ITEM 3.5 Adoption of Captial Assests policyOtSeTO
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MINNESOTA
DEPARTMENT INFORMATION
Request for
City Council Action
ORIGINATING DEPARTMENT:
REQUESTOR:
MEETING DATE:
Administration
Adam Flaherty, Finance Director
June 13, 2016
PRESENTER(s):
REVIEWED BY:
ITEM #:
Consent Agenda
City Administrator Johnson
3.5
AGENDA ITEM DETAILS
RECOMMENDATION:
It is recommended by staff that the City Council adopt a new policy for the City's capital assets.
ARE YOU SEEKING APPROVAL OF A CONTRACT?
IS A PUBLIC HEARING REQUIRED?
No
No
BACKGROUND/JUSTIFICATION:
The City currently does not have a formal capital assets policy. The Finance Director has developed a
policy that has established criteria for reporting of capital assets within the City's financial statements in
order to provide the users with consistent and comparable asset information for all future fiscal periods.
Having such a policy is a recommended best practice from the National Government Finance Officers
Association (GFOA); and has been a recommendation from the City's auditors in the past.
The primary criteria within the policy are as follows:
- Defining a threshold for capitalization of assets by major asset class.
- Setting guidelines for estimated useful lives of assets for depreciation purposes.
SUPPORTING DOCUMENTS: ATTACHED NONE
• City of Otsego Capital Assets Policy
POSSIBLE MOTION
Please word motion as you would like it to appear in the minutes.
-Motion to adopt the City's capital asset policy.
BUDGET INFORMATION
FUNDING: BUDGETED:
N/A N/A
ACTION TAKEN
❑ APPROVED AS REQUESTED ❑ DENIED ❑ TABLED ❑ OTHER (List changes)
COMMENTS:
CITY OF OTSEGO
CAPITAL ASSET POLICY
OVERVIEW
The City of Otsego annually prepares financial statements in accordance with accounting
principles generally accepted in the United States of America (GAAP), with further applicability
guidance from the Governmental Accounting Standards Board (GASB).
PURPOSE
To establish criteria for reporting of capital assets within the City's financial statements in order
to provide the users with consistent and comparable asset information for the current and all
future fiscal periods.
DEFINITIONS
Capital assets are assets that: 1) are used in City operations; and 2) have an initial life in excess
of three years. The term embraces both tangible assets (land, buildings, site & building
improvements, machinery & equipment, infrastructure) and intangible assets (easements,
software, mineral rights).
Assets acquired for the purpose of sale or investments do not qualify as capital assets,
regardless of their form, because they are not used in operations.
POLICY
The cost to acquire, construct, or improve a capital asset is not recognized immediately as
expense when incurred, but instead is deferred (capitalized) and allocated over the estimated
useful life of the capital asset in the form of depreciation expense (tangible assets) or
amortization expense (intangible assets).
Capitalizable costs include not just the cost to purchase or construct an asset, but also any
capitalized interest and ancillary charges (licenses, taxes, freight, installation, etc) necessary to
place the asset into use.
Donated capital assets should be reported at the estimated fair market value at the time of
donation, plus any ancillary charges incurred.
DRAFT —June 1, 2016
CAPITALIZATION THRESHOLDS
In general, the capitalization threshold for any individual capital asset is $5,000, Due to the
nature and scope of some of the City's assets, the following thresholds were established for
each respective major asset class.
Asset Class
Threshold
Land
$
-
Buildings & Improvements
$
50,000
Land & Site Improvements
$
25,000
Machinery & Equipment
$
5,000
Street Infrastructure
$
100,000
Utility System Infrastructure
$
100,000
*All land qualifying as an asset will be capitalized.
DEPRECIATION & USEFUL LIVES
The City's capital assets will be depreciated using the straight-line method over the assets
estimated useful life. In general, an asset needs to have at least a useful life in excess of three
years. Due to the nature and scope of some of the City's assets, the following guidelines have
been established for each respective major asset class.
Asset Class
Land
Buildings & Improvements
Land & Site Improvements
Machinery & Equipment
Street Infrastructure
Utility System Infrastructure
*Land assets are not depreciated.
Estimated
Useful Life
n/a
10 - 40 Years
5 - 20 Years
3 - 15 Years
25 Years
40 Years
DRAFT —June 1, 2016
BETTERMENT
In order for costs related to existing capital assets to be capitalized, the cost must exceed the
thresholds defined earlier in this policy, and must meet at least one of the following criteria:
1] Extend the useful life of the asset beyond its initial estimate.
2] Increase the service capacity of the capital asset.
MAINTENANCE
Any outlay that does no more than return a capital asset to its original condition, regardless of
amount, will be classified as maintenance and repairs by the City, and will be recognized as
expense as they are incurred.
DISPOSITION
All sales of City assets will be completed in accordance with applicable Minnesota Statutes. Any
disposition via trade-ins of City assets will be approved by the City Council.
All capital assets will be examined with respect to condition, efficiency of use, and technological
obsolescence each year; this is the responsibility of the department who is the primary user of
each respective capital asset.
DRAFT —June 1, 2016