Best Practices with Non-Capital Assets

As a government finance professional, you likely have a strong handle on capital assets.  These assets comprise the majority of most government-wide net positions and enterprise fund balances.  Therefore, these items are budgeted, identified, tracked, inventoried, insured, depreciated, and selected for audit testing.  In summary, Capital Assets receive a significant portion of our attention and time.  The short definition of Capital Assets from paragraph 19 of GASB Statement 34 is:

"…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 and that have initial useful lives extending beyond a single reporting period." 

However, over time inflation takes effect, our states, counties, and local governments must determine the financial cut-off that designates a capital asset.  GFOA provides a best practice for these thresholds, which can be found here.

The City of Rockledge, Florida, recently passed legislation and administrative code changes that have moved the asset capitalization threshold to items with an initial purchase value of $5,000 or more.  Our City's previous threshold for capitalization was $1,000.  Additionally, the state has mandated the continued tracking of "attractive" assets below the capitalization threshold.  Attractiveness, it seems, is in the eye of the beholder.  However, guidelines provided in the administrative code include those assets that require additional attention to "ensure legal compliance, protect public safety, and avoid potential liability, or to compensate for heightened risk of theft." In enacting policy and procedures to empower city employees and departments to comply with this change in legislation, our City was faced with the general who, what, when, where, why, and how's of this newly expanded group of assets.  Complicating the matter is that some assets were formally capitalized, some of which continue to depreciate.  While not everyone who reads this article is immediately faced with such a decision, the exercise our City undertook may benefit you in the future.

Our roadmap for success in undertaking this endeavor was to perform the following actions:

1.       Identify the departmental parties involved in decision making as our procurement is decentralized

2.       Identify the individuals who have a working knowledge of procurement, storage, operation, and disposal of these items

3.       Ensure the appropriate leadership who can champion and enact any required changes are involved

4.       Consult our local and state ordinances and statutes to ensure we are compliant with the law and to determine any changes necessary to local ordinances

5.       Consult with our legal help, such as the City Attorney

6.       Consult GFOA best practices: Here is a list of some of the best practices utilized in our exercise:

• https://www.gfoa.org/materials/control-over-items-that-are-not-capitalized
• https://www.gfoa.org/materials/capital-asset-management
• https://www.gfoa.org/materials/inventories-tangible-capital-assets

7.       Create a checklist/ rubric of what your entity must legally do, and what best practices say you should do (required versus recommended practices)

8.       Meet with the identified group (potentially many times) and talk through the current process and policies, identify practices that must change as well as areas where efficiencies of control improvements can be made; this opportunity comes by rarely

9.        Designate a few individuals to document this/ these discussion(s)

10.   We decided it was best to separate policy changes from procedural changes, as our entity enacts these changes at different levels and through differing channels (Council for policy, City Management for procedures)

11.   Consult your auditor at key moments to avoid setting yourself up for failure

• Policy changes must still comply with GASB
• Procedural changes should be considered with internal controls in mind
• Determine what will happen to the property that is changing categorization, especially property still in service and being depreciated

12.   While going through this discussion, inventory all capital and non-capital assets to identify how your proposed policy and procedural changes will impact your entity

13.   Take the appropriate steps to pass your policy and procedures

14.   Take the administrative steps to enact your new policy and procedures

15.   Schedule reviews of this policy within the policy itself; we opted for staff review annually, and Council review every three years

At the time of this writing, we are working through the administrative steps to enact our new policy and procedures.  We have had many follow-up discussions, both internally and with the auditors.  We have constructed and are working from a timeline to administer our implementation.  A schedule of deliverables has been created for the departments involved.  There were many benefits gained from this process, including:

Operational insights

• Enhanced identification of important attractive non-capital items
• Scheduled inventorying with specified asset custodians
• Scheduled reporting to the City Manager and Finance

Additionally, many aspects of our Capital Asset Policy and procedures were addressed, yielding enhanced workflows, understanding amongst and between departments, and better internal controls for future reporting.  Quality data can be utilized for better capital improvement budget planning and reporting. 

Finally, while this process will likely look slightly different for each entity, the benefits would likely be similar in nature.While the task may appear daunting, by following best practices and ensuring compliance with the law, a case can be made for the importance of the exercise, and the efficiencies gained will pay dividends to our small governmental operations.