States that assets should be recorded at their actual cost on the date of purchase
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Although the content, presentation, and basis of accounting may vary according to the reporting requirements of Statement 34, the basic elements of the financial statements remain the same. The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements. However, the narrative does not exhaustively discuss all reporting requirements that school districts may face. School district personnel, therefore, should refer to the actual GASB statements or other definitive sources for detailed disclosure requirements and reporting formats. Show
Assets Assets are defined as a probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. The following typically represent the major asset categories:
Cash and investments often represent a large portion of the assets on a government's balance sheet. Because of the importance of these assets, proper management based on sound investment policies and strategies is vital. The investment of excess funds is often governed by statute. Many state governments have adopted legal frameworks that restrict the investment activities of local governments, including school districts. These restrictions often place limitations on the types of investments allowed, regulate procedures used to manage investments, and require governing bodies to institute certain review procedures. The following discussion about cash and investments does not illustrate all the possible investment scenarios that a local government might use. However, the following five general rules may protect a school district from problems related to investment decisions.
Financial Statement Presentation and Disclosure. The complexity and range of investment potential and the large amounts of cash and other assets present in most governmental units emphasize the need to carefully capture and present these data in usable form. Cash and investment balances are segregated into individual funds and, depending on contractual requirements, may be classified as restricted assets. If a fund overdraws its share of a pooled cash account, the overdraft should be reported as a liability of that fund. Fund overdrafts of this type should be reported as interfund payables and receivables. Disclosures for cash and investments normally include, in addition to the GASB Statement 3 disclosures (see following chapter), the valuation basis of investments (e.g., investments are stated at fair value that approximates market). Changes in fair value are included as a component of investment income. The detailed disclosure requirements for cash and investments have been established in GASB Statement 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements (issued in April 1986); GASB Statement 28, Accounting and Financial Reporting for Securities Lending Transactions (issued in May 1995); and GASB Statement 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools (issued March 1997). These GASB statements and the entity's external auditor should both be consulted regarding disclosure requirements for cash and investments. Receivables Receivables usually arise as a result of revenue transactions. The following are the main sources of revenues for school districts that would result in outstanding receivables:
Because governmental funds use the modified accrual basis of accounting, governmental fund revenues should be recognized in the accounting period in which they become susceptible to accrual, that is, when they become both measurable and available to finance expenditures of the fiscal period. "Available" refers to the collectibility of the receivable within the current period or soon enough thereafter to be used to pay for liabilities of the current period. A general criterion for availability is 60 days, although a longer or shorter period may be used, except for property taxes in which the maximum period may not be more than 60 days. The availability period will be disclosed in the notes. Each entity should adopt a revenue accrual policy that implements the susceptibility to accrual criterion and applies it consistently. This policy should also be disclosed in the notes to the financial statements. Proprietary funds use the accrual basis of accounting to determine when revenues and related receivables should be recorded. Revenues are recognized when they are earned, that is, when the earnings process is complete and an exchange has taken place. GASB Statements 33, Accounting and Financial Reporting for Nonexchange Transactions, and 36, Recipient Reporting for Certain Shared Nonexchange Revenues, may have an impact on a governmental entity's reporting of revenues related to certain non-exchange transactions. Entities should consult the statements and their external auditors to determine the impact. Property Taxes Receivable. Property taxes are generally assessed to finance expenditures of a specific fiscal year. On the assessment date or levy date, the property taxes become a lien against the assessed property. Property taxes should be recorded in the governmental funds by using the modified accrual basis of accounting (recorded when they are both measurable and available). The amount of the property taxes receivable is based on the assessed value of the property, the current property tax rate, and an estimate of the uncollectible portion. When taxes are levied, the revenue and related receivable should be recognized, net of estimated uncollectible amounts. A receivable is usually recognized at the time an enforceable legal claim arises. The revenue is usually recognized in the first period in which the use of the revenues is permitted or required. If taxes that are levied to finance a subsequent fiscal period are collected in the current period, the amount collected should be recorded as deferred revenue. In the next fiscal year, a journal entry will be recorded to recognize the revenue amount that was collected in advance. In the fund financial statements, when property taxes are delinquent but expected to be collected, they should be reported as deferred revenues if it is estimated that the taxes will not be available to pay current obligations of the governmental fund. This situation indicates that the delinquent property taxes are not expected to be collected within 60 days of the close of the fiscal year, although a shorter availability period may be used. Due From State. This receivable represents amounts from state resources that exceed the amounts received during the fiscal year for which the school district has met all eligibility requirements. A district should also use the measurable and available criteria that are consistent with the modified accrual basis of accounting in the governmental funds to record revenues due from the state. Revenue due from the state for which all eligibility requirements were met during the fiscal year, and which is expected to be received within the availability period (e.g., 60 days) from the financial statement date, should be recorded as a receivable using this account. Due From Federal Agencies. This account represents amounts for which all eligibility requirements have been met by a district under a federal financial assistance program that are expected to be available to finance current liabilities. Such revenues are usually accounted for in special revenue funds using the measurable and available criteria, as appropriate for a modified accrual-based fund. If this is an expenditure-driven grant, revenues may be recognized only to the extent that expenditures have been incurred. Due From Other Governments or Agencies. In some instances, districts become eligible for revenue from other local governments or agencies through grant programs or by providing services. The receivable earned from such revenue should be recorded only if it also meets the measurable and available criteria. Thus, when the revenue has been earned under the grant program or the services have been provided, the district should recognize the revenues and receivables for the amount earned. In addition, if the amount of an outstanding receivable at the end of a fiscal year is not expected to be collected within the availability period (e.g., 60 days) from the financial statement date, the district should record a deferred revenue for the outstanding amount. Accrued Interest Receivable. Accrued interest represents the amount of interest at the end of an accounting period on all cash accounts and investments held at that date. Accrued interest should be computed for all investments and cash accounts held by the government that generate interest earnings regardless of the expected payment date. [back to top] Inventory Governmental accounting generally requires that amounts spent to purchase goods be recorded as an expenditure at the time of the purchase. An exception to this general rule is made for inventory. If the amount of inventory on hand at year-end is significant, the value of such inventory should be recorded as an asset. This is considered the "Purchase Method" whereupon fund balance is reserved for the amount of inventory. Inventory may also be recorded as an expenditure when it is consumed rather than when it is purchased. Under the "Consumption Method," purchase transactions are first recorded in the inventory account. As inventory is actually used, an entry to recognize the expenditure is posted to the appropriate accounts. This method is required for the proprietary funds. It is not uncommon for school districts to have a relatively high level of inventory at the end of the fiscal year, since this often coincides with the start of a new school year. In addition to the balance sheet presentation, note disclosure regarding the method of accounting for inventory should be made. Districts often distribute inventoried supplies to schools prior to fiscal year-end to accommodate the beginning of the new academic school year. Such inventories may either be included in inventory at year-end or be expensed in the year of distribution. For the entity-wide statements, the consumption method must be used. If the purchase method is used in the governmental funds and the consumption method produces a different result, the difference should be included in the reconciliations of governmental funds to governmental activities. (Second Statement 34 Q & A, Q23)
Accounting for and Control of Inventory. Governmental entities have several options for physical counts of inventory. Independent auditors are required by generally accepted auditing procedures to conduct physical observations of inventories at least annually when such inventories are material to the district's operations. The physical observations should be conducted as of the balance sheet date or as of a single date that is within a reasonable time before or after the balance sheet date. The independent auditor is usually present at the time of the inventory to assess the effectiveness of the inventory-taking procedures and to determine the reliance that the independent auditor can place on the entity's representations relating to the physical condition and quantities of the inventory. The most common physical inventory count methods are
However, there may be instances in which resources are transmitted before the eligibility requirements are met. These resources would be reflected by the recipient as deferred revenues. (Statement 33, paragraph 21). Pension Assets The advanced funding of pension plans is an intangible asset, which is recognized by an employer for contributions to a pension plan, which were greater than pension expense. This asset will be amortized against the pension costs of the employer when due. Capital Assets Governmental entities are responsible for accounting for, controlling, and reporting both current and capital assets. Capital assets have certain properties that distinguish them from other types of assets:
Basis of Capital Assets. Capital assets are included in the financial records at cost. In some situations, the purchase or acquisition documents may not be available for capital assets already on hand. If reliable historical records are not available, an estimate or appraisal of the original cost based on other information, such as price index levels at time of acquisition, may be used. The intent of such valuation is to record a fair value at the date of acquisition and not expend excessive resources in ascertaining exact costs. If capital assets are acquired by gift, then the fair value on the date received is the appropriate amount to include in the capital asset records. Capital assets may be acquired by several methods:
Capital Asset Reporting. GASB Statement 34 establishes reporting requirements for general government capital assets. Previously, financial statement presentation for capital assets of the general government was limited to the general fixed asset account group in the combined balance sheet. No depreciation was recognized on these assets. However, Statement 34 establishes the following new reporting requirements for capital assets:
[back to top] Capitalization Thresholds, Estimated Useful Lives, and Depreciation Methods for Capital Assets Given the new requirements in Statement 34 to depreciate general capital assets, governments must establish a range of policies regarding capitalization thresholds for capital assets, estimates for useful lives, and depreciation methods. Statement 34 does not prescribe policies for any of these areas; however, note disclosure is required. Management is granted discretion to determine appropriate policies for control purposes in accordance with the laws and regulations under which the entity operates. Some states have established specific regulations surrounding capital assets; therefore, school districts should consult state sources in establishing new policies. Capitalization Thresholds. Capitalization threshold refers to the dollar value threshold at which purchases of assets will be capitalized in the financial records of the governmental entity rather than be recorded as an expenditure/expense at the time of purchase. Many assets having useful lives greater than one year do not have values that are material to the entity's financial statements. Additionally, the costs of tagging, tracking, and accounting for numbers of immaterial items may be considered excessive by the entity. As a result, many local governments establish capitalization thresholds that exclude reporting these items as capital assets and instead rely on systems other than the financial management system for tracking and control purposes (e.g., PC inventories, building equipment lists, maintenance systems). In determining an appropriate capitalization threshold, entities should consider the following factors:
Finally, local governmental entities should review applicable state and federal requirements related to asset capitalization in determining appropriate policies. For example, the federal government uses a dollar threshold of $5,000 for federal grant management purposes. This threshold may have an impact on an entity's policies, particularly as it relates to capital assets that are acquired with federal grant funds. Estimated Useful Lives. The estimated useful life of an asset is the period (of months or years) that the asset will be used for the purpose for which it was purchased. In determining the estimated useful life of an asset, consideration must be given to the asset's present condition and intended use, maintenance policy, and how long the asset is expected to meet service and technology standards. School districts may use general guidelines obtained from professional or industry organizations, information on comparable assets of other school districts/governments, and internal historical data. The determination of appropriate estimated useful lives is a management decision that is affected by a number of factors:
Depreciation Methods. GASB Codification Section 1400.113 states that "depreciation expense should be measured by allocating the net cost of depreciable assets (historical cost less estimated salvage value) over their estimated useful lives in a systematic and rational manner." Although GASB requires governmental entities to depreciate capital assets (other than nonexhaustible assets), the Statement does not prescribe the method. As a result, depreciation methods are a management decision that should be based on the resources necessary to determine the various calculations and the capabilities of asset management systems. In addition to composite or group methods, any established depreciation method may be used (e.g., straight-line, sum-of the-years' digits, or double-declining balance). Depreciation may be calculated for individual assets or it may be determined for a
To simplify the calculations involved, the composite method may be used to calculate depreciation expense. It is applied to a group of similar assets or dissimilar assets in the same class, using the same depreciation rate, but not across classes of assets. The estimated life for the group may be based on the individual weighted average, the simple average of the useful lives of the assets in the group, or the weighted average or assessment of the life of the group as a whole. This method assumes no salvage value for assets; therefore, it simplifies the calculations and the recording of asset dispositions. Works of Art and Historical Treasures. Works of art, historical treasures, and similar assets are a special class of capital assets that may require developing a specific capitalization and depreciation policy. These assets are defined as items held singly or in collections that meet all of the following conditions (Statement 34, paragraph 27):
Depreciation is not required for those capitalized collections or individual items that are considered to be inexhaustible. Inexhaustible collections of individual works of art or historical treasures are those with extraordinarily long useful lives. Because of their cultural, aesthetic, or historical value, the holder of the asset applies efforts to protect and preserve the asset in a manner greater than that for similar assets without such cultural, aesthetic, or historical value. Technology Assets. Technology-related assets are a class of capital assets that may require special treatment and reporting by school districts based on local or state reporting and accountability requirements or policies. Although technology assets are not dissimilar from other capital assets such as vehicles or furniture and fixtures, the resources dedicated to the installation and ongoing support and use of technology by school districts have resulted in an increased level of interest by policymakers and citizens related to the use of resources dedicated to these purposes. Thus, many school districts have instituted special accounting and reporting practices associated with expenditures for technology-related assets. To facilitate the proper accounting and reporting of technology expenditures by school districts, chapter 6 (Account Classification Descriptions) of this handbook establishes a number of expenditure and asset reporting codes. As chapter 6 outlines, school districts should account for technology-related expenditures according to the following principles:
Infrastructure Assets. Infrastructure assets are long-lived capital assets that are normally stationary in nature and that can be maintained for a significantly greater number of years than most capital assets. Infrastructure assets include
Reporting Requirements.Infrastructure assets have several reporting requirements:
Valuation of Infrastructure Assets.Infrastructure assets are reported at historical cost or estimated historical cost. If a determination of the historical cost is not viable because of incomplete records, an estimated historical cost may be determined in the following ways:
If entities choose the modified approach for reporting general infrastructure assets, they are required to present information on condition and on estimated versus actual maintenance as required supplementary information (RSI). If the governmental entities report eligible infrastructure assets using the modified approach, additional schedules and disclosures are required as RSI. Entities should consult their external auditors and the detailed disclosure requirements outlined in Statement 34 to determine policy decisions concerning the modified approach of infrastructure asset reporting. What states that accounting information is based on actual cost?The cost principle means items need to be recorded as the actual price paid. It is the same way when a buyer buys products, and the recording is done based on the price paid. In short, the cost principle is equal to the amount paid for each transaction.
Which accounting principle states that purchase of assets must be recorded at its acquisition price?A historical cost is a measure of value used in accounting in which the value of an asset on the balance sheet is recorded at its original cost when acquired by the company.
Are assets recorded at cost or market value?11.2 When a fixed asset is acquired in exchange for shares or other securities in the enterprise, it is usually recorded at its fair market value, or the fair market value of the securities issued, whichever is more clearly evident.
Which accounting concept states that all assets should be recorded in the books of accounts at their historical cost?The concept according to which assets are recorded in the books of accounts at the price at which they are acquired or purchased is called cost concept.
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