Other Related Documents

3.5 Capital Assets

Capital Assets are tangible assets that are purchased, constructed, developed or otherwise acquired and:

1. are held for use in the production or supply of goods, the delivery of services or to produce program outputs;
2. have a useful life extending beyond one fiscal year and are intended to be used on a continuing basis; and,
3. are not intended for resale in the ordinary course of operations.

For the government, capital assets have the following characteristics:

1. beneficial ownership and control clearly rest with the government;
2. the asset is used to achieve government objectives; and,
3. risks and benefits of ownership clearly rest with the government (as is the case of capital leases).

For government accounting purposes capital assets generally include all assets treated as capital assets under Public Sector Accounting Board recommendations and generally accepted accounting principles in Canada, having an initial cost of $10,000 or more. Departments may choose a lower threshold value.

The cost of property, equipment and other capital assets including betterments is essentially a long-term prepayment of an expense in advance of the use of an asset. As the economic service life of the asset expires, the cost of the asset is systematically allocated to operations as an expense called "amortization".

References

• TBAS 3.1 Capital Assets
• TBAS 3.1.1 Software
• PS 3150
• CICA 3060

3.5.1 Tangible Capital Assets

Introduction

Tangible capital assets are a significant economic resource managed by governments and a key component in the delivery of many government programs. Tangible capital assets include such diverse items as land, heritage buildings, military assets, infrastructure assets, purchased computer software, in-house developed software, computer hardware, assets acquired by capital leases or by donations, etc.

Betterments versus Repairs

The cost incurred to enhance the service potential of a capital asset is a betterment. Service potential may be enhanced when there is an increase in the previously assessed physical output or service capacity, associated operating costs are lowered, the useful life is extended, or the quality of output is improved. The cost incurred in the maintenance of the service potential of a capital asset is a repair, not a betterment.

Write-down

A department would write down the cost of a tangible capital asset when it can demonstrate that the reduction in future economic benefits is expected to be permanent. Conditions that may indicate that the future economic benefits associated with a tangible capital asset have been reduced and a write-down is appropriate include:

1. a change in the extent to which the asset is used;
2. a change in the manner in which the asset is used;
3. significant technological developments;
4. physical damage;
5. removal of the asset from service;
6. a decline in or cessation of, the need for the services provided by the asset;
7. a decision to halt construction of the asset before it is complete or in usable or saleable condition;
8. a change in the law or environment affecting the extent to which the asset can be used.

PS 3150.36

References

• TBAS 3.1 - Capital Assets
• TBAS 3.1.1 - Software
• TBAS 1.2
• CICA 3060
• PS 3150

Scenario A - Purchase of a Tangible Capital Asset

The Department purchased and received a vehicle for $23,500 on January 31, 2000. Delivery costs are an additional $500. Total GST is $1,680. Payment does not take place until the following fiscal year, April 15, 2000. The vehicle has a useful life of 10 years with no estimated residual value.

Journal Entries

These entries assume the vehicle is charged directly to the asset FRA. See alternative entry if amounts are to be initially charged to an operating expense and then re-allocated to a capital asset FRA.

1) To record the purchase and receipt of the vehicle on January 31, 2000.

FRA coding rationale: The Department must capitalize this asset as a debit to the capital asset (vehicle) account, since it is above the $10,000 threshold. Delivery costs should be capitalized as part of the laid down cost of the asset. At this point the Department is being charged GST on the vehicle, and must pay it to the vendor. However, as the Department will eventually recover this amount from Canada Customs and Revenue Agency (CCRA), they should record it as an asset in "13392 GST/HST Refundable advance accounts". Since the Department has not paid for the vehicle, a liability must be recorded for the amount owing.

Authority coding rationale: (*) In this example it is assumed this purchase would be charged to the capital vote. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for the accounts payable so the code to be used would be "R300-All other assets and liabilities"

Object coding rationale: As economic objects are recorded on an expenditure basis, the economic object is recorded at this point. Economic object 1261 is used in this example since the purchase was a motor vehicle. The appropriate economic object is used depending on the nature of the purchase. Economic object "0210-Transportation of things not elsewhere specified" would be used to record freight. However, where a department's system cannot handle the use of more than one economic object for an asset, the cost of freight may be coded to the same object code as the asset. Since there is GST/HST payable, the GST must be reflected by using, "8171-Payment of GST on purchases". "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish the accrual of the amount owing.

Alternative set of entries: Departments may choose to record the purchase as an operating expense and reallocate amounts to an asset FRA. This method involves two entries: 1) recording the purchase as operating expense with all objects, 2) reallocating the amounts for all objects to an asset class.

First entry: To record the purchase and receipt of the vehicle on January 31, 2000.

Coding rationale - there is no change in the coding from entry 1, except for the use of the operating expense FRA instead of the asset FRA.

Second entry: To reallocate amounts for all objects.

Coding rationale - (*)There is no impact on the authority code unless it is moved to a capital appropriation (B14A). Object Coding: Departments may either use "3425 - Reallocation of expenditures/costs within a department" for all lines of the transaction or the asset and freight object codes used in entry 1. If more than one object is used, the same object must be used in the same amount for both the debit and credit sides of the entry. Note: if the transaction involves revenue credited to the vote, the economic object to use is "3717 - Recoveries of expenditures/costs within a department" for the credit side of the entry and "3425 - Reallocation of expenditures/costs within a department" for the debit side of the entry.

3) To record the amortization expense and the accumulated amortization at February 28, 2000.

FRA coding rationale: It is necessary to allocate the cost of the asset as an expense in a rational and systematic manner over those periods expected to benefit from the use of the asset. Using straight-line amortization, the monthly charge to amortization expense and accumulated amortization would be $200 ($24,000/10yrs = $2,400/year; $2,400/12mths = $200/month).

Authority coding rationale: Expenditures for the acquisition were charged to an appropriation in the previous journal entry, therefore the appropriations are not affected in this journal entry. To assist with departmental reconciliations, F codes are used for these non-appropriated amounts. "F111 - Expenditures previously charged to appropriations/Amortization expenses for capital assets" is used for amortization expense and "F311 - Non-appropriated amounts added to or deducted from asset balances/ Increases (decreases) to accumulated amortization of capital assets" is used for accumulated amortization.

Object coding rationale: As these are non-cash (non-expenditure) items, they have no effect on economic objects." 7061 - Accumulated amortization on capital assets" is used to capture accumulated amortization. Alternatively, "7099 - Net increase or decrease in other transactions" may also be used. "3451 - Amortization expense for capital assets" is used to capture amortization expense.

4) To record payment of vehicle on April 15, 2000.

See section on Accounts Payable for related entries.

Scenario B - Betterment

A betterment should be capitalized if the amount exceeds the department's threshold for betterments. The maximum threshold for betterments is $10,000. A department may choose a lower threshold. If the amount of the betterment is less the department's threshold for betterments, then the department should expense it.

The Department owns a building with an original cost of $250,000 and a useful life of 40 years. After 20 years the Department decides to do a major renovation that will increase the amount of usable space. The renovation work is contracted to one company and has a cost of $75,000. At this point the net book value of the building is $125,000 ($250,000/40yrs = $6,250/yr) ($6,250/yrx20yrs = 125,000) ($250,000-$125,000 = $125,000)

Journal Entries

1) Record the betterment

FRA coding rationale: Since the renovation is a betterment, it is added to the cost of the building i.e. capitalized as part of the building cost. The new value of the building is $200,000 ($125,000+$75,000). The amortization expense on the building will now increase to $10,000 ($200,000/20 years).

Authority coding rationale: (*) In this example it is assumed this purchase would be charged to the capital vote. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. There is no impact on the authority side for the accounts payable but as the system requires that a code be used, it would be "R300 - All other assets and liabilities"

Object coding rationale: As economic objects are recorded on an expenditure basis, the economic object is recorded at this point, and not when the cash (disbursement) is paid out. Economic object 1340 is used (in this example) since the renovation was on a building. If the details of the renovation expenditures are provided on the contractor's invoices and the department's system can accommodate the use of more than one economic object per asset class, it would be preferable to use the different economic object codes depending on the nature of the purchase (as done in Scenario C). "6299 - Net Increase or Decrease to Other Liability Accounts" is used to record the accrual of the amount owing.

Scenario C - Betterment - Work Managed by Department

Same details as in Scenario B except the department is contracting the work. The cost of the betterment include: wages, freight, architect fees, rentals of machinery; materials, equipment and fixtures. An alternative entry involving the detailed re-allocation of all objects is shown for the second and third entries.

1) Record the $25,000 of expenses incurred during the first month

FRA coding rationale: The expenses are charged to operating expenses rather than being charged directly to the building asset account.

Authority coding rationale: It is assumed the expenses would be charged to B11A - Program Vote or B12A Operating Vote. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. There is no impact on authorities for the accounts payable so the code to be used would be "R300-All other assets and liabilities"

Object coding rationale: The economic object code matching each type of purchase is recorded.

2) At month-end, transfer expenses to work-in-process account

FRA coding rationale: At month-end the expenses incurred are transferred to a work in process asset account. As the work has not yet been completed, the expenses may not be charged to the building account as amortization should not be recorded against the expenses until the work is substantially complete.

Authority coding rationale: These expenses have already been charged against an authority hence there is no effect on appropriations. "F152 - Reallocation of capital asset expenditures" is used.

Object coding rationale: Object information was recorded at the time the expenses were incurred, hence "3425 - Reallocation of expenditures/costs within a department" is used on both sides of the entry. Note: if revenue credited to the vote is involved, then the object code on the credit side would change to "3717 - Recoveries of expenditures/costs within a department".

Alternatively, a department may choose to record the details by object. In this case the transaction would be as follows:

If this alternative is used, the same object code must be used for the same amounts on both the debit and credit sides of the entry.

3) Once all work complete, (assume final costs were $75,000):

FRA coding rationale: Once all renovation work has been completed,the costs are transferred from a work in process asset account to a capital asset account. These costs will now be amortized along with the remaining costs of the building. However, if the betterment had a significantly different useful life than that of the building, it should be amortized separately.

Authority coding rationale: : It is assumed that there is no impact on authorities hence "F152- Re-allocation of capital asset expenditures" is used. However, a department may choose the reallocate the expenses from an operating authority to a capital authority, in which case B11A/B12A and B14A would be used.

Object coding rationale: Object information was recorded at the time the expenses were incurred, hence "3425 - Reallocation of expenditures/costs within a department" is used on both sides of the entry. Note: if revenue credited to the vote is involved, then the object code on the credit side would change to "3717- Recoveries of expenditures/costs within a department".

Alternatively, a department may choose to record the details by object. In this case the transaction would be as follows:

If this alternative is used, the same object must be used for the same amounts on both the debit and credit sides of the entry.

Scenario D - Disposal via Sale of Tangible Capital Asset

On May 1, 2000, the Department purchased informatics-hardware for $32,000 with an estimated service life of five years and an estimated residual value after five years of $2,000. The Department uses straight-line amortization and decides to sell the asset on November 1, 2004, for $8,000.

Alternative entries using a suspense account for proceeds from asset sales, and involving two entries in each case are shown below.

Journal Entries

1a) Record the disposal of the asset and related gain in November 2004.

FRA coding rationale: The Department must record the proceeds received ($8,000) by debiting Cash in the hands of the department awaiting deposit to the RG. The equipment and related accumulated amortization must be written off the books. In this case the net of these three items results in a gain which will be credited to the non-tax revenue FRA. The accumulated amortization is $27,000 and is calculated as follows ($32,000-2,000 = $30,000) ($30,000/60 mths = $500/mth) (54 mths x $500 = $27,000)

Authority coding rationale: There is no authority impact for the cash received, R300 is used. "D321- Proceeds from disposal of crown assets" is used for the remaining debits and credits ($27,000-$32,000-$3,000) as it reflects the allocation of the proceeds of $8,000 received by the Department.

Object coding rationale: To record the net impact on Cash Accounts, 5299 would be used. As economic objects are recorded on an expenditure basis, one object should be used to record the proceeds from sale. "4843 - Sales of surplus Crown assets to outside parties".

Alternative entries: There is an alternative method to record the sale of an asset that uses two entries with a suspense account in the middle

First entry:

Second entry:

Rationale: The FRAs used are the same with the exception of the addition of a suspense account (FRA 21627). All the authority and object information are in the first entry, while the second entry provides the accrual accounting data, while having a nil impact on the authority and object information. To ensure a nil effect on economic objects, the same code, "7099-Net Increase or Decrease in Other Transactions" or "3425-Reallocation of expenditures/costs within a department" should be used throughout the transaction.

1b) Assuming the circumstance is the same as above except the Department decides to sell the asset for $3,000, on November 1, 2004. Record the disposal of the asset and the related loss.

FRA coding rationale: The Department must record the proceeds received ($3,000) by debiting Cash in the hands of the department awaiting deposit to the RG. The equipment and related accumulated amortization must be written off the books. In this case the net of these three items results in a loss which will be debited to an expense FRA.

Authority coding rationale: There is no authority impact for cash received, but the system requires that a code be used. In this case R300 is used. "D321- Proceeds from disposal of crown assets" is used for the remaining debits and credits ($27,000-$32,000+$2,000) as it reflects the allocation of the proceeds of $3,000 received by the Department.

Object coding rationale: As economic objects are recorded on an expenditure basis, one object is used to record the proceeds from sale "4843-Sales of surplus Crown assets to outside parties". To record the net impact on Cash Accounts, 5299 would be used.

Alternative entries: There is an alternative method to record the sale of an asset which uses two entries with a suspense account in the middle

First entry:

Second entry:

Rationale: The FRAs used are the same with the exception of the addition of a suspense account (FRA 21627). All the authority and object information are in the first entry, while the second entry provides the accrual accounting data, while having a nil impact on the authority and object information. To ensure a nil effect on economic objects, the same code, "7099 - Net Increase or Decrease in Other Transactions" or "3425 - Reallocation of expenditures/costs within a department" should be used throughout the transaction.

Scenario E - Disposal via Trade-In

It should be noted that there are restrictions on what moveable assets departments can trade-in (e.g. passenger cars, wagons and light commercial trucks) and whether departments can trade these assets for similar or different types of assets (see the Material Management Policy and Motor Vehicle Policy:

/pubs_pol/dcgpubs/materielmanage/siglist_e.asp ).

The Department trades in an old piece of research equipment for a new piece of research equipment. The old equipment has an accumulated amortization of $7,000 and an original cost of $8,000. The department receives $600 on the trade in. The new equipment has a value of $10,000.

Journal Entries

1) Record the trade-in

FRA coding rationale: The equipment (old) and related accumulated amortization must be written off the books. Because the Department received $600 for the trade-in, the loss on the disposal of the trade-in is $400 ($8,000-$7,000-$600). The equipment (new) is recorded at its original purchase price and the amount payable to the vendor is the difference between the purchase price of the equipment (new) and the $600 received for the trade in, plus GST of $658. GST is payable on the net purchase price of the equipment (7% of $9,400).

Authority coding rationale: (*) In this example it is assumed this purchase (equipment (new)) would be charged to the capital vote. However, depending on the department and the asset purchased, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, or A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. There is no impact on the authority side for the accounts payable, "R300- All other assets and liabilities" would be used. "D321 - Proceeds from disposal of crown assets" is used ($7,000+$400-$8,000) to reflect proceeds of $600 received by the Department for the old equipment. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111.

Object coding rationale: The economic object is recorded at this point since objects are recorded on an expenditure basis. Economic object 1219 is used to record the purchase of the new equipment - other machinery parts. " 6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish the payable for the amount owing. The GST is reflected by using "8171 - Payment of GST on purchases". "4843 - Sales of surplus Crown assets to outside parties" is used in the remainder of this entry, because it relates to all the proceeds received for the asset being sold.

2) Transfer of funds (optional entry)

FRA coding rationale: The purpose of this entry is purely for authority purposes, there is no effect on FRAs. The same FRA is debited and credited.

Authority coding rationale: The proceeds from the trade-in of $600 are credited to whichever B code the purchase was charged to. In this way, the charge to the appropriation is the net cost of the asset. This entry is optional depending on how departments choose to use the funds related to A131 - Spending of amounts equivalent to proceeds from disposal of surplus crown assets.

Object coding rationale: The purpose of this entry is purely for authority purposes, there is no effect on economic objects. "7099 - Net increase or decrease in other transactions" is used on both sides of the transaction.

Scenario F - Write-off of Tangible Capital Asset

Informatics hardware originally costing $120,000 with a useful life of 5 years has a $60,000 accumulated amortization balance on April 1, 2000. It is amortized at $2,000 per month. In July a fire caused substantial damage to the equipment. The Department decides the equipment has no future benefits and should be written off immediately.

Journal Entries

1) Write-off (bringing the value of the capital asset to zero)

FRA coding rationale: The equipment and related accumulated amortization (after adding an additional $6,000 in amortization expense to the accumulated amortization for the informatics hardware in year 2000) must be written off the books. The net result of these items will result in a loss of $54,000. FRA 51511 is used as the department has disposed of the asset. FRA 51733 "Losses on write-offs and write-downs" would be used if the asset continues to be used (see Scenario G).

Authority coding rationale: This is strictly an accrual accounting transaction. There is no impact on the authorities as the appropriation was charged when the asset was purchased. In order to ensure there is a nil effect on authorities, the same authority code is used for all debits and credits. In this case "F351 - Write off of Capital Assets was used."

Object coding rationale: This is strictly an accrual accounting transaction with no impact on the economic objects, as there is no impact on the economy. The economic objects were affected when the asset was purchased. To ensure a nil effect on economic objects, the same code, "7099 - Net Increase or Decrease in Other Transactions" or "3425 - Reallocation of expenditures/costs within a department" should be used throughout the transaction.

Scenario G - Write-down of Tangible Capital Asset

Internally developed software put into operation a year ago has a cost of $400,000 and accumulated amortization of $40,000. The department determines that the software will not provide the full benefits expected (e.g. the software cannot handle the volume of processing required and additional software will have to be purchased to supplement it). The department determines that the cost of the software should be reduced by $100,000 to reflect the decline in the asset's value (this could be the amount of the additional costs required to supplement the software).

Note: other reasons supporting the need for the write-down of an asset can be found in PS 3150.36.

Journal Entries

1) Write-down

FRA coding rationale: FRA 51733 "Losses on write-downs" would be used as the asset continues to be used. The credit is to accumulated amortization to reflect the decrease in the net book value of the asset.

Authority coding rationale: This is strictly an accrual accounting transaction. There is no impact on the authorities as the appropriation was charged when the asset was purchased. In order to ensure there is a nil effect on authorities, the same authority code is used for the debit and credit. In this case "F351 - Write off of Capital Assets was used."

Object coding rationale: This is strictly an accrual accounting transaction with no impact on the economic objects, as there is no impact on the economy. The economic objects were affected when the asset was purchased. To ensure a nil effect on economic objects, the same code "7099 - Net Increase or Decrease in Other Transactions" or "3425 - Reallocation of expenditures/costs within a department" should be used throughout the transaction.

Departmental Financial Statement Presentation and Disclosure Requirements

As per TBAS 1.2, for each category of capital asset disclose original cost, additions, disposals, write-downs, accumulated amortization, amortization, and net book value on the Schedule of Capital Assets in the departmental financial statements. Also, for those capital assets where the net book value is already nil, the original historic cost should be disclosed in the notes to the financial statements as an indication of their existence.

3.5.1.1 Capital Leases

A lease is a contractual agreement between a lessor and a lessee that gives the lessee the right to use specific property owned by the lessor for a specific period of time in return for generally periodic cash payments.

If a government department is the lessee, the lease is classified for accounting purposes as either an operating lease or a capital lease. The department would classify a lease as capital if any one of the following conditions are met:

• Is there a transfer of ownership?
• Is there a bargain purchase option?
• Is the lease term greater than or equal to 75% of the asset's economic life?
• Is the present value of payments greater than or equal to 90% of the fair value of the asset?

If a government department is the lessor, then the leases would be classified for accounting purposes as either:

• Operating leases; or
• Direct financing leases or sales-type leases

References

• CICA 3065 (particularly CICA 3065.21-26)

Scenario A - Department enters into Capital Lease agreement as Lessee

Lessor Company and the Department sign a lease agreement that calls for Lessor Company to lease informatics equipment to the Department beginning January 1, 2005. The lease contains the following terms and provisions.

1. The term of the lease is five years, and the lease agreement is non-cancellable, requiring equal payments of $25,981.62 at the beginning of each year (annuity due basis) plus GST.
2. The equipment has a fair value at the inception of the lease of $100,000, an estimated economic life of five years, and no residual value at the end of the 5 years.
3. The Department pays all the executory costs directly except for maintenance costs of $2,000 per year, which are included in the annual payments to the lessor.
4. The lease contains no renewal options and the equipment reverts to Lessor Company at the termination of the lease.
5. The Department amortizes similar equipment it owns on a straight-line basis.
6. Lessor Company set the annual rental to ensure a rate of return on its investments of 10% per year; the Department is aware of this fact. In the event that the Department did not know the lessor's rate of return, the Department would use the CRF lending rate at the time the agreement is signed.

The lease meets the criteria for classification as a capital lease because (1) the lease term of five years, being equal to the equipment's estimated economic life of five years, satisfies the 75% test; or because (2) the present value of the minimum lease payments ($100, 000 as computed below) exceeds 90% of the fair value of the property ($100,000).

Journal Entries

1) To record the capital lease on January 1, 2005.

FRA coding rationale: The asset value and the amount of the obligation are recorded at the beginning of the lease term at the present value of the lease payments, excluding the portion relating to executory costs.

The minimum lease payments are $119,908.10 ($23,981.62 x 5) and the amount capitalized as leased assets is $100,000, the present value of the minimum lease payments is determined as follows:

The lessor's implicit interest rate of 10% is used instead of the lessee's incremental borrowing rate of 11% because (1) it is lower, and (2) the lessee has knowledge of it.

Authority coding rationale: This is strictly an accrual entry. The appropriations are not affected at this point. The appropriation is charged only when the lease, interest payments and executory payments are made. "R300 - All other assets and liabilities" is used here for both sides of the entry.

Object coding rationale: As economic objects are recorded on an expenditure basis, the economic object is not recorded at this point but when the lease payment is made. "7099-Net increase or decrease in other transactions" is used. "6299-Net Increases or Decreases in Other Liability Accounts" is used to establish the accrual of the amount owing.

2) To record the first lease payment on January 1, 2005.

FRA coding rationale: The first lease payment of $23,981.62 represents a reduction of the principal of the lease obligation. There is no interest paid out at this point. At year-end the expense is accrued, (see journal entry 3) below. The executory costs are coded to operating expenses. The Department must record a payable for the amount owing of $25,981.62 plus GST of $1,818.71.

Authority coding rationale: (**) In this example, it is assumed this lease payment and operating expense would be charged to the capital vote -B14A. However, depending on the departmental appropriations, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. As there is no impact on the authorities for accounts payable, the code would be "R300- All other assets and liabilities" since the system requires that a code be used. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111.

Object coding rationale: At this point expenditures are made for the executory costs and lease costs. Therefore economic objects are affected. In this case, "0525-Rental of computer equipment" is used for the executory costs and "1221-Voice communication equipment" is used for the lease payment. "6299-Net Increase or Decrease to Other Liability Accounts" is used establish an accounts payable. The GST must be reflected by using "8171-Payment of GST on purchases".

Each rental payment of $25,981.62 consists of three elements: (1) a reduction in the principal of the lease obligation; (2) a financing cost (interest expense); and (3) executory costs. The total financing cost or interest expense over the term of the lease is the difference between the present value of the lease payments ($100,000) and the actual cash disbursed, net of executory costs ($119,908.10), or $19,908.10. Note: In the journal entry 2) above no portion of the 23,981.62 relates to interest expense. The interest is accrued at the end of the year, (see journal entry 3) below) and is paid in the beginning of the following year (see 5) below).

1. Lease payment as required by lessor, excluding executory costs.
2. 10% of the preceding balance of (d) except for January 1, 2005; since this is an annuity due, no time has elapsed at the date of the first payment and no interest has accrued.
3. (a) minus (b)
4. Preceding balance minus (c).

3a) To record the interest expense for the period between Jan 01, 2005 and March 31, 2005.

Accrued interest payable on capital leases would be reversed and put into Accounts Payable on January 1, 2006, (see 5) below).

FRA coding rationale: The interest expense over the term of the lease is the difference between the present value of the lease payments and the actual cash disbursed for the lease payment. The interest expense is a function of the outstanding obligation. $7,601.84 = ((100,000-23,981.62) x 10%). It is necessary to set up an accrual for the three months Jan 01, 2005 to March 31, 2005 since the department's fiscal year ends on March 31. This would amount to $1,900.46 ($7,601.84 / 12mths x 3mths) interest owing. The Accrued Interest Payable on Capital Leases would be reversed in the following year. Please note: if material, the interest expense would recorded on a monthly basis.

Authority coding rationale: This is strictly an accrual transaction. The appropriation is not affected at this time. The charge to the appropriation occurs when the interest is actually paid out as part of the periodic lease payment. Therefore, it is necessary to use an F code. For the interest expense portion "F129 - Expenses to be charged later to appropriations/Other amounts to be charged later". Accrued interest payable on capital leases does not affect the appropriations, thus "R300 - Total amounts of all other assets and liabilities" would be used.

Object coding rationale: This is strictly an accrual transaction and there is no effect on economic objects. "3469- Charges to other liability account" or "7099- Net increase of decrease in other transactions" should be used. To establish the payable "6299-Net Increase or Decrease to Other Liability Accounts" should be used.

3b) To record the interest expense for the period between April 01, 2005 and Dec. 31, 2005.

Accrued interest payable on capital leases would be reversed and put into Accounts Payable on January 1, 2006, see 5) below.

FRA coding rationale: It is necessary to set up an accrual for nine months April 01, 2005 to December 31, 2005. This would amount to $5,701.38 ($7,601.84 / 12mths x 9mths) interest owing. The accrued interest payable on capital leases would be reversed in the following year. Please note: If material the interest expense would recorded on a monthly basis.

Authority coding rationale: Same as 3a).

Object coding rationale: Same as 3a).

4) To record the amortization expense and accumulated amortization for the month.

FRA coding rationale: The Department should record amortization expense and accumulated amortization as per the Department's normal amortization policy (e.g. straight-line method). $100,000/5years= $20,000/yr $20,000/12mths=$1,666.67/mth

Authority coding rationale: Since the expenditure for the acquisition was already charged to an appropriation in previous journal entries, the appropriations are not affected. F codes would be used to assist with departmental reconciliations. "F111 - Amortization expenses for capital assets" is used for amortization expense and "F311 - Increases (decreases) to accumulated amortization of capital assets" is used for accumulated amortization.

Object coding rationale: These non-cash items have no effect on economic objects."7061- Accumulated amortization on capital assets" or "7099 - Net increase or decrease in other transactions" is used to capture accumulated amortization. "3451 - Amortization expense for capital assets" is used to capture amortization expense.

5) To record the lease payment and to charge the interest expense to the appropriation on January 1, 2006.

5a) To record the lease payment on January 1, 2006

See the Accounts payable section for journal entries used to settle this payable.

Note: entries through 2009 follow the pattern above.

FRA coding rationale: The recording of the lease payment results in a reduction of the lease obligation and the recording of a payable to reflect an amount owing to the lessor. The accrued interest charges are reversed and recorded as an accounts payable to reflect an amount owing the lessor as well. The executory costs are charged to an operating expense.

Authority coding rationale: (**) In this example, it is assumed this lease payment and operating expenses would be charged to the capital vote B14A. However, depending on the departmental appropriations, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. As there in no impact on authorities for accounts payable and accrued interest payable on capital leases, R300 would be used, as the system requires that a code be input.

Object coding rationale: "6299-Net Increase or Decrease to Other Liability Accounts" is used to record the net impact on other liabilities. At this point expenditures are incurred for the executory costs and the lease costs, therefore economic objects are affected. In this case "0525-Rental of computer equipment" and "1221-Voice communication equipment" are used.

5b) To charge the interest expense to the appropriation on January 1, 2006

FRA coding rationale: This transaction does not affect accruals only appropriations. However, the system requires that FRA codes be input. To ensure a nil effect on departmental FRAs, it would be necessary to debit and credit the same FRA code for the same amount.

Authority coding rationale: (***) In this example, it is assumed the lease payment and operating expense would be charged to the capital vote B14A, therefore the interest expense would be charged to the same vote. This is not considered to be a public debt charge. However, depending on the department, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. Since this transaction is required to affect an appropriation, only one side of the transaction will get charged. As a result it is necessary to use an F code on the other (credit) side of the transaction. In this case, "F159 - Other expenses not being charged to appropriations at the same time" is used.

Object coding rationale: The economic object "3252- Interest administration or service charges, and other penalty charges" would be used to record the interest expense. The credit entry would be to "7099 - Net Increase or Decrease in Other Transactions".

Scenario B - Department purchases leased equipment at the end of the lease term.

Please note that same terms and conditions apply in this Scenario as in Scenario A except that the Department purchases the leased equipment at the end of the lease term for $5,000. (The estimated useful life has been increased by 2 years)

Journal Entries

Journal entries 1 to 5 - see Scenario A above.

6) To record the purchase of the leased equipment at end of lease term for $5,000.

FRA coding rationale: Since the $5,000 is a component of the total cost of the equipment, it is capitalized. Upon expiration of the lease, the amount capitalized as leased equipment is fully amortized and taken off the books (note: at this point the lease obligation is fully discharged). Since the equipment has already been amortized for 5 years, the accumulated amortization must be recorded on the books. The remaining $5,000 will be amortized over the next two years. GST of $350 (7% on $5,000) is owed on the purchase.

Authority coding rationale: Only $5,000 will get charged to an appropriation since the $100,000 was already charged when the lease payments were made over the last 5 years.

(****) In this example, it is assumed the purchase would be charged to a capital vote- B14A. However, depending on the department, the following authority codes could be used: B11A - Program Vote, B12A Operating Vote, and A131 Spending of amounts equivalent to proceeds from disposal of surplus Crown assets. There is no affect on appropriations throughout the rest of the entry therefore the applicable F codes are used, as well as R300 for the accounts payable set up.

Object coding rationale: There is no affect on expenditures in this transaction except for the additional $5,000 spent on the Informatics equipment. To capture the accumulated amortization on the equipment 7061 or 7099 is used. Economic object 1221 reflects the $5,000 acquisition of the residual Informatics capital asset. "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish the payable. To indicate the nil effect on the remainder of the transaction "7099-Net Increase or Decrease in Other Transactions.

Departmental Financial Statement Presentation and Disclosure Requirements

The gross amount of assets under capital leases and related accumulated amortization should be disclosed. Obligations related to leased assets should be shown separately from other financial obligations. Particulars of obligations related to leased assets, including interest rates and expiry dates, should be shown separately in the notes to the financial statements from other financial obligations. Significant restrictions imposed on the lessee as a result of the lease agreement should be disclosed.

Disclosure should be made of the future minimum lease payments in aggregate and for each of the five succeeding years. A separate deduction should be made from the aggregate figure for amounts included in the minimum lease payments representing executory costs and imputed interest. The resultant net amount would be the balance of the unpaid obligation.

The amount of amortization for leased property should be disclosed separately or as part of amortization and amortization expense for fixed assets. Disclosure should be made of methods and rates of amortization.

Interest expense related to lease obligations should be disclosed separately.

3.5.1.2 Assets Under Construction

Introduction

The cost of a constructed asset would include direct construction or development costs (such as materials and labour), and overhead costs directly attributable to the construction or development activity. PS 3150.12

Capitalization of costs ceases, however, when a tangible capital asset is ready for use. Determining when a tangible capital asset, or a portion thereof, is ready for productive use requires consideration of the circumstances in which it is to be operated. Normally it would be predetermined by reference to factors such as productive capacity, occupancy level, or the passage of time. PS 3150.17

Assets under construction also include those assets that have been acquired but require additional work to get them ready for use. See Scenario A.

Amortization

Assets under construction are not amortized while they are still being constructed. This is because the asset is not being used in program delivery. The amortization process starts when the asset's construction is complete and has begun being used by the department.

1. to which the asset can be used.

References

• PS 3150.12, .17, .36, .45
• TBAS 3.1 Capital Assets
• TBAS 1.2 Departmental and Agency Financial Statements

Scenario A - Department purchases a computer but work is still required to get it ready for use.

Department buys computer hardware for $200,000. The equipment is not functional until it has been installed properly and is ready for use. Until that time the equipment will not be amortized. The following costs are associated with getting the equipment ready for use.

• Freight $500
• Computer consultants to set up the hardware $35,000
• Departmental Staff salaries used to set up hardware $20,000
• Additional circuits required to modify the hardware to adapt to Departmental needs $5,000
• It is assumed that the department has a separate capital vote.

Journal Entries

1) Purchase of the computer hardware

FRA Coding Rationale: The asset is over the threshold $10,000 amount and must be capitalized. However, since the asset is not ready for use, the costs must be allocated to a work in progress (WIP) account. This is essential since the asset should not be amortized. At this point the Department is being charged GST on the computer, and must pay it to the vendor. However, as the Department will eventually recover this amount from Canada Customs and Revenue Agency (CCRA) they should record it as an asset in "13392 GST/HST Refundable advance accounts". Since the Department has not paid for the computer equipment, a payable must be recorded for the amount owing.

Note: if the department's system cannot accommodate this entry, the purchase of hardware may first be charged to operating expenses and then transferred to the work in process account. See Section 3.5.1 Capital Assets, Scenario C, journal entries 1 and 2 for an example of this type of entry.

Authority Coding Rationale: (*) In this example it is assumed this purchase would be charged to the capital vote. However, depending on the department's vote structure and the asset purchased, the following authority codes could be used: B11A - Program Vote or B12A Operating Vote. Since GST is not to be charged to a departmental appropriation, it is set up as an advance under a special authority, G111. Since Accounts Payable has no impact on the authority side, "R300 - All Other Assets and Liabilities" is used.

Object Coding Rationale: "1226 - Computer Equipment - Large/medium- mainframe, mini" would be used to reflect the purchase of this equipment. Since there is GST/HST payable, the GST must be reflected by using, "8171-Payment of GST on purchases". "6299-Net Increase or Decrease to Other Liability Accounts" is used to establish the accrual of the amount owing.

2) Departmental salaries are paid and a portion is allocated to the WIP account

2a) Departmental Salaries and wages are paid

FRA Coding Rationale: Salaries and wages for employees in the department are recorded as an operating expense and the amount is paid through the Payroll Control Account. The amount that pertains to the asset in question will get allocated to the Computer equipment WIP account accordingly (see below).

Authority Coding Rationale: Salaries can be charged to of the Department's capital, program or operating appropriation depending on the vote structure of the Department. Payroll Control account has no impact on appropriations and is therefore coded as 0000.

Object Coding Rationale: "0101- Civilian regular time - continuing employment" is used for salaries paid to full-time indeterminate employees. All RG interface Control Accounts are zero filled (0000), with the exception of I/S Control Accounts, at the object level.

2b) Salaries related to the computer equipment ($20,000) are charged to the WIP account

FRA Coding Rationale: $20,000 of salaries and wages that relate directly to the computer hardware will get re-allocated from operating expenses to the computer equipment WIP account.

Authority Coding Rationale: The salaries and wages should be re-allocated from the program or operating vote to the capital vote.

Object Coding Rationale: Since the salaries are being reallocated to a WIP account within the same department "3425 - Reallocation of expenditures/costs within a department" is used for the debit side of the transaction and "3717 - Recoveries of expenditures/costs within a department" is used on the credit side of the transaction. Since both of these items relate to standard object 12 they will be netted against each other, therefore having a nil effect.

3) To record additional expenses related to the computer hardware

FRA Coding Rationale: Once again the asset is still not ready for use, invoices has been received for consulting fees, additional circuits and freight so these amounts must be capitalized to the computer hardware WIP account. As well, a liability must be set up for the amount owing to the contractor. In this case, "21111 - Accounts Payable" is used.

Note: if the department's system cannot accommodate this entry, these costs may first be charged to operating expenses and then transferred to the work in process account. See Section 3.5.1 Capital Assets, Scenario C, journal entries 1 and 2 for an example of this type of entry.

Authority Coding Rationale: B14A(*) Consulting fees, freight and circuits that pertain to the computer is to be paid out of the Department's capital, program or operating appropriation depending the vote structure of the Department. Since Accounts Payable has no impact on the authority side, "R300 - All Other Assets and Liabilities" is used

Object Coding Rationale: Assuming that the freight charges are billed separately from the computer hardware purchase "0210 - Transportation of things not elsewhere specified" is used. "0472 - Information Technology consultants" is used for the consulting fees incurred by the department."1229 - Computer Equipment parts" is used for the circuits. "6299 - Net Increase or Decrease to Other Liability Accounts" is used to establish the accrual of the amount owing.

4) The computer is ready for use

FRA Coding Rationale: Since the asset is now ready for use, it also now must start being amortized. This means that the balance in WIP must reallocated to the Computer Hardware (asset) account.

Authority Coding Rationale: This is strictly an accrual transaction, so there is no impact on the authority side. The charge to the appropriation was made in the previous entry. In this case, "F999 - Other F Codes" will be both debited and credited, so there will be no effect on the authorities.

Object Coding Rationale: Since this is a re-allocation from the WIP account to the asset account within the same department, "3425 - Reallocation of expenditures/costs within a department" is used for the debit side of the transaction and "3717 - Recoveries of expenditures/costs within a department" is used on the credit side of the transaction. Since both of these items relate to standard object 12 they will be netted against each other, therefore having a nil effect.

Departmental Financial Statement Presentation and Disclosure Requirements

The department's Statement of Financial Position should disclose the net book value of tangible capital assets not being amortized because they are under construction or development. PS 3150.45.