HOME > DEPARTMENTS > CITY OFFICE > CAPITALIZATION POLICY

CITY OF LANESBORO CAPITALIZATION POLICY

This policy defines dollar thresholds and descriptions for categories of capital assets for the City of Lanesboro.

Capital Assets Definition

Capital assets include land, land improvements, buildings, building improvements, construction in progress, machinery and equipment, vehicles, infrastructure, easements, works of art and historical treasurers acquired by the City for use in providing services to its citizens. A capital asset is to be reported and depreciated in government-wide financial statements. In the government-wide financial statements, assets that are not capitalized are expended in the year of acquisition.

Infrastructure assets are long-lived capital assets that normally can be preserved for a significant greater number of years than most capital assets and are normally stationary in nature. Examples include roads, bridges, tunnels, drainage systems, water and sewer systems, and dams. Infrastructure assets do not include buildings, driveways, parking lots or any other examples given above that are incidental to property or access to the property. However, acquisitions of water and sewer infrastructures are added to the utility fixed asset inventory based on current costs of construction and are depreciated accordingly.

Inventory Record

The City shall inventory all capital assets. Each inventory record should include: description, year of acquisition, method of acquisition (e.g. purchase, donation, etc.) funding source, cost or estimated cost, salvage value, and estimated useful life. The inventory record will also identify the function(s) that use the asset. The existence, location, and condition of all fixed assets should be verified by taking an annual inventory on December 31st.

Recording Land

Land is to be capitalized but not depreciated. It is recorded at historical cost and remains at that cost until disposal. All costs for legal services incidental to the acquisition and other charges in preparing the land for use shall be included in the cost. If there is a gain or loss on the sale of land, it is reported as a special item in the statement of activities.

Recording Land Improvements

Land improvements include items such as excavation, non-infrastructure utility installation, driveways, sidewalks, parking lots, flagpoles, retaining walls, fencing, signs, outdoor lighting, and other non-building improvements intended to make the land ready for its intended purpose. Land improvements can be further categorized as non-exhaustible and exhaustible.

Non-Exhaustible Expenditures for improvements that do not require maintenance or replacement expenditures to bring land into condition to commence erection of structure, expenditures for improvements not identified with structures, and expenditures for land improvements that do not deteriorate with use or passage of time are additions to the cost of land and are not exhaustible and therefore not depreciable.

Exhaustible Other improvements that are part of the site, such as parking lots, landscaping and fencing, are usually exhaustible and are depreciable. Depreciation of site improvements is necessary if the improvement is exhaustible.

Recording Buildings

Buildings should be recorded at either their acquisition cost or construction cost. The cost of new construction should be carefully evaluated because projects usually consist of major components such as land, land improvements, building construction (including professional fees and permits), furniture, fixtures and equipment. In addition, buildings include components such as roof, air conditioner system, etc. that should be recorded separately when significant because these building components have different useful lives. The value of each component needs to be determined and placed within its own category.

Recording Building Improvements

Building improvements that extend the useful life should be capitalized. Examples of building improvements include roofing projects, remodeling or replacing major building components.

Recording Construction in Progress

This is primarily used in conjunction with Capital Projects. Capital Project costs are accumulated until completion, when cumulative costs are transferred to the appropriate fixed asset account. Construction in progress should be capitalized and not depreciated. It should be reported with land and other non-depreciating assets at the government-wide level. Unspent debt proceeds from capital assets related debt are reported in the net assets section of the statement of net assets as “restricted for capital projects”.

Recording Machinery and Equipment (Including Office Equipment)

Assets such as furniture, machinery and equipment (that meet threshold levels) should be capitalized and inventoried. These items are described as tangible property not permanently affixed to real property, which are needed in carrying out the operations of the City. Installation cost should be included in the capitalized amount. Some assets, individually, may fall below the capitalization threshold but may be purchased in large quantities by the City e.g. computers, books. City staff should aggregate such assets and consider the materiality and significance of them and if material or significant capitalize such items either individually or in the aggregate.

Recording Vehicles

Vehicles are described as all equipment that must be titled by the Minnesota Division of Motor Vehicles and bear a license tag. Cars, trucks and trailers are examples. Vehicles should be identified, inventoried and depreciated.

Recording Easements

An easement is an interest in land owned by another that entitles its holder to a specific limited use of the land. Therefore, easements are not required to be reported unless the City paid for the easement.

Recording Works of Art and Historical Treasures

Works of art and historical treasures should be recorded at historical costs. Depreciation is not required for collections or works of art that are inexhaustible.

Establishing and Setting the Threshold Levels for Recording Capital Assets

The following elements of useful life and asset costs are established for capitalization of assets.

Estimated Useful Life The first criterion is useful life. An asset must have an estimated useful life greater that one (1) year to be considered for capitalization and depreciation. Assets that are consumed, used-up, habitually lost or worn-out in one year or less will not be capitalized.

Asset Cost The second criterion for determining depreciable capital assets is cost. The capitalization threshold shall be established as follows for per individual asset item.

Land ---------------------Capitalize Only
Construction in Progress ----------------- Capitalize Only
Land Improvements – Improvements other than Buildings $5,000 and over - Capitalize & Depreciate Buildings and Building Improvements $5,000 and over ------- Capitalize & Depreciate
Infrastructure $5,000 and over --------- Capitalize & Depreciate
Machinery and Equipment $5,000 and over ----- Capitalize & Depreciate

Assets acquired or put in service before December 31, 2003, will not be capitalized unless required per GASB standards.

Obtaining an Asset’s Cost of Acquisition Value

Capital assets are reported at historical cost and should include the cost of freight, site preparation, architect and engineering fees, etc. If something other than cash is used to pay for the asset, then the fair-market value of the non-cash payment or consideration determines the asset’s cost or acquisition value. When the value of the consideration paid can’t be determined, the asset’s fair-market value determines its cost. With few exceptions, an asset’s cost should also include necessary costs incurred to place the asset in service. Costs include the invoice price plus incidental costs (insurance during transit, freight, capitalized interest as described below, duties, title search, registration fees, and installation costs). Exceptions to this rule include interest expenses associated with deferred payments and real estate taxes paid, if any, in the acquisition of property.

Capitalized Interest

Interest costs incurred during the period of construction of proprietary fund capital assets should be capitalized. The costs of capital assets for governmental activities do not include capitalized interest. However, interest is capitalized on:

Assets that are constructed or otherwise produced for an enterprise’s own use.
Assets intended for sale or lease that are constructed or otherwise produced as discrete projects.

Depreciation Definition

Depreciation is the process of allocating the cost of tangible property over a period of time rather than deducting the cost as an expense in the year of acquisition.

It is the City’s policy to use the straight-line depreciation method. The basis of the asset is written off evenly over the estimated useful life of the asset. The same amount of depreciation is taken each year. In general, the amount of annual depreciation is determined by dividing an asset’s depreciable cost by its estimated life. The total amount depreciated can never exceed the asset’s historic cost less salvage value. At the end of the asset’s estimated life, the salvage value will remain.

To avoid the complications of depreciating each asset from the specific year in which it is placed in service, the City will utilize a full-year convention. Under this convention, no depreciation will be taken for the year of acquisition and a full year of depreciation will be taken in the year of disposition (unless the asset is fully depreciated).

To calculate depreciation on a capital asset, the following five factors must be known:

1. The year the asset was placed in service.
2. The asset’s cost or acquisition value.
3. The asset’s salvage value.
4. The asset’s estimated useful life.
5. The depreciation method.
   

Establishing Classes of Assets

The City establishes the following major categories of capital assets, with further details defined in Exhibit A attached hereto and made a part of this policy.

Land
Land Improvements—Improvements other than buildings
Buildings and Building Improvements
Construction in Progress
Vehicles
Machinery and Equipment (Including Office Equipment)
Infrastructure

Leases

Operating Leases are not capitalized. A lease is an operating lease if it does not transfer the benefits and risk of ownership to the local governmental unit. Operating lease payments are recognized as expenses/expenditures to the local governmental unit when they become payable.

Capital Leases will meet one of the following criteria:

a. The lease transfers ownership of the property to the governmental unit by the end of the lease.
b. The lease contains a bargain purchase option (an option extending to the lease the right to purchase the leased property at a price so favorable that the exercise of the option appears, at the inception of the lease, to be reasonably assured).
c. The term is 75% or more of the estimated life of the leased property.
d. The present value, at the beginning of the lease term, of the minimum lease payments is at least 90% of the fair market value of the leased property to the lessor.

Capital leases should be capitalized at the lessor of either the present value or the fair market value. The present value is determined to be the amount that would be borrowed to purchase the asset at the inception of the lease.

Items Not Considered to be Fixed Assets.

In order to clarify the question of asset classification, the following list of specific examples is provided.

COMPUTER SOFTWARE: Computer software, regardless of cost, is not regarded as a fixed asset because it is not a tangible item. Most of the purchase price of software consists of a one-time license fee to use the product only. The media and documentation cost are incidental.

MAINTENANCE AND REPAIR REPLACEMENTS: The replacement costs of component part(s) of a fixed asset, not the entire asset itself, during a maintenance and repair operation which also enhances the performance or life of the asset are not generally considered to be capital asset additions or modifications. For example, replacing an original disk drive with a higher capacity disk drive in a microcomputer or a more powerful engine in a leaf vacuum machine is considered to be an, maintenance and repair, expense.

DRAPERIES AND CARPET: The original purchase of draperies and carpet is considered an addition to the total asset value of the building. Replacement of either of these items is classified as maintenance to the building.
SUPPLIES: Any supply, regardless of cost, that is not permanent and will be consumed within a year is not considered a fixed asset.

AGGREGATE PURCHASES: A purchase of items in quantity with an extended cost equal to, or more than the fixed asset limit of $5,000.00. For example, 50 chairs at $100.00 each were purchased on a single purchase order for a total of $5,000.00. Even though the total is at the policy limit, the chairs are not considered as fixed assets since the individual cost does not qualify.

Click here for City of Lanesboro, Minn. - Recommended Life Cycle of Fixed Assets Grid (PDF)

City of Lanesboro Steven L. Rahn, Mayor | Bobbie Vickerman, City Administrator 202 Parkway Avenue South - - Lanesboro, MN 55949 507-467-3722 | lanesboro@acegroup.cc

CITY COUNCIL | PUBLIC UTILITIES | ECONOMIC DEVELOPMENT | COMMISSIONS & COMMITTEES | DEPARTMENTS | CITY ORDINANCES | PERMITS & LICENSING | CAMPING & CONVENTIONS | RELOCATION TO LANESBORO | LINKS | CONTACT US