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RES 2025-36 Approving a Revised Capital Assets PolicyCITY OF OTSEGO COUNTY OF WRIGHT STATE OF MINNESOTA RESOLUTION NO: 2025-36 APPROVING A REVISED CAPITAL ASSETS POLICY WHEREAS, the City previously adopted a Capital Assets Policy on June 13, 2016; and WHEREAS, the City has made certain revisions within the Capital Assets Policy; and WHEREAS, the City Council has met to discuss and review the revised Capital Assets Policy; and WHEREAS, the City Council has determined that the revised Capital Assets Policy shall be in force and effect upon the date of adoption of this resolution. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF OTSEGO, MINNESOTA: 1. That the revised Capital Assets Policy as attached hereto is hereby adopted effective August 11, 2025. 2. That the following City policies previously adopted are no longer in force and effect: a. Capital Assets Policy; adopted June 13, 2016. ADOPTED by the Otsego City Council this 11th day of August, 2025. MOTION BY: Dunlap SECONDED BY: Tanner IN FAVOR: Stockamp, Dunlap, Goede, Lund, and Tanner OPPOSED: none CITY OF OTSEGO af t h Jessica L. Stockamp, Mayo ATTEST: Audra J. Etzeh' City Clerk 1 CAPITAL ASSET POLICY ADOPTED: August 11, 2025 (Resolution 2025-36) PURPOSE It is the policy of the City of Otsego to maintain appropriate procedures regarding the procurement, management, and disposal of all capital assets in accordance with Minnesota Statutes and Governmental Accounting Standards Board (GASB) Statements. This Capital Assets Policy establishes criteria for reporting capital assets within the City’s financial statements to provide users with consistent and comparable information for the current and all future fiscal periods. CAPITAL ASSET DEFINITION The term capital assets include land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure, and all other tangible or intangible assets that are used in operations that have initial useful lives in excess of five years, with an exception for intangible assets as specified later in this policy. Items acquired for sale, rather than for use in operations, are not capital assets. They are treated like sales inventories and investments for accounting and financial reporting purposes. Capital assets are reported in the applicable governmental or business-type activities columns in the City’s government- wide financial statements, and within the enterprise funds in the City’s proprietary funds financial statements. CAPITALIZATION THRESHOLDS For financial reporting purposes only, the City will classify and establish capitalization thresholds for each asset class as follows: Construction in Progress asset costs will be accumulated if the estimated asset amount is expected to exceed the respective thresholds defined above and will be capitalized upon completion. Asset Class Threshold Land 10,000$ Buildings & Building Improvements 100,000$ Land Improvements 50,000$ Machinery & Equipment 25,000$ Infrastructure 100,000$ All Other Assets (and Intangible Assets)25,000$ Group Asset Purchases 100,000$ 2 Group Asset Purchases In certain instances, the City of Otsego will capitalize assets where the individual asset costs are less than the defined capitalization thresholds defined in this policy if those assets in the aggregate are significant and meet the group asset capitalization threshold defined in this policy. Examples of assets that may not meet the threshold on an individual basis, yet could meet the threshold for group assets include, but are not limited to computers, radios, office furniture, library books, etc. To be considered a group asset for capitalization, the purchase will exceed the threshold defined in this policy and meet all the following criteria: • Assets will be of similar asset useful lives • Assets will be of similar asset classes • All the grouped assets must be disposed of at the same time (i.e., not individual dispositions) REPORTING CAPITAL ASSETS Capital assets are reported at their historical cost. The historical cost of a capital asset should include the cost of the asset itself and the following: • Ancillary charges necessary to place the asset into its intended location (e.g., freight charges, licenses, taxes) • Ancillary charges necessary to place the asset into its intended condition for use (e.g., installation and site preparation charges) A cost should only be capitalized if it is (1) directly identifiable with a specific asset and (2) only if it is incurred after the acquisition of the related asset has come to be considered probable (i.e., “likely to occur”). For example, a study to determine the best location for a building or a feasibly study would not be capitalized while legal costs to acquire property would be capitalized. The historical cost of a capital asset should include the cost of any subsequent additions or improvements but exclude the cost of repairs and maintenance. An addition or improvement, unlike repairs or maintenance, either enhances a capital asset’s functionality (effectiveness or efficiency), or it extends a capital asset’s expected useful life. For example, mill and overlays or periodically resurfacing a new road would be treated as a repair (the cost would not be capitalized), while reconstructing a road or adding a new lane constitutes an addition (a cost that would be capitalized). Additional examples of repair and maintenance activities include the repaving of trails, the replacement of heating and cooling and related systems, and the exterior renovations (replacement) of building materials, roofing, or masonry. In the event the historical cost of a capital asset is not practically determinable, it will be necessary to record an estimated historical cost of the asset using alternative methods. Alternative methods include standard costing and normal costing. Standard costing estimates the historical cost of a capital asset by establishing the average cost of obtaining the same or a similar asset at the time of acquisition. Normal costing estimates historical cost based on the current cost to either reproduce or replace the capital asset, indexed by a reciprocal factor from the estimated acquisition date, i.e., taking the value of acquiring the asset new today and then discounting that amount by an appropriate inflation factor back to the date of acquisition. Assets that the City purchases at a nominal amount or are given by another party are to be recorded as donations rather than using the actual nominal cost to the City. Donated capital assets should be reported at their estimated acquisition value at the time of donation plus ancillary charges, if any. Acquisition value is the amount at which an asset could be exchanged in a current transfer at arm’s length between willing parties, other than in a forced or liquidation sale. For assets that do not have easily obtainable acquisition values, the City should use the amount it would cost them to purchase or contract the asset in question. Donations are defined as voluntary contributions of resources to the City by a non-governmental entity. A voluntary contribution of resources between governmental entities is not a donation. 3 MAJOR ASSET CLASSES Governments commonly report seven or more major classes of capital assets: 1. Land Land is generally characterized by an indefinite useful life; therefore, it is not depreciated. The cost of land should not only include its acquisition price, but also the cost of initially preparing the land for its intended use (excavation, fill, grading). Land frequently is closely associated with some other assets (e.g., land under a building or road). No matter how close this relationship may be, land should always be treated separately. Examples of items to be capitalized as land: • Purchase price or fair value at the time of gift • Commissions • Professional fees, including title searches, architect, legal, engineering, appraisal, surveying, environmental assessments, etc. • Demolition of existing buildings and improvements (less salvage value) • Accrued and unpaid taxes at the date of purchase • Other costs incurred in acquiring the land • Permanent right-of-way 2. Land Improvements Land Improvements are permanent (i.e., non-movable) improvements, other than buildings, that add value to land but do not have an indefinite useful life as further identified below. These are also considered improvements that prepare land for its intended use. Movable items should be classified as machinery and equipment. Examples of items to be capitalized as land improvements are: • Fencing and gates • Landscaping and retaining walls • Parking lots, driveways, and parking barriers • Outside sprinkler and irrigation systems • Recreation areas, skate parks, playgrounds, and athletic fields • Splashpads, outdoor pools, and water parks • Paths and trails • Fountains and memorials • Land excavation, fill, grading, drainage, and utility installation • The removal, relocation, or reconstruction of property owned by others, such as power, telephone, and railroad lines, and retaining walls, parking lots, fencing, and landscaping 3. Buildings and Building Improvements Buildings are permanent structures that are attached to land, have a roof, are partially or completely enclosed by walls, and are not intended to be transportable or movable. The City can elect to report major components of buildings as separate capital assets in their own right, when these components have a significantly shorter estimated useful life than the structure to which they relate (e.g., HVAC). Certain buildings or structures that are an ancillary part of infrastructure networks, such as a water pumping station, should be reported as infrastructure rather than as buildings. Examples of items to be capitalized as buildings include: 4 Purchased Buildings • Original purchase price • Expenses for remodeling, reconditioning, or alterations to make it ready for its intended purpose • Environmental compliance (i.e., asbestos abatement, radon mitigation) • Professional fees • Cancellation or buyout of existing leases • Other costs required to place or render the asset into operation Constructed Buildings • Completed project costs • Cost of excavation, grading, or filling of land for a specific building • Expenses incurred for the preparation of plans, specifications, and blueprints • Building permits • Professional fees • Costs of temporary buildings used during construction • Permanently attached fixtures that cannot be removed without impairing the use of the building • Additions to buildings (i.e., expansions, extensions, or enlargements) Building improvements include capitalized costs that materially extend the useful life of a building, increase the value of a building, or both. Building improvements should not include maintenance and repairs done in the normal course of business. If practical, the costs of an improvement are normally added to the cost of the related structure, rather than treating it as a separate asset. Examples of items to be capitalized as building improvements include: • Conversions of attics, basements, etc. into usable office space • Structures attached to the building such as garages, enclosed stairwells, etc. • Installation or upgrade of heating and cooling systems, including ceiling fans and attic fans • Original installation or upgrade of wall or ceiling covering such as carpeting, tiles, paneling, or parquet • Structural changes such as reinforcement of floors or walls, installation or replacement of beams, rafters, joists, steel grids, or other interior framing • Installation or upgrade of window or door-frames, upgrading windows or doors, built-in closet and cabinets • Interior renovation of casings, baseboards, light fixtures, and ceiling trim • Exterior renovations (original installation) of building siding, roofing, or masonry • Installation or upgrade of plumbing and electrical wiring • Installation or upgrade of telecommunication systems • Other costs associated with the above improvements Examples of items considered repairs or maintenance in nature and should not be capitalized as buildings or building improvements include: • Adding, removing, or moving of walls relating to rehabilitation and renovation projects • Improvement projects of minimal or no added life expectancy and/or value to the building • Plumbing or electrical repairs • Cleaning, pest extermination, or other periodic maintenance • Interior decoration (i.e., draperies, blinds, curtain roads, wallpaper) • Exterior decoration (i.e., detachable awnings, uncovered porches, decorative fences) • Maintenance-type interior renovation including repainting, touch-up plastering, replacement of carpet, tile, or pane sections, and refinishing of sinks and fixtures • Replacement of a part or component of a building with a new part of the same type and performance capabilities • Any other maintenance-related expenditure which does not increase the value of the building 5 4. Machinery and Equipment Machinery and equipment include physical movable personal property such as vehicles, furnishings (i.e., furniture, office equipment, etc.), and similar movable items used for operations for which the benefit extends beyond five years from the date of delivery. These are directly related to the purchase and preparation of the asset for its intended use. Personal property paid jointly by the City and other governmental entities should be capitalized by the entity responsible for future maintenance. Examples of expenses to be capitalized as machinery and equipment include: • Original contract or invoice price • Freight and delivery charges • Handling and storage charges • In-transit insurance charges • Sales, use and other taxes imposed on the acquisition • Installation charges • Registration and titling • Charges for testing and preparation for use • Cost of reconditioning used items that substantially extend the life of the asset (i.e., engine replacement or rebuild) • Parts and labor associated with the construction of equipment, machinery, or vehicles Note that the cost of extended warranties and/or maintenance agreements, which can be separately identified from the cost of the equipment, machinery, or vehicle, shall not be capitalized. Additionally, the trade-in value of vehicles and/or equipment received shall be added to the net purchase price of the applicable capital asset at the time of capitalization. Such trade values should be reported as an addition to the capital asset and related gain on sale of equipment in the enterprise (proprietary) funds. Such activities do not take place on the governmental fund financial statements but instead will be recorded on the government-wide financials for governmental activities in accordance with the Governmental Accounting Standards Board. 5. Infrastructure Infrastructure assets are long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets (i.e., roads, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems). Generally, the cost of buildings associated with infrastructure should be reported separately as buildings rather than as part of the cost of the infrastructure. The exception to this rule is buildings that are purely ancillary to a network or subsystem of infrastructure (e.g., road maintenance structures such as shops and garages associated with a highway system and water pumping stations associated with water systems). Examples of infrastructure assets include: • Roads, streets, curbs, gutters, paved trails, and sidewalks • Bridges • Water wells, including the initial cost for drilling, the pump, and its casing • Water and sanitary sewer systems • Drainage and storm water systems • Street lighting systems • Signage 6 6. All Other Assets (and Intangible Assets) This asset class is used for assets that do not fit into one of the other major asset classes previously described. This class also includes intangible assets that are excluded from GASB Statement No. 96, Subscription-Based Information Technology Arrangements (SBITAs) (see Subscriptions) but are subject to GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets. As noted, all other capital assets include assets that are subject to GASB Statement No. 51, which details the criteria and specifications of accounting for intangible assets. There are several requirements that must be met to be considered an intangible asset: • Having a lack of physical substance, is nonfinancial in nature, and have a useful life greater than one-year. Income generating assets and goodwill from governmental combinations are excluded from consideration • The asset must be identifiable and can be separated or divided from the entity through the sale, transfer, exchange, or by contractual obligation • The useful life of the asset is limited by its contractual or legal provisions • Capitalized assets will be amortized instead of depreciated on the financial statements Examples of intangible assets include: • Easements • Permits and licenses (non-GASB 96 SBITA related) • Water, timber, and mineral rights • Patents • Copyrights • Trademarks • Internally generated Internally generated assets (i.e., computer software, websites) are those that were developed or purchased (one- time outlay, no subscription-related requirements in accordance with GASB No. 96) for internal use. These assets should be capitalized if the cost of the software exceeds capitalization thresholds and is depreciated over the software’s estimated useful life. Examples of expenses to be capitalized as computer software include: • External direct costs of materials and services (i.e., third-party fees for services) • Costs to obtain software from third parties • Travel costs incurred by employees in their duties directly associated with development • Payroll and payroll-related costs of employees directly associated with or devoting time to encoding, installing, or testing • Costs to develop or obtain software that allows for access or conversion of old data by new information systems Note that upgrades and enhancements should only be capitalized to the extent that they increase the functionality of the product. 7. Construction In Progress This asset class is used for costs incurred to construct or develop an asset before it is substantially ready to be placed into service, at which time it is reclassified into the appropriate major asset class. 7 DEPRECIATING CAPITAL ASSETS Depreciation is the process of allocating the cost of a tangible asset to the periods of benefit. The City's Capital assets shall be depreciated over their estimated useful life with the exception of the following: • Inexhaustible assets, i.e., land, and land improvements that do not require maintenance or replacement, e.g., certain works of art and historical treasures • Infrastructure assets reported using the modified approach and construction work-in-progress • Construction work-in-progress For financial purposes, the City will use the straight-line method of depreciation, which allocates the cost evenly over the life of the asset. Generally, at the end of an asset’s life, the sum of the amounts charged for depreciation in each accounting period, or accumulated depreciation, will equal the original cost less salvage value. Note that the City will record the partial year depreciation of capital assets in the year of acquisition or that were sold and/or scrapped at the time of disposition (i.e., purchase, sale of assets, etc.). CAPITAL ASSETS ESTIMATED USEFUL LIFE The City’s capital assets are depreciated over the following estimated useful lives derived from the Internal Revenue Service Alternative Depreciation System (ADS): Land (and some Intangible Assets) Indefinite life, not depreciated Land Improvements Fencing and gates 20 years Landscaping and retaining walls 20 years Parking lots, driveways, and parking barriers 20 years Outdoor sprinkler and irrigation systems 20 years Splashpads, outdoor pools, and water parks 20 years Tennis, pickleball, and basketball courts, and skate parks 20 years Fountains and memorials 20 years Outdoor lighting 20 years Recreation areas and playgrounds 15 years Athletic fields and bleachers 15 years Paths and trails 15 years Septic systems 15 years Other improvements not listed above 15-20 years Buildings and Building Improvements Buildings 40 years Temporary and portable buildings 25 years Roof 20 years HVAC systems 20 years Electrical 20 years Plumbing 20 years Sprinkler system 20 years Elevators 20 years Floor covering other than carpet 15 years Interior construction 15 years Security and fire alarm system 10 years Cabling 10 years Interior renovation 10 years Carpeting 7 years Other buildings and building improvements not listed above 7-40 years 8 Machinery and Equipment Firefighting trucks 15 years Athletic equipment 10 years Telecommunications equipment 10 years Fire department equipment 10 years Furniture and fixtures (excluding structural components) 10 years Grounds equipment (mowers, tractors, bobcats) 10 years Kitchen equipment (appliances) 10 years Lab equipment 10 years Law enforcement equipment 10 years Custodial equipment 10 years Business machines and office equipment 7 years Audio visual equipment 6 years Heavy general purpose truck and equipment (weight > 13,000lbs) 6 years Cars, light general purpose trucks (weight < 13,000lbs) 5 years Photocopiers 5 years Computer equipment and software 5 years Machinery, tools, and other equipment not listed above 5 years Infrastructure and Other Improvements Water, sanitary sewer, storm sewer systems 40 years Roads, streets, curb, and gutter 25 years Paved trails and sidewalks 20 years Bridges 20 years Parking lots, driveways, and parking barriers 15 years Other infrastructure and improvements not listed above 15-50 years The estimated useful lives of capital assets are intended to be guidance, not absolute. The estimated useful life of a capital asset may be adjusted based on the professional judgment of a qualified individual in the Finance Department. Determinations must be made on a case-by-case basis. SALE/DISPOSITION OF CITY ASSETS Department Heads are to review a capital asset listing each year pertaining to their department. They are responsible for notifying the Finance Department of any purchases not already included in the listing as well as any sales or dispositions of assets (including trade-ins). This will help ensure the City’s asset listing is current and accurate. Per Minnesota State Statute Section 15.054, officers (elected officials and employees who can influence the decision making related to the sale or disposition of the asset in question) and employees of the City are generally prohibited from selling City-owned assets to another officer or employee of the City. This prohibition does not apply to the sale of items acquired or produced for sale to the general public in the ordinary course of business. In addition, City employees and officers are allowed to sell City assets if the sale is in the normal course of their duties. Both City employees and officers are also subject to Minnesota Statute Sections 471.87 through 471.88 regarding conflicts of interest for the sale or contract of goods/services. Assets no longer needed for public purposes can be sold to a City employee (but not to an officer) under the following conditions: • There has been reasonable public notice and the property is sold by public auction or sealed bid • The employee is the highest responsible bidder • The employee who buys the property must not be directly involved in the public auction or sealed bid process There is no exception that allows the sale of City-owned real estate to a City officer. 9 These prohibitions indicated above do not apply to the sale of items acquired or produced for sale to the general public in the ordinary course of business. In addition, such City assets should follow Minnesota Statute Section 471.345, Subdivision 17 regulating the sale of surplus equipment, materials or supplies through a competitive auction environment (and advertised in a newspaper of general circulation, as applicable). LEASES Any City leases that meet the GASB Statement No. 87, Leases determination as a lessee asset lease shall be recorded as leased asset on the City annual financial statements subject to the materiality thresholds on the fund-level or government-wide basis, as considered applicable. If the leased assets are considered subject to GASB No. 87, as specified above, they’re to be considered right-to-use lease assets and will have offsetting lease liabilities. These assets are to be initially measured at the present value of payments expected to be made during the lease term, adjusted for lease payments made at or before the lease commencement date, plus certain initial direct costs. Subsequently, the lease asset is to be amortized, in a systematic and rational manner over the shorter of the lease term or the useful life of the underlying asset. All remaining financial reporting requirements and note disclosures will follow the guidance defined in the standard. For those leases that do not meet any of the above conditions, they shall be recorded as an operating lease and reported in the notes of the financial statements in accordance with the GASB Statement described above. SUBSCRIPTIONS Any City subscriptions that meet the GASB Statement No. 96, Subscription-Based Information Technology Arrangements (SBITAs) determination as a SBITA asset shall be recorded on the City annual financial statements subject to the materiality thresholds on the fund-level or government-wide basis, as applicable. A subscription (SBITA), as defined by GASB, is a contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction. If the SBITA is considered subject to GASB No. 96, as noted above, they are considered to be SBITA assets. These are considered to be right to use subscription (intangible) assets and will have offsetting subscription liabilities. These assets are to be initially measured as the sum of the present value of payments expected to be made during the subscription term, payments associated with the SBITA contract made to the SBITA vendor at the commencement of the subscription term, when applicable, and capitalizable implementation costs, less any SBITA vendor incentives received form the SBITA vendor at the commencement of the SBITA term. Subsequently, the SBITA assets are to be amortized, in a systematic and rational manner over the shorter of the subscription term or the useful life of the underlying IT assets. All remaining financial reporting requirements and note disclosures will follow the guidance defined in the standard. For those SBITAs that do not meet any of the above conditions, they should be recorded as an intangible asset in accordance with GASB No. 51 as other capital assets and reported in the notes of the financial statements in accordance with the GASB Statement described above. POLICY HISTORY This is the current and effective version of the Capital Assets Policy and supersedes and replaces past versions that were adopted on these dates: - June 13, 2016