11

Patrick Collins

Business Development Manager

630/705-9282

Illinois ASBO’s 56th Annual Conference

May 17, 2007

Fixed Asset Management in the Education Environment

22

Overview

Why Manage Fixed Assets

Review GASB 34 Reporting Requirements

Common Audit Exceptions

Physical Inventories/Verifications

Insurance Appraisals

33

Why Manage Fixed Assets?

Federal Reporting Requirements

GASB 34 ReportingDepreciationQualified audit

Risk Management Insurance PlacementSupport of Proof of Loss

44

Why Manage Fixed Assets? – Cont.

Maximize the use of district resources

Reutilization

Life cycle management and planning

Management information for decision making

Provide required level of service

Loss, damage, and destruction avoidance

Good stewardship to: School Board, Local Press, Public

55

GASB 34 Reporting Requirements

Timetable Phase-in approach starting for FY ending June 30, 2003 By June 30, 2005 all school districts should be compliant

Reporting Requirements Capital assets reported at historical or estimated original cost Capital assets are to be depreciated over estimated useful life Capital asset reported net of accumulated depreciation in

Statement of Net Assets Depreciation expense should be reported in the Statement of

Activities

66

GASB 34 Capital Asset ReportingReport Depreciation by Function:

1100 Regular Instruction

1200 Sp. Ed. Instruction

1300-1900 Other Instruction

2100 Pupil Services

2200 Instructional Services

2300 General Admin. Srvs.

2400 School Admin. Srvs.

2500 Business Services

2550 Transportation Services

2600 Central Services

2540 O&M

77

Common Audit Exceptions

Useful life assignment inconsistent with Board Policy/Capital Asset Policy

Depreciation method does not match Board Policy/Capital Asset Policy

Function data not reported

Buildings not reported by Function

Beginning Balance does not match Ending Balance from previous year

Assets fully depreciated at transition

Federal funds not being tracked ($500 level)

88

Common Audit Exceptions – Cont.

Land Account Often reported with no detail backup If cost information in lacking, can the assessor provide with confidence,

estimates of original cost at the date of acquisition or donation? Estimating historical land values

Buildings/Construction Costs Entry for Land/Improvements to land to prepare site (non-depreciable) Entry for land improvements- parking lots, sidewalks, lighting,

landscaping, etc. (useful life shorter) Entry for building cost

99

Inventory Control vs. GASB 34 Reporting

1010

GASB 34 Capitalization Threshold

Issues to Consider

Property Record Maintenance higher capitalization threshold equates to accounting for big items

easier sophisticated, recognizable items less movement fewer items

economies efficiencies auditability

1111

Inventory Control Threshold

Items that require special attention to ensure legal compliance Items that require special attention to protect public safety and avoid

potential liability Items that require special attention to compensate for heightened risk of

theft (“walk away” items) Individuals responsible for controlled capital-type items should prepare

and maintain a complete list of those items each year within the department

Departments should certify each to the central accounting function (or other designated finance function) that updated lists of controlled capital-type items are on file and available for inspection

The central accounting function should periodically verify data on controlled capital-type items on file in each department.

GFOA recommending practice on “Ensuring Control over Noncapitalized Items” (2005):

1212

Physical Inventory

Objectives

To confirm assets in the system are physically exist

Assets are appropriately recorded in the system

Records are accurate as to location, description, accountability, etc.

Identify excess, unserviceable or obsolete property

Assesses Health of the System!

1313

Working with outside firm to verifycapital asset schedule

Existing data file

Physical verification of equipment

Tagging

Inspection of buildings and improvements (for insurance?)

Review client data for non-tagged assets

Reconciliation

Report preparation

Capital Asset Reports

Exception Reports

1414

Property Insurance Appraisals

Used to establish Cost of Reproduction New for insurance placement

Buildings

Insurable Land Improvements

Contents

Every 5 years

Support of Proof-of-Loss

In conjunction with “verification” or accounting services

1515

Property Insurance Appraisals -cont.

Cost of Reproduction New - Estimated amount required to reproduce a duplicate or a replica of the entire property at one time in like kind and materials in accordance with current market prices for materials, labor, and manufactured equipment, contractors' overhead and profit, and fees, without provision for overtime, bonuses for labor, or premiums for material or equipment. Synonymous with the insurance industry term “replacement cost”.

VS.

Replacement Cost New - the estimated amount required to replace the entire property at one time with a modern new unit using the most current technology and construction materials that will duplicate the production capacity and utility of an existing unit at current market prices for materials, labor, and manufactured equipment, contractors’ overhead and profit, and fees, but without provision for overtime, bonuses for labor, or premiums for material or equipment.

1616

Property Insurance Appraisals -cont.

Property Insurance Update 2001-2005

Post 9/11/01 hardening of the property insurance market

Historical underwriting losses were attributable to significant valuation issues for the insured properties.

Valuation issues were attributable to the lack of accuracy and completeness of data obtained from the insured.

Increased scrutiny of the insurance industry by Federal and State regulators

Significant losses related to the hurricanes in the gulf coast.

Difficulty placing coverages in certain sectors

Reinsurance market is beginning to dictate changes in the underwriting process

1717

Property Insurance Appraisals -cont. – changes in insurance market Improved underwriting discipline dictated by the reinsurance markets

Increased emphasis on a consistent disciplined approach to underwriting:

Exposure data analysis (COPE data)

Loss experience analysis

Management assessment

Increased market specialization for carriers

Increased focus on geography

Discontinuance of blanket coverage

Appraisal requirements for insured properties

Discontinuance of contingent broker commissions

Increased financial transparency (Sarbanes-Oxley)

1818

Property Insurance Trends 2006-2007

Natural Catastrophe (Wind, Quake & Flood) Exposures:

Increased pricing

Increased windstorm deductibles

Decreased coverage capacity

Tightening of underwriting guidelines

Closer attention to aggregate geographic risks

Increased emphasis on portfolio catastrophe modeling

New catastrophe models have increased expected losses

Non-Cat. Property Decreases Time to get appraisal

1919

Inflation: What’s Happening in Construction Cost Trends?

Moderate construction inflation over the last fifteen years (1% - 3%).

Significant construction inflation in 2004 (10.5%).

Slowing but not back to normal in 2005 (5.5 – 6.5%)

Slowing again 2006 (4.4%)

20%+ Inflation in 3 years!!!!!!!!

2020

Inflation: What’s Happening in Equipment Cost Trends?

Equipment Inflationary Increases, 1990 – January 2006:

Machinery & Equipment Cost Trends

Total Increase Annual Average

Marshall & Swift – Ind. Average + 40.1% + 2.15%

FM Global – Industrial Equipment Composite + 34.4% + 1.85%

BLS-PPI Finished Goods Composite + 36.3% + 1.95%

Sources cited:

Marshal Valuation Service - Marshall & Swift Quarterly Cost Index, industrial Equipment Average of All

FM Global – Industrial Cost Trends, Industrial Equipment Composite

U.S. Department of Labor, Bureau of Labor Statistics - Producer Price Index, Finished Goods Seasonally Adjusted - Table WPSSOP3000

2121

Inflation: What’s Happening in Equipment Cost Trends?

Machinery & Equipment Cost Trends

2004 2005 2006

Marshall & Swift – Ind. Average + 7.5% + 4.7% + 6.2%

FM Global – Industrial Equipment Composite + 2.6% + 3.0% + 2.9%

BLS-PPI Capital Equipment + 2.4% + 1.3% + 1.8%

Equipment Inflationary Increases, 2004 – January 2006:

Sources cited:

Marshal Valuation Service - Marshall & Swift Quarterly Cost Index, industrial Equipment Average of All

FM Global – Industrial Cost Trends, Industrial Equipment Composite

U.S. Department of Labor, Bureau of Labor Statistics - Producer Price Index, Capital Equipment - Table WPUSOP3200

2222

Benefits of Insurance Appraisal

Determine the adequacy of insurance coverage:

completeness of property listingaccuracy of property values

Improved risk management

Improved marketability to underwriters

Serves as a basis for the allocation of premiums

Serves as a basis for the preparation of a proof-of-loss

2323

Now what?

Capital asset/insurance reporting policiesCapitalization Threshold

Useful Life Schedule

Set guidelines for property management

Set forth specific procedures

Acquisition

Retirement

Transfers

Tagging

Inventory

2424

Reports

Capital Asset Reporting for GASB 34

Summary Reports by Account

Summary Report by Function

Detailed Record

Insurance Appraisals

Summary Report (Statement of Values)Buildings, land improvements, contents

Detailed Reports