeding 40 years should be supported with demonstratedexperience and documentation .

123-5.

Generally, the useful lives will be utilized for the asset classes . However thehe useful life of any

asset must be done based upon thefactors in 12 .3.2. As a guideline assets should be amortized over the following life

The original cost of land is not amortized ;

Land Improvements : 10 1o25 yeor ;

Buildings: 20 to 50 years ;

Page 1 4 of 21

12.4 .1 .

Different methods of amortizing a tangible capital asset result in different patterns ofcost recognition . The objective is to provide a systematic and rational basis forallocating the cost of a tangible capital asset, less any residual value, over its usefullife . A straight-line method reflects enonetant charge for the service as a function of

A variable charge method reflects service as a function of usage . Othermethods may be appropriate in certain situations . The amortization methods thatmeet GAAP are as follows :



iv . Machinery and equipment : 5 to 15 years ;

v . Works and infrastructure : 20 to 100 years ;

vi . Computer hardware : 3 to 10 years ;

vii. Computer software : 1 to 10 years ;

viii . Vehicles and Vessels : 3 to 25 years ;

ix. Leasehold improvements : over the useful life of the improvement or the leaseterm, whichever is shorter. The lease term would include any renewal option periodswhere extension of the lease is expected ; and

x .

Betterments: over the useful life of the asset to which the improvement wasmade or the useful life of the betterment if significantly shorter .

12.4. Amortization Methods

i . Straight-line - The straight-line method of amortization is based on theassumption that an asset provides equivalent service or value for its use each yearof its life . Straight-line depreciation has a constant amount of depreciationrecognized per time period .

ii . Declining Balance - Declining balance method of amortization accelerates thenanognidonofamortizationbynauognizing!argeamouniaofdepreoietioneadyintheuseful life of the asset. This method does not subtract the asset's residual value fromthe cost, instead the depreciation stops when the asset's net book value equals itsresidual value . The declining balance rate is 100% divided by the Useful Life inyears. For example, if an asset had a useful life of 5 years, the declining balancerate wouild be 20% .

balance method of depine rate .

of the Years Digits - Sum of the Years Digits (SOY) method ofdepreciation provides more depreciation at the beginning of an asset's life than atthe end. The SOY fraction made up of the sum of the years of the useful life as adenominator and the numerator is the number of years remaining in the useful life .For example if the useful life of an asset was 3 years and there were two yearsremaining in the asset's useful life, the denominator would be 6 and the numerator

Page 1 5 of 21

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13.1 .2 .

The transfer of land from an outside party to a department should only be capitalizedas an asset when the agreement provides for a transfer of ownership . Where theagreement does not provide for a transfer of ownership, the land may not becapitalized . However, the costs of buildings and infrastructure built on the land will becapitalized if they meet the capitalization criteria . An example of this situation is whenan agreement provides for unlimited use of the land by a department but the landreverts to the outside party once the department is no longer using it .

14.

IMPAIRMENT OF ASSETS (WRITE DOWNS OF TANGIBLE CAPITAL ASSETS)

14.1 .1 .

PS 3150 - Tangible Capital Assets, states that when conditions indicate that atangible capital asset no longer contributes to a municipality's ability to provide goodsand services, or that the value of future economic benefits associated with thetangible capital asset is less than its net book value, the cost of the tangible capitalasset should be reduced to reflect the decline in the asset's value .

14 .1 .2 .

The net write-downs of the tangible capital asset will be accounted for as an expensein the statement of operations and cannot be reversed . Consequently, the decisionto write-down an impaired asset could have a significant impact on the annualsurplus or deficit. It is important to note, however, that this is simply a timingdifference. Eventually, the impairment of the asset will be reflected on the statementof operations, that is upon disposal .

14.1 .3 .

The Township should write down the cost of a tangible capital asset when it candemonstrate that the reduction in future economic benefits is expected to bepermanent. A write down of an asset is generally more desirable than a change inamortization method since those decisions are policy decisions affecting prioraccounting periods .

14 .1 .4 .

Conditions that may indicate that the future economic benefits associated with atangible capital asset have been reduced and a write-down is appropriate include :

a change in the extent to which the tangible capital asset is used ;

a change in the manner in which the tangible capital asset s used ;

elopments ;

removal of the tangible capital asset from service;

a decline in, or cessation of, the need for the services provided by the tangiblecapital asset ;

a decision

i of the tangible capita asset before it is complete orable or saleab

~ and

Page 1 7 of 21



viii . a change in the law or environment affecting the extent to which the tangiblecapital asset can be used .

14.1 .5 .

The persistence of such conditions over several successive years increases theprobability that a write-down is required unless there is persuasive evidence to thecontrary .

14.1 .6. When the tangible capital asset no longer contributes to the municipality's ability toprovide goods and services, it would be written down to residual value, if any . Thiswould be appropriate when the Township has no intention of continuing to use theasset in its current capacity, and there is no alternative use for the asset .

14 .1 .7 .

In other circumstances,

ill be necessary to estimate the value of expectedremaining future economic benefits . Where a municipality can objectively estimate areduction in the value of the asset's service potential to the government, and haspersuasive evidence that the reduction is expected to be permanent in nature, thetangible capital asset would be written down to the revised estimate of the value ofthe asset's remaining service potential to the government .

14.1 .8 .

Since all of the above decisions affect the Township's statement of operations, theDepartment and the Finance Department must work together to determine the bestapproach . In the event that the impact is material, a report to Township Counciloutlining the impact on the financial statements, budget and operations may bewarranted .

15 .

DISPOSALS

15.1 .1 .

Under PS3150, the difference between the net proceeds on disposal of a tangiblecapital asset and the net book value of the asset should be accounted for as arevenue or expense in the statement of operations .

15.1 .2 .

Disposals of tangible capitaa

accounting pen

ay occur by sale,trade-in destruction, loss or abandonment . Such disposals represent a reduction inthe Tu'v',.,is '

tangible capital assets, regardless of how thatinvestment

eported .

15.1 .3. Departments are required to identify the planned dispos Is of tangible capital assetsduring the budget process . The Finance Department wil ssist in the determinationof the effect of these disposals on the statement of operations and the budgetary

Page 1 8 of 21



15.1 .4.

Upon disposal, the Departments must inform the Finance Department of the result ofthe disposal and provide the proceeds on disposal together with the documentationdescribing the disposal .

15.2 . Whenever a tangible capital asset is disposed that results in a material gain or loss onthe Statement of Operations, Township Council will be informed of the disposal and theimpact on the financial statements .

16 .

CAPITAL LEASES

16.1 .1 . The determination of a capital versus an operating lease needs to be undertaken inall leasing situations . The Township of Russell's Statement of Leasing Policy andGoals should be referred to with respect to the responsibilities for financing .

16.1 .2 . This section is designed to assist the Township in determining whether or not thelease of tangible capital assets meets the definition of aoapital lease . If a capitallease meets the definition below, the asset must be capitalized and reflected as anasset on the Township's Statement of Financial Position .

16 .1 .3 .

Aleased tangible capital asset is defined in Public Sector Guideline 2 (PSG-2) as

"A leased tangible capital asset is amm-financial asset that has physical substanceand a useful life extending beyond an accounting period, and is held under lease by agovernment for use, on a continuing basis, in the production or supply of goods andservices . Under the terms and conditions of the lease, substantially all of the benefitsand risks incident to ownership are, in substance, transferred to the governmentwithout necessarily transferring legal ownership ."

1G.1 .4.

A tangible capital asset procured and financed meeting the definition of a capitallease must be capitalized in the same manner as all other tangible capital assets andfollow this policy. The Treasurer in conjunction with the Department will make thedetermination of the type of lease . This should be determined during the budgetprocess as the impact on the statement of operations should be disclosed toTownship Council .

Page 1 9 of 21



17.

LEASEHOLD IMPROVEMENTS

1T1] . A leasehold improvement is a betterment made to leased property . Betterments areexpenditures relating to the alteration or modernization of an asset that appreciablyprolong the item's period of usefulness or improve its functionality .

17 .1 .2 .

To be considered a leasehold improvement, the modification must have at least four

The modifications must be made to assets that have been leased ;

ii . The lessee department/agency must pay for the improvements . If the expenses arethe responsibility of the lessor then it will account for the expenses in its own records ;

iii . The leaselhold improvements should be durable, they should bring benefits to thedepartment for more than one year ; and

iv. The betterment reverts to the lessor at the end of the lease (i .e . cannot be detachedfrom the leased property) .

17.1 .3 .

Examples of leasehold improvements that should be capitalized include significantupgrades to the electrical system to meet the needs of computer systems and theinstallation of walls and doors to create permanent offices . Examples of modificationsthat would not be capitalized include remodelling costs such as painting andcarpeting.

171A

Betterments made to an asset subject to an operating tease or a capitall lease whereownership does not transfer to the lessee (i .e . lease does not contain a bargainpurchase option or provide for transfer of ownership of the asset) should be classifiedas a leasehold improvement .

17.1 .5 .

Betterments made to an asset subject to a capital lease where ownership is e

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to transfer to the lessee, should be classified as betterments . The cost of bettermentsmay be capitalized as part of the cost of the capital asset and amortized over theuseful life of the asset . However, where the useful life of the betterment isaignif!canUyehorturthanthntoftheaaset,itohou!dbecapita!izedandamortizadseparately.

17 .1 .6 .

Where a department builds a building and/or infrastructure on leased land, thesecosts would be capitalized as uleasehold improvement except where the land isbased fmm another department or the lease provides for transfer of ownership . !nthe latter cases, the building and/or infrastructure should be capitalized as an assetrather than a leasehold improvement .

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A BY-LAW TO ADOPT THE TANGIBLE CAPITAL ASSET ...fr.russell.hosted.civiclive.com/UserFiles/Servers/Server...This policy should be read in conjunction with PSAB Handbook Section PS 3150