Consider how many capital asset purchases your municipality makes each year. The capital assets purchased and disposed of include everything from water and sewer system lines to copiers used in daily operations. Many governmental entities face the challenge of properly accounting for these purchases and sales. It is imperative to track and report them to the finance department to ensure that the capital asset balances presented in the government entity’s annual financial report are accurate and represent the actual capital assets the entity has in its possession. There are a number of common capital asset reporting issues encountered by municipalities.
It may be difficult for the finance department to report the capital asset balances accurately. Two common hurdles that a governmental entity may encounter are:
- The capital asset listing contains assets that the governmental entity no longer possesses.
- The capital asset listing is missing key information required to physically identify the asset.
Each of these hurdles is addressed below in more detail, with recommendations for overcoming them.
Disposal of assets
Capital asset listings for governmental entities are typically very large and contain assets from many years ago that are likely still in use, such as buildings or land. However, it is common for a capital asset listing to contain assets that may have been disposed of long ago, which were unidentified. This is partially because many governmental entities focus heavily on the capital assets that are being purchased each year as they require approvals and additional documentation that flows directly through the finance department. Also, disposal of capital assets does not always result in the governmental entity receiving proceeds; therefore, individual departments may dispose of capital assets (due to obsolescence, malfunction, etc.) without notifying the finance department.
To help mitigate the risk that disposed capital assets will not be removed from the listing, capital asset policies should be in place that include capitalization thresholds for each major capital asset category as well as detailed capital asset purchase and disposal procedures. Further, strong communication of these policies by the finance department to all other departments of the governmental entity is key to ensure that they are aware of the requirements and are adequately tracking their purchases and disposals throughout the year and reporting this information to the finance department.
Since most capital asset listings for governmental entities were set up many years ago, governmental entities may be challenged to know which description corresponds to which asset. Typically, this happens because the description is too vague. For example, a governmental entity purchases a truck for public works and labels it on the capital asset listing as “Truck.” While this description states what the asset being added to the listing is, it does not contain any other specific information such as a model number, vehicle identification number (VIN), etc. The description should contain enough detailed information so that any person in the governmental entity could physically verify that the asset exists from the information contained in the listing.
A best practice that could be incorporated into a governmental entity’s capital asset policies would be to require a serial number for the asset (such as a VIN), the fiscal year it was added to the listing, or some additional piece of information that would assist in identification. Assigning each purchase a unique capital asset number and tagging the actual asset is also encouraged as it provides another layer of identification.
By establishing clear policies and procedures related to the purchase and disposition of capital assets and communicating them to individual departments, the governmental entity will have a more accurate capital asset listing. Individual departments should be encouraged to review their capital asset listings periodically to help identify items that need to be removed. For federally purchased assets, Uniform Guidance requirements should be considered in the policies and procedures to ensure compliance with all grant requirements.