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STRATEGIC OUTCOMES |
ACTION |
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Department: |
☐ Safe & Prosperous |
☐ Motion |
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Finance |
☐ Active & Appealing |
☒ Resolution |
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☒ Respected & Responsible |
☐ Ordinance - Introduction |
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Division: |
☐ Connected & Engaged |
☐ Ordinance - Adoption |
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☐ Unique & Creative |
☐ Public Hearing |
TITLE: t
Adopt Capital Asset Criteria for Financial Reporting Purposes
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SUMMARY RECOMMENDATION: Summary Recommendation
Update and establish the City’s capitalization threshold and criteria to identify capital assets for financial reporting purposes in accordance with accounting principles generally accepted in the United States of America. (Finance) (Douglas Allen)
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STRATEGIC OUTCOME:
This resolution assists in furthering the City Council’s strategic outcome of Respected and Responsible. Updating and officially adopting the City’s capitalization threshold and criteria to identify capital assets is an integral component of fiduciary responsibility and exercising due prudence to establish systems, policies, and procedures to accurately account for and maintain custody of all City assets.
REPORT:
WHAT IS A CAPTIAL ASSET?
Capital Assets include tangible and intangible property owned or leased by the City including land, buildings, improvements to land, infrastructure assets (roads, bridges, water systems, sewer systems), major equipment, and subscription-based information technology arrangements (SBITA) that meet or exceed the capitalization threshold.
The capitalization threshold is the minimum cost at which an asset is considered a capital asset, as defined in this resolution. Amortization and depreciation are the systematic allocations of the cost of a capital asset over its estimated useful life.
WHEN WERE CAPITAL ASSETS FIRST REPORTED?
In June of 1999 the Governmental Accounting Standards Board (GASB) issued GASB 34, commonly known as “the new reporting model”, bringing sweeping changes to the governmental financial reporting model. One change was requiring government to report of capital assets for government-wide operations. The GASB allowed governments to use estimates for historical infrastructure and set reasonable capitalization thresholds to not overburden governments with capitalizing small value equipment.
In fiscal year 2002, the City implemented GASB 34 and increased the capitalization threshold from $1,000 to “$5,000 or more and a useful life greater than 1 year.”
WHY UPDATE THE CAPITAL ASSET CRITERIA?
Twenty-two years later (2024), inflation and advances in technology and engineering have changed and resulted in significant increases in costs of equipment. In turn, this caused substantial increases in the amount of equipment that needs to be capitalized for financial reporting purposes.
According to City’s capital asset records:
• A fleet F-150 in 2003 was priced at $16,064
• Twenty years later, in 2023 fleet F-150s were priced between $41,982 and $88,326
o An increase in base cost but also improved features, technology and engineering
In FY 2024 Capital Assets under $25,000 accounted for 35% of the City’s total number of capital assets, but only 1% of the total value of capital assets of $569,809,975. This results in a substantial and labor-intensive reporting effort for nominal value on the financial statements.
EFFECTIVE FY 2025
Implementation of the new capital asset threshold is prospective, not retroactive.
• New assets acquired on or after July 1, 2024 (FY 2025), are subject to the new criteria.
• Assets acquired on or before June 30, 2024 (FY 2024), are not subject to the new criteria.
o This means: If a capital asset is capitalized on the books in FY 2024, it stays on the books.
HOW DOES THE UPDATED CRITERIA AFFECT SAFEGUARDING OF ASSETS?
This policy only sets criteria to identify capital assets for financial reporting purposes. This policy does not relinquish or lessen the City’s fiduciary responsibility to safeguard City assets.
City assets are still tracked by exercising due care in establishing and adhering to systems, policies, and procedures that accurately account for and maintain custody of all City assets. Many internal controls continually evolve and require guidelines and safeguards to be tailored to the nature of the asset type, sensitive inventories and risk environments.
WHO APPROVES AND WHERE IS THE UPDATED CAPITAL ASSETS CRITERA?
Establishing systems, procedures and financial reporting, including auditing financial statements and related assertions, is the responsibility of management. Policy areas rest with the City Council for approval. This adds a higher level of professionalism, complies with standard practice among local governments, and is prescribed by the Governmental Accounting Standards Board (GASB).
City Administration and Finance recommend the follow policy points for City Council’s consideration, which are incorporated in the Resolution.
I. DEFINITION OF CAPITAL ASSETS: For financial reporting purposes, a capital asset is defined as:
1) A tangible item of property owned or leased by the City with a cost of $25,000 or more and a useful life exceeding three years.
2) A subscription-based information technology arrangement (SBITA) with a minimum cost of $460,000 in a non-revokable agreement greater than one year.
The chart below represents the City’s asset categories, capitalization thresholds and estimated lives for amortization and depreciation purposes.
II. ASSET VALUATION: All capitalized assets shall be recorded at their historical cost, including acquisition costs such as freight, installation, professional fees, and other related costs.
III. LIFE OF AN ASSET: Book life or estimated useful life of an asset will be determined by the City’s Finance Director using industry standards within accounting principles generally accepted in the United States of America (GAAP) which satisfy independent financial audit requirements.
IV. AMORTIZATION AND DEPRECIATION: Amortization and depreciation of assets should use the straight-line method to amortize or depreciate the asset over its useful life unless the City’s Finance Director determines a more appropriate method will better represent the City’s financial statement presentation that adheres to standards prescribed by the Government Accounting Standards Board (GASB) and meets independent financial audit requirements.
V. IMPROVEMENTS, REPAIRS AND MAINTENANCE:
• Significant improvements adding value or extending the useful life of a capital asset shall be capitalized by adjusting the capital assets valuation and depreciation schedules.
• The cost of minor repairs and maintenance not adding value to or extending the life of a capital asset shall be expensed as incurred with no adjustments to the capital assets valuation or depreciation schedules.
VI. GRANTS AND OTHER SPECIFIC FUNDING RESTRICTIONS: If a grant or specific funding source has a capitalization threshold, valuation, depreciation method or other asset criteria that differs from the City’s capitalization criteria, the City will use the most stringent criteria, to meet grant requirements.
VII. DISPOSAL OF CAPITAL ASSETS: Gains or losses are recognized when capital assets are retired from service or otherwise surplused or disposed of. Any surplus or disposal of a capital asset shall follow the City’s surplus disposal procedures and be recorded in accordance with GAAP.
VIII. EFFECTIVE DATE: The capital asset threshold and criteria to identify capital assets shall be implemented prospectively, presented, and disclosed in the FY 2025 Audited Annual Comprehensive Financial Statements, as prescribed by GASB.
FISCAL REQUIREMENTS:
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CITY FUNDS: |
$ 0.00
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BUDGETED: |
$ 0.00
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STATE FUNDS: |
$ 0.00
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AVAILABLE TO TRANSFER: |
$ 0.00
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FEDERAL FUNDS: |
$ 0.00
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IN CONTINGENCY: |
$ 0.00
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OTHER SOURCES: |
$ 0.00
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FUNDING: ACCOUNT/FUND #/CIP |
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TOTAL |
$ 0.00
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To total; right click number & choose “Update Field” |
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FISCAL IMPACT STATEMENT:
Increases efficient use of resources and reduces unnecessary redundancy of labor-intensive processes.
ADDITIONAL INFORMATION:
SUPPORTING DOCUMENTS NOT ATTACHED TO THE CITY COUNCIL ACTION FORM THAT ARE ON FILE IN THE OFFICE OF THE CITY CLERK:
NONE
IF CITY COUNCIL ACTION INCLUDES A CONTRACT, LEASE OR AGREEMENT, WHO WILL BE RESPONSIBLE FOR ROUTING THE DOCUMENT FOR SIGNATURE AFTER CITY COUNCIL APPROVAL?
☐ Department
☐ City Clerk’s Office
☐ Document to be recorded
☐ Document to be codified
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Acting City Administrator: |
Date: |
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John D. Simonton |
09/05/2025 |
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Reviewed by City Attorney: |
Date: |
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Richard W. Files |
09/04/2025 |