Loading...
HomeMy WebLinkAboutBy-law No. 2009-080 THE CORPORATION OF THE MUNICIPALITY OF BAYHAM BY-LAW NO.2009-080 A BY-LAW TO ESTABLISH TANGIBLE CAPITAL ASSET POLICIES WHEREAS subsection 11(2)of the Municipal Act,2001 provides,in part,"a lower-tier municipality and an upper-tier municipality may pass by-laws,subject to the rules set out in subsection(4),respecting the following matters: 3.Financial management of the municipality and its local boards." AND WHEREAS section 294.1 of the Municipal Act,2001 requires a municipality to follow the generally accepted accounting principles for local governments as recommended by the Public Sector Accounting Board of the Canadian Institute of Chartered Accountants. THEREFORE THE COUNCIL OF THE CORPORATION OF THE MUNICIPALITY OF BAYHAM ENACTS AS FOLLOWS: 1. THAT the Tangible Capital Asset Policies as detailed in the Municipality of Bayham PSAB 3150 Compliance Report dated April 14,2009,as prepared by Watson and Associates,be and the same are hereby adopted by the Municipality of Bayham. 2. THAT this by-law shall come into full force and effect upon final passing. READ A FIRST,SECOND AND THIRD TIME AND FINALLY PASSED THIS 4n DAY OF JUNE 2009. T r S R CLERK 1. PSAB 3150 Overview Municipality of Bayham o Beginning with the 2009 fiscal year,all local PSAB 3150 Compliance governments must move from a modified accrual — _,,4 to a full accrual accounting approach •Similar accounting approach to other levels of Council Presentation government and private sector •The primary changes for local governments: Den Wilson-Manager,Municipal Rio= o The accounting treatment for-tangible capdal assets WaLat&Associates Economists ltd o Year and reporting format(Financial Statements,FIR) June 4,2009 What is a Tangible Capital PSAB 3150 Overview Asset? • Tangible Capital Assets*(TCA's): - Inclusions: • Non-financial assets having physical substance that: • Facilities/Buildings •Are held for use In productlonfsupply at goods and services • Equipment,Furniture,Vehicles (1•oludese for rant,admin,Wrehmtion,mom.ao) . LandRand Improvements - Have a useful economic life beyond one accounting period •Are to be used on a continuing basis • Infrastructure •Are not for sale In the ordinary m•axa of nlwalinns - Exdusions: I MY idea am PSAB.3150 R c'-'d. Intangible Assets Natural Resources - Crown Lands • Works of Art&Historical Treasures PSAB 3150 J Implications Project Work Plan P • Local governments will be required to: - Create and maintain an inventory of tangible capital Moot t assets(for external reporting purposes) r•morpr • Historical cost valuation PM*lop Atailer ni 1 • Maintain a record of annual PSAB 3150 disclosure "' information i - Include non-cash expenses on the financial statements • • Modify the audited financial statement format to •,-- conform with the new full accrual approach . Meet deadline for full compliance:2009 financial statements { n Transportation Infrastructure: Progress to Date I °dads Merriam o PSAB 3150 Compliance Report Complete �. • Is. + •„�„„ •PSAB 3150 Policies ! ,. '2007 "� •Asset Data Collection(with Valuation) %balm f Ica.:Surikce •Review of new Financial Statement Presentation �+ o With Review of Oisdosure Requirements '10°' a •Review of Potential Budgeting Implications ▪ ' Meatled ,,, UM 0•02102.0 '�. o Asset Management Lifecycle Analysis tio eM1 �° i Sett �° In Currently underway aimstla • .,.: 7 ito •Substantially complete '� i12007 O lesa Mad ..w ▪Min Y.1 .wl 0%0 Not Vilm MO CIWaemn , CP1h Environmental Infrastructure: LHPI" ies,Rolling Stock,Equipment,Land,and mprovements 9r11erMur 8aidq&wer{iher dd91.p K lir Yyn or 1111 i3 gip, 9 a1M6t5f1, .,�I.M .�y.wy.,1 Oil 1W1411" F.l..b el ylIIO i1q .lyNMir AL '�'PM/rr�s 1A16:rWher aw�1, rr Ype.y.., 011.11gSkrd1 �orpo.entAll >iAftimM0d �YV IAL _ . ...a I 4. 7A A0.iW IY.1%making I biouh '°� l ..1..l11.. rh ,�rs.k lmd 1,32r.n ilnureme�ill .� 1� •i. i 1^1 . el14sal ClitS2n TCA Summary Reporting Requirements Beginning for 2009,for each major category(asset type): .11o11dt ` o Historical Cost at the beginning and end of the period kfrkc7-77^_7171= MMEMI ' 1J .N=11.3321 a Additions for the period srrtr-1 -rrr-.I a Disposals for the period it 1:7 I-^lT9^r-^.a1♦ 5r71 - AIIIMMEI a Write-downs for the period iimment "s "� o Amortization for the period AILe.,n.C.tq» slnacal•bme.t, a Accumulated Amortization at the beginning and firja of BrcWq.laid udla.dlmpmreme.tAeeh the period o Net Book Value at the beginning and end of the period 4, •Immool*imin DM .. I ('Nk!tsan rver.u' Reporting Requirements r Next Steps a Amortization method used(rate per category) PSAB 3150 Compliance o Net book value of assets not amortized 1. Council approval of PSAB 3150 Policies ■ Under ator not in service 2. Staff to update asset data for 2008 and 2009 • Nature andnd amount of contributed assets received during the period s. Preparation of 2009 Reporting Requirements a Nature and use of assets recorded at a nominal value o Nature of works of art and historical treasures held by Asset Management the government o Amount of interest capitalized during the period t Watson Associates finalize calculations in June,2009 2. Review of results with Staff C"Oftn u Wet r. Questions 1 Comments? a, (L a.e�o9-a O 3. TANGIBLE CAPITAL ASSET POLICIES Watson&Associates Economists Ltd. HABayhamlPSAB&Asset ManagementlBayham PSAB Compliance Report doc 3-1 3. TANGIBLE CAPITAL ASSET POLICIES 3.1 Background The following policies were developed through discussions with Municipal staff, taking into account the types, amounts and values of tangible capital assets in Bayham. These policies have been reviewed and accepted by the Municipality's external auditor. 3.1.1 Purpose The Canadian Institute of Chartered Accountants Public Sector Accounting Standards Board has approved the recommendations to Section PSAB 3150, Tangible Capital Assets. Starting with December 31, 2009 financial statements, all Canadian local governments will be required to account for Tangible Capital Assets at historical cost and amortize this cost over the estimated life of all assets. This policy establishes standards on how to account for and report tangible capital assets in the financial statements of the Municipality of Bayham. The standards do not apply to intangible assets, natural resources and Crown lands that have not been purchased by the Municipality. 3.1.2 Definitions a) Assets are defined as: economic resources within the control of the Municipality resulting from past transactions or events and from which future economic benefits may be obtained. b) Amortization is the allocation of the cost (less the residual value) of a tangible capital asset to operating periods as an expense over its useful life in a rational and systematic manner appropriate to its nature and use. Amortization is also commonly known as depreciation. Watson&Associates Economists Ltd. H:1BayhamlPSAB&Asset ManagementlBayham PSAB Compliance Report.doc 3-2 c) Betterment is a cost incurred which enhances the service potential of a tangible capital asset. Such expenditures would be included in the tangible capital asset's cost. Service potential is enhanced for a tangible capital asset when costs are incurred to: i. extend its useful life; ii. increase its service capacity, or previously assessed physical output; iii. lower any operating costs associated with the tangible capital assets; or iv. improve the quality of the output from the tangible capital asset. d) Capital Work-In-Progress is the cost of a Municipality's tangible capital assets under construction, constructed or in an uncompleted process of acquisition and that are not yet in service. Amortization is not applied to Capital Work-In-Progress. e) Capitalization Threshold is the value above which tangible capital assets are capitalized and reported in the financial statements t) Contributed (Donated) Assets are tangible capital assets received at no or nominal cost. The cost of a contributed tangible capital asset is considered to be equal to its fair value at the date of contribution. Some examples would include a transfer of tangible capital assets from a more senior level of government for no cost; or the receipt of roads, streetlights, and other infrastructure from a developer as part of a subdivision agreement. g) Equipment is defined as an apparatus, tool, device, machine, implement or instrument utilized to facilitate a process, function or completion of a task. Equipment also includes furniture and fixtures. It may be installed within a building, but could be moved and reinstalled at a different location, if required (it is not permanently affixed to or integrated into the building or structure in which it resides). h) Facilities (buildings) are defined under Part 1 of the Ontario Building Code as: i. a structure occupying an area greater than ten square metres consisting of a wall, roof and floor or any of them or a structural system serving the function thereof including all plumbing, works, fixtures and service systems appurtenant thereto, ii. a structure occupying an area of ten square metres or less that contains plumbing, including the plumbing appurtenant thereto, Watson&Associates Economists Ltd. H.•1BayhamlPSAB&Asset Management4Bayham PSAB Compliance Repo►t.doc 3-3 iii. plumbing not located in a structure, iv. a sewage system, or v. structures designated in the building code; i) Fair Value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction who are under no compulsion to act. j) Historical Cost is the gross amount of consideration originally given up to acquire, construct, develop or better a tangible capital asset, and includes all costs directly attributable to the asset's acquisition, construction, development or betterment, including installing the asset at the location and in the condition necessary for its intended use. Capital grants would not be netted against the cost of the related tangible capital asset. k) Infrastructure Assets are composed of linear assets and their associated specific components. Some examples would include: Transportation Infrastructure (Roads — including cycling lanes, bridges, tunnels, public transit rail line portion only, drainage systems), Utilities (telephone, gas and electrical) and Environmental Infrastructure (water delivery systems, waste water treatment, storm drainage systems). I) Intangible Capital Asset is a non-financial asset that has no substance, such as copyrights, trademarks, patents and goodwill. Intangible capital assets are separate and distinct from tangible capital assets. m) Land is defined as real property in the form of a plot, lot or area. Includes all expenditures made to acquire land and to ready it for use where the improvements are considered permanent in nature and includes purchase price, closing costs, grading, filling, draining and clearing, removal of old buildings (net of salvage), assumption of liens or mortgages, and any additional land improvements that have an indefinite life. Land is valued separately from buildings which may be erected upon it. n) Land Improvements consist of betterments, site preparation and site improvements (other than buildings) that ready land for its intended use, and which generally decay or break down over time (i.e. have a defined useful life).. Watson&Associates Economists Ltd. H.•1BayhamlPSAB&Asset ManagementlBayham PSAB Compliance Report.doc — a 3-4 o) Linear Assets are assets generally constructed or arranged in a continuous and connected network. p) Nature (of an asset) is a description of the type of asset, its characteristics, features and location. q) Net Book Value of a tangible capital asset is its historical cost, less accumulated amortization and the amount of write-downs, if applicable. r) Non-Financial assets are defined as: acquired, constructed or developed assets that do not normally provide resources to discharge existing liabilities, but instead: i. are normally employed to deliver government services; ii. may be consumed in the normal course of operations; and iii. are not for sale in the normal course of operations.(PS 1000.42) s) Pooled Tangible Capital Assets are homogenous in terms of their physical characteristics, use and expected useful life. Pooled tangible capital assets are amortized using a composite amortization rate based on the average useful life of the different assets in a group. t) Replacement Cost is the cost of replacing an asset with one that has substantially the same functionality and capacity but has a different physical form or uses the most common current technology. u) Reproduction Cost is the cost of replacing an asset with a substantially similar one, or the price of replacing an asset in its present physical form and utilizing similar technology to the original asset. v) Residual Value is the estimated net realizable value of a tangible capital asset at the end of its useful life to a local government. Also commonly referred to as salvage value. Watson&Associates Economists Ltd. H:1BayhamlPSAB&Asset ManagementlBayham PSAB Compliance Report.doc 3-5 w) Tangible Capital Assets are defined as: Non-financial assets having physical substance that: i. are held for use in the production or supply of goods and services, for rental to others, for administrative purposes or for the development, construction, maintenance or repair of other tangible capital assets; ii. have useful economic lives extending beyond an accounting period; iii. are used on a continuing basis; and iv. are not for resale in the ordinary course of operations. (PS 3150.05) x) Useful Life is the estimate of either the period over which a local government expects to use a tangible capital asset, or the number of production or similar units that it can obtain from the tangible capital asset. The life of a tangible capital asset may extend beyond its useful life. The life of a tangible capital asset, other than land, is finite, and is normally the shortest of the physical, technological, commercial, and legal life. y) Vehicle is a means of transportation, usually having wheels, for transporting persons or things or designed to be towed behind such an apparatus. Also commonly referred to as 'rolling stock'. z) Write-Down is a reduction in the cost of a tangible capital asset to reflect the decline in the asset's value due to a permanent impairment. 3.2 Inventory Collection, Valuation and Maintenance Policies 3.2.1 Asset Categories a) Asset hierarchies have been created to be used in developing and maintaining the inventory listing. The hierarchy identifies multiple "aggregation levels" which allow the inventory data to be consolidated to assist the Municipality with multiple initiatives (e.g. PSAB 3150 Financial Reporting, Financial Information Return Reporting, Budgeting and Financial Planning, and Asset Management). Please refer to Appendix A for details. b) As illustrated in the appendix to this policy, the asset hierarchies can be categorized into multiple aggregation levels such as: Watson&Associates Economists Ltd. H:1BayhamlPSAB&Asset ManagementlBayham PSAB Compliance Report.doc 3-6 i. AGGREGATION LEVEL (ASSET CODE) 1: By Asset Time - a category of assets that are objectively similar in nature or function in a municipality's operations. This categorization is required for disclosure purposes on the annual audited financial statements. A summary of asset types include: • Land • Land improvements • Equipment • Vehicles • Facilities • Infrastructure ii. AGGREGATION LEVEL (ASSET CODE) 2: By FIR Category - aggregation of assets by functional service areas, in which an asset is used, with the annual Financial Information Return (FIR) as a reference for categorization. This categorization is required to complete the Municipality's annual FIR. A summary of FIR categories used by the Municipality include: • General Government • Protection Services • Transportation Services • Environmental Services • Health Services • Recreation & Culture • Planning & Development iii. AGGREGATION LEVEL (ASSET CODE) 3: BY Budget Area - aggregation of assets by departmental service areas, in which an asset is used, with the annual Financial Information Return (FIR) as a reference for categorization. This categorization assists the Municipality with internal reporting and budgeting as well as detailed breakdowns for the annual FIR. Watson will be utilizing the data within this aggregation to prepare the Phase 3 lifecycle financial plan for the Municipality. Some examples of budget areas include: • Administration • Fire • Protective Inspection & Control Watson&Associates Economists Ltd. H:4BayhamlPSAB&Asset ManagementtBayham PSAB Compliance Report.doc 3-7 • Roadways • Waterworks • Parks • Libraries • Planning iv. AGGREGATION LEVEL (ASSET CODE)4-6: By Asset Detail - Description of the specific asset being recorded. This categorization provides for asset management related detail which better inform asset service life and capital planning. Some examples of asset detail include: • Specific land parcels • Facility roof • Gravel Roads • Sidewalks c) The hierarchies represent the applicable tangible capital asset groupings and level of asset detail for the Municipality of Bayham. d) In relation to the Facilities hierarchy, a facility or building must meet the definition contained in policy 3.1.2 to be recorded as a facility. Failure to meet the definition requires the asset to be recorded as an asset under another category (e.g. land improvement or equipment). Single Asset vs. Component Approach e) Certain complex tangible capital assets consist of a number of significant components. PSAB 3150 provides the option to record complex tangible capital assets as a 'single asset', or to record each major component as a separate asset. f) Under the 'single asset' approach, cost includes all components combined, and amortization is based on the average useful life of the entire asset. The replacements of the individual components will be expensed as incurred. Watson&Associates Economists Ltd. H:4BeyhamlPSAB&Asset Management,Bayham PSAB Compliance Reportdoc 3-8 g) The component approach requires that the cost of each component be tracked, and amortization is based on the expected useful life of each of the components. The replacement of the individual components would be eligible to be capitalized. 3.2.2 Pooled Tangible Capital Assets In circumstances where multiple tangible capital assets are similar in nature and there is little or no benefit in segregating out each individual item into separate assets, they may be grouped into 'pooled tangible capital assets'. Common characteristics of pooled tangible capital assets are: a) Pooled Tangible Capital Assets are assets normally bought or owned in quantity that are treated as one single asset for accounting purposes. b) Pooled Assets do not meet the single asset capitalization threshold individually, however when pooled together exceed the pooled capitalization threshold. c) Assets that will be pooled together will be identical or close to identical in terms of asset type and characteristics. d) The following represents a list of assets to be pooled by the Municipality: i. Furniture ii. Picnic Tables iii. Computers iv. Fire Equipment (Various) v. Curb Stops vi. Water Valves vii. Hydrants viii. Water Meters ix. Wastewater Valves e) For accounting purposes, pooled tangible capital assets will be tracked by year of purchase, with a deemed disposition occurring in the final year of useful life, with the Watson&Associates Economists Ltd. H:1BayhamlPSAB&Asset Managementlaayham PSAB Compliance Report.doc 3-9 exception of the pool for Picnic Tables. The pool for Picnic Tables will deem one tenth (1/10) of the total pool disposed of at then end of each year. 3.2.3 Capitalization Thresholds Each tangible capital asset type is assigned a capitalization threshold. Capitalization thresholds represent the minimum amounts that capital related costs must exceed before they are considered for capitalization as a tangible capital asset. This threshold will be used to determine if a related cost incurred should be recorded as a tangible capital asset or if the cost is immaterial and should be expensed in operations. In determining the capitalization thresholds, consideration has been given to: a) weighing the benefits realized versus the costs incurred in collecting and maintaining the tangible capital asset inventory for the various asset types, as some assets may be impractical or prohibitively costly to maintain in the tangible capital asset inventory; b) ensuring the total value of assets below the thresholds (and therefore not capitalized) is small enough that it will not exceed the external auditor's materiality level; and c) the impact of changes in capitalization levels on future operating budgets and performance measure reporting, which enhances comparability on a year-to-year basis and with other municipalities. Table 3-1 illustrates the capitalization thresholds (by asset type) that have been established for single assets within an asset type. Table 3-1 Single Asset Capitalization Thresholds Asset Type Municipality of Bayham Capitalization Thresholds Land $5,000 Land Improvements $5,000 Facilities $5,000 Rolling Stock(Vehicles) $10,000 Equipment $5,000 Infrastructure $20,000 Watson&Associates Economists Ltd. H:lBayhamlPSAB&Asset Management4Bayhem PSAB Compliance Report.doc 3-10 in the case of pooled tangible capital assets, the individual assets within the pool will be valued below the threshold levels shown in Table 3-1. However, when the total value of the pool is considered, it represents a significant investment and should be recorded as part of the tangible capital asset inventory. Table 3-2 represents the combined historical cost value of a TCA pool (by asset type) needed to create or maintain a pool. Please note that if a single asset exceeds the thresholds set in Table 3-1, then a pool cannot be created (must maintain as a single asset). Table 3-2 Threshold Required to Asset Type Create/Maintain a Pool of Assets Land $15,000 Land Improvements _ $15,000 Facilities $15,000 Rolling Stock(Vehicles) $30,000 Equipment $15,000 Infrastructure $60,000 Regarding annual purchases of pooled assets, any purchase that falls into one of the pooled asset categories that exceeds $1,000 will automatically be accounted for as an addition to the pooled asset. A purchase that falls below$1,000 will be expensed within the operating budget. 3.2.4 Valuation and Measurement a) Historical cost valuation of tangible capital assets is required for PSAB 3150 compliance. b) Valuation methods used when becoming PSAB 3150 compliant will be documented for review by the auditor during their year-end audit procedures. Actual historical cost will be utilized for valuing tangible capital assets purchased, constructed or developed where the information is readily available. c) For tangible capital assets with no actual historical cost values, historical cost will be estimated using alternative valuation techniques. For this purpose, replacement cost values have been are to be used and then discounted to an estimated historical cost. Watson&Associates Economists Ltd. HABayhamlPSAB&Asset ManagementlBayham PSAB Compliance Report.doc 3-11 d) The deflating or discounting process required the use of multiple indices. The indices used by asset type are as follows: Table 3-2 Historical Cost Indices Asset Type Nature Preferred Index Appendix Equipment&Rolling Stock Consumer Related Consumer Price Index Appendix F Land&Land Improvements Consumer Related Consumer Price index Appendix F Facilities/Buildings Construction Non Residential Building Appendix G Construction Price Index Infrastructure Construction Non Residential Building Appendix G Construction Price Index PSAB 3150 states that costs directly associated with preparing a tangible capital asset for its intended use can be included as part of the historical cost of the asset. Some examples of valid costs to be included: • Installation and assembly costs (payroll costs of staff directly involved in installation/assembly, contracted services); • Initial delivery costs (freight, duty, transportation services); • Site preparation costs (demolition costs, environmental cleanup); ▪ Initial testing costs to ensure the asset is functioning properly (payroll costs of staff directly involved in testing, contracted services); • Professional fees (engineering, legal, architect, environmental); 4 Internal design and inspection costs (payroll costs of staff while working directly on capital asset design/inspection); • Capitalized interest (borrowing costs) incurred during the period of time the capital asset is actively being prepared for its intended use. 3.2.5 Contributed or Donated Tangible Capital Assets PSAB 3150 requires municipalities to record contributed (or donated) assets as tangible capital assets. Examples of contributed tangible capital assets include: Watson&Associates Economists Ltd. H:kBayhamkPSAB&Asset ManagementiBayham PSAB Compliance Report doc 3-12 • A road constructed by a developer (usually as part of a developer agreement) and contributed to the Municipality; • Donated playground equipment. • The contribution/donation could be made up of an entire asset, or a partial payment of an asset. Contributed tangible capital assets will be recorded as follows: a) as assets of the Municipality; b) the timing of the recording of the contributed tangible capital asset will be at the date when ownership is acquired; c) if a development agreement is involved, ownership will be based on the terms and conditions of the development agreement; d) the cost will be considered to be equal to its fair value at the date of contribution; e) when the asset contribution date differs from the asset purchase, construction or development date by more than one year, the cost of the asset will be discounted using relevant amortization rates in order to determine an accurate value at contribution; and f) when costing data is not available from the contributor, the Municipality will use internal costing data to estimate asset value. This internal costing data will be provided by the respective department involved, and checked by the Finance department. 3.2.6 Leased Tangible Capital Assets and Leasehold Improvements Certain leased assets are capital in nature and therefore qualify to be included in the tangible capital asset listing, due to the specifications in the terms of the lease. All leases that meet one of the following conditions must be included in the tangible capital asset inventory in the same manner as owned tangible capital assets: a) the Municipality will own (or will likely own) the leased asset at the end of the term; Watson&Associates Economists Ltd. H;BayhamlPSAB&Asset ManagementWBayham PSAB Compliance Reporf.cloc 3-13 b) the lease term is most(i.e. over 75%) of the estimated useful life of the leased asset; c) the current value of lease payments over the term of the lease is substantially all (i.e. over 90%) of the fair value of the leased tangible capital asset; or d) other lease terms suggest that the lease is capital in nature. As at December 31, 2007 the Municipality of Bayham did not have any leases in place that have determined to be capital in nature. The above conditions will be used to test future leases for capital related qualities. In lease arrangements where the leased asset does not qualify to be included in the tangible capital asset listing (i.e. it is operating lease), any modification to the leased asset can be considered a leasehold improvement and capitalized for PSAB 3150 purposes where each of the following four criteria have been met: a) modifications must have been made to leased assets; b) the Municipality (as lessee) must pay for the improvements (without reimbursement from the lessor); c) the leasehold ;rnprovement should meet the definition of a tangible capital asset; and d) the modification reverts back to the lessor at the end of the lease (i.e. cannot be separated from the leased properly). Leasehold improvements are amortized over the useful life of the improvement or the lease term (including any renewal option where extension of the lease is expected) whichever is shorter. Where the leased asset qualifies to be included in the tangible capital asset listing, the modification is classified as a betterment and capitalized as part of the original cost of the capital asset; amortized over the useful life of the asset unless the life of the betterment is significantly less than that of the asset. Watson&Associates Economists Ltd. H:IBayhamlPSAB&Asset MansgementlBayham PSAB Compliance Report.doc 3-14 3.2.7 Long term Development or Construction of Tangible Capital Assets PSAB 3150 states that the following must be presented in the notes to the Municipality's annual financial statements: The net book value of tangible capital assets not being amortized because they are under construction or development or have been removed from service; (PS 3150.42b) Due to this requirement, the Municipality's asset hierarchy has been established so that this information can be easily extracted from the inventory database. "Construction in Progress" accounts have been established to ensure these assets will not be amortized until they are put into service. As part of the year-end procedures, a "Construction in Progress" report that illustrates all activity posted to these accounts with be maintained by the Finance department. Departments will review the report annually to ensure that once a tangible capital asset is put into service that it is excluded from the construction in progress report. 3.2.8 Tangible Capital Assets of Consolidated Entities In situations where a joint service board exists (i.e. local service board) and the Municipality of Bayham has partial control or ownership of the Board: a) Tangible capital assets of the Board will be inventoried and maintained by the Board. The results will be shown in the Board's annual financial statements. It is the Municipality's preference that similar inventory policies, procedures and asset structure as identified in this policy be utilized by the respective Boards. b) The Municipality of Bayham, through the year-end audit process, will consolidate its share of the Board's financial statements with the Municipality's activities for the purposes of the Municipality's year-end consolidated financial statements. Watson&Associates Economists Ltd. li:lBeyhamlPSAB&Asset ManagementlBayham PSAB Compliance Report.doc 3-15 3.2.9 Capitalized Interest Interest costs attributable to financing up-front costs of the acquisition, construction, or development of tangible capital assets will be expensed in the operating budget, and not capitalized. 3.2.10 Declaring a Tangible Capital Asset Surplus If a Tangible Capital Asset goes from being "in use" to being "for sale", it must be classified as an inventory item held for resale (i.e. not a tangible capital asset). In order for an asset to be reclassified as a surplus asset, all of the following criteria must be met: a) Council has committed to selling the asset; b) The asset is in a condition to be sold; c) The asset is publicly seen to be for sale; d) There is an active market for the asset; e) There is a plan in place for selling the asset; and f) It is reasonably anticipated that the sale will be completed within one year of the financial reporting date. 3.2.11 Nominal Tangible Capital Assets PSAB 3150.42 requires municipalities to disclose the nature and use of tangible capital assets that have been recorded at nominal amounts. Assets can be recorded at nominal amounts if estimating the historical cost of the assets is very difficult, and the resulting net book value would be immaterial. A list of assets that have been recorded at nominal values will be maintained by the Municipality, to ensure the Municipality will be in a position to disclose the required information each year on the financial statements. 3.2.12 Works of Art and Historical Treasures Works of Art and Historical Treasures owned by the Municipality are not to be included in the tangible capital asset listing since a reasonable estimate of the future benefits associated with these items cannot be made. However, the nature of these assets must be disclosed in the Watson&Associates Economists Ltd. H:lBayhamlPSAB&Asset ManagementlBayham PSAB Compliance fieport.doc 3-16 notes to the annual financial statements. Some examples of items that fall under this category include: • Works of art(i.e. in a museum or used as decoration n a Municipal building); • Antiques owned by the Municipality (i.e. antique fire trucks used in parades). Works of Art and Historical Treasures will be treated as follows: a) All assets that are considered works of art or historical treasures will not be recorded as tangible capital assets in the Municipality's asset inventory. b) All works of art and historical treasures will be tracked only for financial statement note disclosure on an annual basis. Note disclosure will be based on the nature of the assets, not the quantity and value. c) Any future purchases of works of art and/or historical treasures will be expensed to operations at cost. 3.3 PSAB 3150 Compliance Policies 3.3.1 Amortization Methods and Rates PSAB 3150 requires tangible capital assets to be amortized "in a rational and systematic manner appropriate to its nature and use by the government". To meet these requirements, the Municipality will utilize the Straight Line amortization method for all tangible capital assets with the exception of rolling stock. No amortization will be charged in the year of acquisition. For amortization calculation purposes, residual value will be zero for all tangible capital assets. Rolling stock amortization will be based on kilometres or hours driven over a kilometre or number of hours useful life per asset. If none of those are applicable the straight-line method will be implemented, as above. For the rolling stock assets using the alternative method, amortization will be charged in the year of acquisition. Watson&Associates Economists Ltd. H:t8ayhamlPSAB&Asset ManagementBayham PSAB Compliance Report.doc 3-17 TYPE PATTERN EXAMPLE Straight Line Amortization Consistent over life $10,000 asset r 10 year life $ 1,000 amortization per year. Kilometres/Hours Driven Varies per year by usage $32,000 asset +300,000 km useful life x 30.000 km driven in 2007 $ 3,200 amortization for 2007 3.3.2 Useful Life Assumptions The determination of expected useful lives for tangible capital assets requires consideration of several factors, including present condition, intended use, expected deterioration, technological obsolescence, construction type, geological factors, and planned maintenance policy. The estimated useful lives used in calculating amortization are summarized in Appendix D. 3.3.3 Betterments For a cost to be included in the value of a tangible capital asset as a betterment, one of the following must be true: a) Non-Complex Network System Tangible Capital Assets (i.e. equipment, rolling stock) a. Increases previous physical output/service capacity; b. Operating costs are lowered; c. Useful life of the asset is extended; or d. Quality of output has improved. b) Complex Network System Tangible Capital Assets (i.e. roads, water/sewer systems) a. Increases the service potential of the tangible capital asset (may or may not increase useful life). Please refer to Appendix C for further details. Watson&Associates Economists Ltd. H.lBayhamlPSAB&Asset ManagementlBayham PSAB Compliance Report.doc 3-18 3.3.4 Write-Offs/Write-Downs PSAB 3150.31 states the following: "When conditions indicate that a tangible capital asset no longer contributes to a government's ability to provide goods and services, or that the value of future economic benefits associated with the tangible capital asset is less than its net book value, the cost of the tangible capital asset should be reduced to reflect the decline in the asset's value." There are many different factors that may lead to one or more of the Municipality's assets having a value that is less than its calculated net book value for PSAB purposes, including the following: • Unforeseen damage to the asset; • Expected maintenance plan not adhered to; • Changes in geological or weather conditions; • Developments in technology resulting in obsolescence; and • A change in how the asset is used. The write-off/write-down process for the Municipality of Bayham is as follows: a) Every year during the year-end process, an evaluation process will be initiated by the Finance department, in conjunction with all departments to identify any tangible capital asset requiring a write-off or write-down. b) During this process the Finance department will provide tangible capital asset listings (showing historical cost, accumulated amortization, and net book value) to each respective department. c) The departments will document (in writing) where write-offs are required to the Finance department, who will assess the need for the write-offs and post the necessary transactions. d) All write-offs will be charged to the applicable operating budget area from which the tangible capital asset is used. Watson&Associates Economists Ltd. H:1BayhamlPSAB&Asset ManagementiBayham PSAB Compliance Report.doc