When auditing a fixed asset account such as land buildings and equipment the auditor will normally?

Sections 7-7-211, 21-35-11 and 21-39-5, Miss. Code Ann. (1972), provide the State Auditor will prescribe systems of accounting for municipalities. The accounting system presented in this section is prescribed for use by all municipalities.

ACCOUNTING SYSTEM

A. ACCOUNTING GUIDELINES AND RECORDS SYSTEM

Purpose of Accounting System

Responsibility for the Accounting System

Funding the Accounting System

Public Access to Accounting Records

Budgetary Support of Accounting Records

Accounting System Fiscal Year

Accounting System Basis of Accounting

Accounting System Required Records

Ledgers

Doubtful Accounts

Cash Funds

Cash Receipt Warrants

Cash Disbursement Warrants or Checks

Cash Receipts Journal

Cash Disbursements Journal

Cash Receipts and Disbursements Ledger

Municipal Clerk's Monthly Cash Budget Report

B. CLASSIFICATION AND CHART OF ACCOUNTS SYSTEM

Purpose of Chart of Accounts

Chart of Accounts Number System

How the Chart of Accounts Works

First Three Digits of Chart of Accounts

Definitions: Fund and Account Groups

Second Three Digits of Chart of Accounts

Third Three Digits of Chart of Accounts

Account Extensions

Example of Account Extensions

Summary of Chart of Accounts Classifications

Classification of Fund and Account Group Numbers

Classification of Program and Department Function Numbers

Classification of Operating Account Numbers

C. PROPERTY ACCOUNTING SYSTEM

Introduction to Fixed Assets

Classification of Fixed Assets

Data Elements of Fixed Assets

Guidelines to Develop Cost of Fixed Assets

Equipment Accounting Procedures

Other Fixed Asset Accounting Procedures

Capital Asset Financial Reporting Procedures

Property Number System

Property Tagging System

Annual Inventory System

Form - Annual Inventory of Property

Form - Fixed Asset Subsidiary Ledger

Form - Fixed Asset Inventory Ledger:

Land

Buildings

Infrastructure and Improvements Other Than Buildings

Construction in Progress

Mobile Equipment

Other Furniture and Equipment

Lease Purchase

ACCOUNTING GUIDELINES AND RECORDS SYSTEM

Purpose of Accounting System

A properly operating municipal accounting system must comply with Mississippi legal requirements. These requirements are intended to provide a system that will present information to the officers and employees of the municipality for the proper operation and management of the municipality. The system is also designed to provide the public, municipal auditors, and regulatory agencies, such as the Office of the State Auditor, information they may require.

Responsibility for the Accounting System

Section 21-35-11, Miss. Code Ann. (1972), requires the clerk of the municipality to open and keep the books and records of the accounting system. This means the municipal clerk is responsible for the accounting records and at all times should assure they are secure from loss, damage and alteration.

Funding the Accounting System

Governing authorities should provide for funding for accounting records within the municipal clerk's department. The cost of accounting records should be paid from the municipal general fund. The costs of accounting records required for some special funds (such as utility system funds) may be paid from those funds or reimbursed to the General Fund.

Public Access to Accounting Records

Section 21-35-11, Miss. Code Ann. (1972), requires accounting records to be available for inspection by any citizen during regular office hours. The open records laws [Chapter 61 of Title 25, Miss. Code Ann. (1972)] also require books and records be available to the public for inspection and copying. Municipal authorities should review the open records laws and develop appropriate policies.

Budgetary Support of Accounting Records

Section 21-35-11, Miss. Code Ann. (1972), makes clear the primary objective of accounting records is to present financial information in such a way that the status of the budget can be easily determined by anyone comparing the records to the adopted budget. This law requires the books must contain headings and accounts corresponding with those adopted in the municipal budget. These headings and accounts should clearly present the purpose of each expenditure group and source of each item of revenue.

Accounting System Fiscal Year

Accounting records must be maintained on a fiscal year beginning October 1 and ending on September 30. This is necessary for financial information to be comparable with the municipal budget [Section 21-39-5, Miss. Code Ann. (1972)].

Accounting System Basis of Accounting

Accounting records must be maintained on a cash basis. This means transactions are recorded when cash is received or disbursements are made during the fiscal year. The only exception to this rule is if claims are received prior to the end of the current fiscal year and paid within thirty days after the end of the current fiscal year, these payments may be recorded within the current fiscal year's records. This is necessary for the financial information to be comparable with the municipal budget [Section 21-35-23, Miss. Code (1972)].

Accounting System Required Records

Certain records must be maintained by all municipalities. The following list explains what these record requirements are and their minimum content. It should also be understood any other records required by law or other regulation must also be maintained, even though they may not be included in this list.

The design and overall content of these records may also vary with the needs of each municipality. Records may be maintained manually or electronically as provided by Section 75-12-13, Miss. Code (1972).

Municipalities may maintain any additional records they deem appropriate for their needs. Additional records may be necessary to meet reporting requirements associated with grants, loans, contracts or federal law.

Ledgers

Records of the municipality's assets and liabilities must be maintained. This means a separate ledger must be maintained to define each of the municipality's asset and liability classifications. The ledger must contain sufficient information to define the nature and source of individual assets or liabilities listed. This requirement is to cover classifications such as receivables, investments and debt obligations which are not otherwise covered in this guide, state law or other regulations.

Doubtful Accounts

Municipal governing authorities may determine the collection of certain receivables is doubtful. Such a finding may be required for financial reporting purposes. However, records of doubtful receivables must be maintained. (Section 100, Miss. Constitution, prohibits the forgiving of receivables without legislative authority.)

Cash Funds

A cash fund is established to account for designated receipts and disbursements. This accountability is necessary to demonstrate compliance with legal or other restrictions. The total number of funds should be kept to a minimum by placing revenues in funds with similar purposes; for example, funds available for all legal municipal purposes should be placed in the General Fund. A special fund must be set up to account for any continuing revenue item with legally restricted expenditures. For example, proceeds of special ad valorem tax levies, state insurance rebate receipts, littering fines are revenues that must be accounted for in special funds. A separate bank account is not necessary for a fund, unless required by law or contractual obligation.

Cash Receipt Warrants

All cash collections must be documented by the issuance of receipt warrants. Receipt warrants must be pre-numbered and accounted for. The receipt warrant form must provide space for date issued, amount of money received, from whom the money was received, to what fund(s) money was deposited, purpose of money received and signature of municipal official who issued the receipt warrant. The receipt warrant must also contain sufficient copies to provide for a municipal record and a copy for the person(s) or entity paying the money. Other copies may be necessary, depending upon the needs of the municipality's total accounting system.

The receipt must itemize all items of costs or services if the payer makes a request for an "itemized receipt". However, it is not required that a copy of a receipt (routine or itemized) be delivered to the payer, unless requested.

Cash Disbursement Warrants or Checks

Sections 21-39-5 and 21-39-13, Miss. Code Ann. (1972), require and explain the legal content of disbursement warrants and checks. Disbursement warrants and checks must be pre-numbered and accounted for; on their faces they must express the date issued, amount of money payable, to whom payable, from what treasury and fund payable, the purpose and municipal minute book authorizing the payment, claim number, seal of the municipality, and space for the mayor (or majority of the board/council) to sign and the municipal clerk to attest. The disbursement warrant or check must also contain a copy to provide for a municipal record. Other copies of the disbursement warrant or check may be necessary, depending upon the needs of the municipality's total accounting system.

Cash Receipts Journal

All cash receipts must be recorded into cash receipts journals. A separate journal must be maintained for each fund. Each journal must be set up on a fiscal year basis, kept in receipt warrant number order, and totaled monthly with a summary of collections by fund and objective function.

Each journal must have separate columns so the entry(s) for each receipt warrant will be recorded to show the receipt warrant date, receipt warrant number, payer and amount(s) received. Each journal should also have columns to classify the amounts received by functional nature of the receipt and objective function account(s) the money was credited to. It may be necessary to have more than one entry for one receipt number.

Cash Disbursements Journal

All cash disbursements must be recorded into a cash disbursements journal. A separate journal must be maintained for each fund. This journal must be set up on a fiscal year basis, kept in disbursement warrant number order and totaled monthly with a summary of payments department and objective function.

Due to a special provision in Section 21-35-23, Miss. Code Ann. (1972), claims recorded prior to the end of the fiscal year, but paid within 30 days after the end of the year, may be charged to the month of September. This means journals are held open for one month to accommodate these disbursements. This process is necessary for accounting records to coincide with the legally adopted budget.

Each journal must have separate columns so the entry(s) for each disbursement warrant will be recorded to show the disbursement warrant date, disbursement warrant number, payee, and amount(s) paid. The journal should also have columns to classify the amounts paid by department(s) and objective function account(s) to be charged. It may be necessary to have more than one entry for one disbursement warrant. Care should be taken to classify disbursement warrants to the proper funds, departments and objects so compliance with budget laws will be demonstrated.

Cash Receipts and Disbursements Ledger

A cash receipts and disbursements ledger must be maintained for each fund. These ledgers are designed to present monthly and annual totals of cash received for and disbursed from the funds.

Each ledger record must present the departments and object columns to correspond to those used in the cash receipts and disbursements journals for the corresponding fund. Each month summarized totals from each funds cash receipts and cash disbursements journals should be posted to their corresponding ledgers. At the end of the fiscal year, the postings to the ledger should be totaled to present the total fiscal years receipts and disbursements.

Municipal Clerk's Monthly Cash Budget Report

Section 21-35-13, Miss. Code Ann. (1972), requires the municipal clerk to prepare a budget report to be presented to the governing authority at the regular meeting each month. This report is intended to provide information to the board/council so it can determine the status of the budget. This information is important for proper management of municipal finances and for the claims approval process. Approval of claims that result in the budget being exceeded could result in liability of the governing authority [Section 21-35-17, Miss. Code Ann. (1972)].

For receipts -- This report should show the total amount received for the fiscal year through the preceding month for property taxes and each other revenue item.

For disbursements -- The report must show the status of each department's budget. This means totals for each item adopted in the department's budget. These totals are as follows:

* Charges to each budget item from the beginning of the fiscal year through the end of the previous month -- This means the total of disbursements and any unpaid claims previously approved;

* Charges to each budget item for the previous month -- This means the total of disbursements and any unpaid claims approved at the previous month's board/council meeting;

* The total balance of each budget item -- This means the total budget item less the charges to the item for the year; and

* The total balance of each budget item as it will be if the board/council approves claims currently under consideration.

Other information -- The report may contain such other information as the board/council may request (See Section 21-39-19). For example, it is recommended a listing of each municipal fund along with its cash balance be included.

CLASSIFICATION AND CHART OF ACCOUNTS SYSTEM

Purpose of Chart of Accounts

The classification and chart of accounts system was developed to provide an accounting for expenditures and revenues on a basis consistent with the municipal budget. The system is also designed to provide information necessary for other purposes; such as financial reporting. The accounts in the chart are intended to define purpose of expenditures and source and nature of revenues.

Chart of Accounts Number System

The accounts listed in the chart should be sufficient to meet the needs of most municipalities. Additional accounts may be added and accounts may be subdivided as needed. Accounts numbers for funds, departments or objects not required or beneficial to the interest of the municipality may be deleted; provided sufficient accounts are used to demonstrate compliance with budget laws and other state legal compliance laws.

Numbers have been assigned to these accounts for organizational purposes and easy reference. Some numbers have not been assigned. Municipal authorities may adopt a different set of numbers for use with this chart of accounts. This may be necessary if the assigned numbers are not flexible enough to meet the needs of the municipality; or are not consistent with the accounting software used by the municipality. If a different set of numbers is adopted for the chart of accounts, the municipality must maintain a reference record to clearly associate each number with the account it represents.

How the Chart of Accounts Works

This is a cash basis system designed to meet the mandatory requirement that a municipality maintain accounting records readily showing the status of compliance with its budget [Section 21-35-11, Miss. Code Ann. (1972)]. The system accounts for cash activity by associating a nine-digit code and optional extensions to each transaction. The nine digits are separated into three groups of three each, so each transaction will be defined in terms of fund affected, department or function related, and purpose. Extensions separated from the primary number by a decimal point may be added for further classification purposes.

Also included in the system are supplemental (non-mandatory) classifications to account for assets, liabilities, etc.

First Three Digits of Chart of Accounts

The first set of three digits of the nine-digit code identify the fund affected by the financial transaction. The numbers in these three digits are divided into groups to categorize the funds used.

Accounting numbers are also provided for supplemental records for long-term debt and fixed assets. These numbers should be used to organize long-term debt and fixed asset information for governmental financial reporting purposes.

Definitions: Fund and Account Groups

General Fund - To account for the municipal general fund and funds created and budgeted by local option to account for money that could have been accounted for within the General Fund (See budget regulations).

Special Revenue Funds - To account for funds required by law to be accounted for within a separate fund which does not fall within any of these other fund groups (such as proceeds of a special tax levy).

Debt Service Funds - To account for funds designated by law for debt payments (such as a tax levy or assessment to repay bonded debt).

Capital Projects Funds - To account for funds designated by law for capital projects (such as proceeds of any bond issue).

Permanent Funds - To account for funds legally restricted to expenditure of their earnings, expenditure of principal is prohibited; and where expenditure is for governmental purposes.

Enterprise Funds - To account for utility funds (such as funds required for utility system operations by Chapter 27 of Title 21).

Internal Service Funds - To account for funds received by a municipal department from another municipal department for services rendered (such as a municipal repair shop or legal department).

Private Purpose Trust Funds - To account for funds for trust arrangements where principal and income benefit others (individuals, private organizations, or other governments).

Agency Funds - To account for funds not subject to expenditure control of the municipality's board/council (such as payroll clearing or the employment security trust fund, state court assessments, etc.).

Long-term Debt - Separate accounting numbers to be used with the municipality's debt accounting system and to organize information for financial reporting purposes.

Capital Assets - Separate accounting number to be used with the property accounting system prescribed in this guide and to organize information for financial reporting and other municipal purposes.

Second Three Digits of Chart of Accounts

The second set of three digits of the nine-digit code identifies the department or program affected by the financial transaction. The numbers in these three digits are divided into groups to categorize the functions of the departments. These functional groups are for financial reporting purposes and may not be used to group departments into a single budget. The following table lists the range of numbers available for departmental or program functions.

Program and Department Functions

It is required that each budgeted department be accounted for separately so the status of the budget is readily apparent [Section 21-35-11, Miss. Code Ann. (1972)]. A separate number must be assigned to each municipal department. Expenditure transactions must be coded with the department function number of the department whose budget will be charged.

Revenue transactions must also be coded with a program or department function number if the municipality is required to prepare full scope financial statements (See Section IV of this guide). Revenue coding is not required if the municipality qualifies for and elects to prepare a limited scope financial report.

Revenue classification is determined by identifying the department associated with the revenue. If a revenue item is not associated with a department, it should be classified by function. For example fees produced by department activity, grants for the operation of the department, etc. should be classified using that department's number. Revenues that are not associated with specific department function should be classified as general function. Revenues that are not associated with a single department or available for general municipal use may be assigned a separate function number.

The "Summary of Classification of Accounts for Municipalities" provides specific program function numbers to classify each department, and program numbers for revenues not associated with a specific department. The summary also includes a "most probable classification" department or program function number (in parentheses) by the revenue operating account numbers.

Third Three Digits of Chart of Accounts

The third set of three digits of the nine digit code provides for the objective account number. The numbers in these three digits are divided into groups to classify transactions by their nature and at the minimum detail level required for municipal budgeting. These numbers should be assigned to define information required for financial reporting and other purposes to be determined locally.

Objective Functions

Account Extensions

An account extension is one or more numbers positioned after a decimal at the end of the assigned account number. Extension numbers are used to define separate financial information in an account when it is not practical to establish a separate account.

Municipalities preparing financial statements in accordance with generally accepted accounting principals (see Section IV of this guide) will require additional financial information, such as when expenditures are associated with a capital project. Extensions used for this purpose or any other good reason; such as tracking special projects, year of agreement, compiling operating cost of particular vehicles or monitoring individual's travel expenses.

Extensions may be added to any of the three classification groups (Fund, Function or Department, or Object). If extensions are used, they must be defined in writing by the municipal clerk and on file in the municipal clerk's office.

Summary of Chart of Accounts Classifications

Classification of Fund and Account Group Numbers

Classification of Program and Department Function Numbers

PROPERTY ACCOUNTING SYSTEM

Real and personal property belonging to the municipality must be accounted for in the municipality's fixed asset records. The following fixed assets accounting system is prescribed for this purpose.

Introduction to Fixed Assets

Fixed assets are those assets of a long-term nature intended to be held or used by the municipality. This definition generally includes land, infrastructure, buildings, improvements other than buildings, equipment and furniture.

The importance of developing and maintaining a complete and accurate accounting of fixed assets cannot be emphasized too strongly. The municipal governing authority is responsible for the custody of its assets (Section 21-17-5, Miss. Code). This protective custody cannot be accomplished without complete and accurate records.

Another reason for developing and maintaining complete and accurate fixed asset records is to allow for accurate financial reporting. The value of fixed assets for all local governments is substantial and usually far greater in value than current assets. When records are not adequate, an audit opinion will be qualified for fixed assets, which means the auditor does not have enough evidence to offer an opinion.

Capital assets are major assets that benefit more than a single fiscal period. By definition, any asset that benefits more than one fiscal period potentially could be classified as a capital asset. As a practical matter, however, municipalities should capitalize only their higher cost assets. Municipalities must also maintain adequate control over all assets, including lower cost capital assets. Therefore, different thresholds (dollar values) have been established for recording fixed assets for legal compliance purposes and capitalizing assets for reporting purposes.

All deletions of fixed assets, regardless of method, shall be entered on the minutes of the governing board or council.

A ledger for each fixed asset is used for providing detailed information about the various assets. These subsidiary records are to be used for accountability of general fixed assets of the local government. Each ledger sheet should contain a description of the asset, including any identifying markings, its cost or estimated fair market value at acquisition, the date purchased, the location of the assets and the identification number, if applicable, which appears on the asset. Sample ledgers for fixed assets are shown in Exhibits C through I. Any changes, such as changes in location, should be recorded in the ledgers. At all times, the total of all individual ledger pages should equal the total on the "Fixed Assets Ledger," Exhibit B.

Classification of Fixed Assets

The following types of classifications should be used to account for fixed assets:

Land -- Land includes the amount of investment held in real estate other than buildings and/or other improvements. All land, as herein defined, should be capitalized without regard to its size or value.

Buildings -- Buildings include all local government-owned buildings, except those whose condition prevents their serving any present or future useful purpose. Permanently installed fixtures to or within the building are considered a part of the building. The costs of major improvements to a building, such as additions or renovations, should be capitalized and added to the value of the building.

Infrastructure Infrastructure includes long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets. Examples of infrastructure assets include roads, bridges, tunnels, drainage systems, water and sewer systems, dams and lighting systems.

Improvements Other Than Buildings -- This is a fixed asset account which reflects acquisition value of permanent improvements other than buildings, which add value to land. Examples are fences, retaining walls, sidewalks, pavements.

Construction-in-progress -- Construction-in-progress includes all partially completed projects for the construction of an asset. The cost of construction-in-progress should not be capitalized until the construction is completed. In the interim, the cost of construction-in-progress should be recorded as an expenditure of the appropriate capital projects fund.

Equipment (Road Equipment and Other Furniture and Equipment) -- Equipment includes movable property of significant value having a useful life that extends beyond one year. Equipment with a value of $500 and over should be capitalized. See "Equipment Accounting Procedures" for exceptions. A local government may consistently exercise the option to capitalize selected items of lesser value. Each local government should establish policies with respect to those items of equipment of lesser value that are to be capitalized.

Leased Property Under Capital Leases -- Lease purchase agreements are contractual agreements which are termed "leases," but which, in substance, amount to purchase contracts.

Data Elements of Fixed Assets

Data elements consist of identifying characteristics that will be recorded for fixed assets. It is important that the municipality initially identify the data elements to satisfy both internal and external reporting requirements.

The municipality must capture the following required data elements for all fixed assets:

Major asset class

Fund number

Acquisition date

Description of asset (Manufacturer, year model, model number, etc.)

Vendor

Serial number

Property control number

Location

Warrant (check) number

Method of Acquisition (Purchased, constructed, donated, etc.)

Acquisition cost or value

Method of disposition

Minute book and page number authorizing purchase or disposition

Date of disposition

Trade-in Amount/Sale Proceeds

Special conditions

Other relevant information (related board orders, court/investigation cases, etc.)

In addition to the required data elements listed above, the municipality must capture the following required data elements for assets that exceed capitalization thresholds:

Useful life of asset

Salvage value of asset

Function

Percentage of use by function if not 100¢

Current year depreciation expense

Accumulated depreciation

Guidelines to Develop Cost of Fixed Assets

The following are guidelines to use in determining the total acquisition cost of fixed assets which are to be used in establishing a value for the asset and which are to be recorded in the subsidiary ledgers:

Land (Exhibit C)

The acquisition cost of all parcels of land includes all expenditures in connection with its procurement, including the following:

Purchase price

Appraisal and negotiation fees

Title search fees

Surveying fees

Cost of consents

Payment of damage claims

Clearing land for use

Demolishing or removing structures

Filing costs

Receipts from the sale of land subsequent to the acquisition of the land should be credited against the cost recorded in the subsidiary ledger.

Land should be recorded at cost or, if donated to the municipality, at fair market value. It will be maintained on the inventory, regardless of purchase price.

Buildings (Exhibit D)

The acquisition cost of buildings, structures and improvements to buildings includes all expenditures in connection with the acquisition and construction including the following:

Purchase price or cost of construction

Fixtures attached to the structure

Professional fees (architect and/or engineering fees, etc.)

Cost of permits and licenses

Payment of damage claims

Insurance premiums

All buildings and building improvements are to be included in this classification regardless of value for legal compliance purposes. Buildings and building improvements with a cost in excess of $50,000 should be capitalized for reporting purposes. The straight line method should be used to calculate depreciation expense based on a useful life of 40 years and a 20¢ salvage value. Any building or building improvement with a value less than the required capitalization threshold will be an expense in the year of acquisition. A memo amount should be recorded in the fixed asset records to document cost.

The acquisition cost of buildings, structures and improvements to buildings should be reduced by receipts for the sale or salvage of materials initially charged to cost of acquisition or construction costs. These would include discounts, allowances and rebates secured, and amounts recovered through the surrender of liability and/or casualty insurance.

Buildings should be recorded at cost or at fair market value (of the building at the time it was donated to the municipality). All buildings, including portable and temporary building structures, will be maintained on the inventory, regardless of purchase price.

Additions to buildings are new and separate units, or extensions of existing units, and are considered fixed assets. The cost of additions to existing assets should be capitalized and added to the value of existing assets.

Alterations to buildings are changes to the physical structure of fixed assets that neither materially add to the value of an asset nor prolong its expected life. As such, alterations should not be capitalized.

Infrastructure (Exhibit E)

Acquisition cost for infrastructure includes the following expenditures:

Construction costs (i.e. contract amounts, payroll, fringe benefits, rental value for equipment, etc.)

Legal fees

Engineering fees

Right of way costs

Payment of damage claims connected with construction

Materials

All infrastructure is to be included in this classification regardless of its value for both legal compliance and reporting purposes. The straight line method should be used to calculate depreciation expense for roads based on a useful life of 20 years and a 30% salvage value. The straight line method should be used to calculate depreciation expense for concrete bridges based on a useful life of 50 years and no salvage value and timber bridges based on a 30 year useful life and no salvage value.

Improvements Other Than Buildings (Exhibit E)

Acquisition cost includes all expenditures in connection with their acquisitions, including the following:

Purchase price, contract price or job order cost

Professional fees (architects, attorneys, appraisers, engineers, financial advisors, etc.)

Payment of damage claims

Insurance premiums

All Improvements Other Than Buildings are to be included in this classification regardless of value for legal compliance purposes. Improvements Other Than Buildings with a cost in excess of $25,000 should be capitalized for reporting purposes. The straight line method should be used to calculate depreciation expense based on a useful life of 20 years and a 20¢ salvage value. Improvements Other Than Buildings with a value less than the required capitalization threshold will be an expense in the year of acquisition. A memo amount should be recorded in the fixed asset records to document cost.

Acquisition cost of improvements other than buildings, if applicable, should be reduced by receipt for the sale of materials initially charged to the cost of acquisition.

The category for improvement other than buildings is the classification created for the capital outlay of infrastructures (roads, bridges, parking lots, sidewalks and lighting) and other improvements other than buildings. A theoretical distinction between capital outlay and maintenance operation for improvements other than buildings is difficult to determine. The following definitions and guidelines are to assist the municipalities in distinguishing between maintenance and capital outlay:

Maintenance is defined as expenditures that neither materially add to the value of an asset nor appreciably prolong its life. Rather, maintenance keeps an asset in an ordinary, efficient operating condition. As such, maintenance costs should not be capitalized.

Capital outlay is defined as expenditures resulting in the acquisition of/or addition to fixed assets that materially add to the value of an asset and prolong its life. Capital outlay should be capitalized.

All new construction, reconstruction, major repairs, resurfacing and altering of surfaces costing in excess of $1,000 should be reported as capital outlay.

Construction-in-Progress (Exhibit F)

Construction-in-Progress represents a temporary capitalization of labor, materials, equipment and overhead cost of a construction project. The cost is accumulated the same as building cost and improvements other than building cost.

When the project is completed, cost in the Construction-in-Progress account is classified to one or more of the other major asset classes.

Equipment (Mobile Equipment and Other Furniture and Equipment) (Exhibits G and H)

The acquisition cost of equipment includes all expenditures in connection with its procurement, including the following:

Purchase price

Transportation charges

Installation cost

Other expenditures required to place the asset in its intended state of operation

All Mobile Equipment with a value of $500 or more and those items required to be included regardless of value are to be included in this classification for legal compliance purposes. Mobile Equipment with a cost in excess of $5,000 should be capitalized for reporting purposes. The straight line method should be used to calculate depreciation expense based on a useful life of 5 years for vehicles and equipment and 10 years for heavy equipment and a 10% salvage value.

Mobile Equipment with a value less than the required capitalization threshold will be an expense in the year of acquisition. A memo amount should be recorded in the fixed asset records to document cost.

Equipment with a value of $500 and a useful life expectancy of at least one year should be reported on inventory.

Leased Property Under Capital Leases (Exhibit I)

Capital leases for municipalities are authorized by Section 31-7-13(e), Miss. Code Ann. (1972). If the purchases are under this authority, they must obtain the following information:

The municipality should have the company from which the equipment and/or furniture was purchased to furnish it with an amortization table. The amortization table should have the payment date, interest rate, total payment, interest, principal and contract payable for each year of the lease purchase. It is important to have the cash price, the amount of each annual payment, commission and other cost associated with the lease purchase. Pertinent information about the company that sold the furniture and/or equipment to the municipality should be kept on file, i.e., name of company, location, etc.

A lease purchase ledger, Exhibit I, must be prepared at the beginning of the capital lease-sale agreement on each capital lease. The principal of the lease-purchase should be the amount recorded. It should be filed separately from the equipment inventory sheets until title has been transferred to the municipality. At that time, it should be added to the equipment and/or furniture inventory.

Equipment Accounting Procedures

All municipalities are required to have and maintain complete and current inventory lists of each property item with a cost to the municipality of $500 or more. Donated equipment is recorded based on its fair market value.

Some equipment should be included on a municipality's inventory list, regardless of the price paid by the municipality to acquire the item or the fair market value of the items. Weapons, audio visual equipment, power tools, refrigerators, televisions, lawn maintenance machinery, chain saws, air compressors, welders, generators and similar type items are examples of equipment to be considered when the municipality adopts its policy.

Items acquired through surplus property shall be added to a municipality's inventory list at fair market value; that is, surplus property items are added at the appraised value.

In the event a municipality is required to include an item on its property inventory list using the item's fair market value, the municipality will be required to maintain adequate documentation to justify how the fair market value was obtained.

A municipality may include other property items on its inventory list, regardless of price, provided the policy is consistently applied and recorded in the board's minutes.

Municipalities are free to label property items not included on their inventory lists with tags entitled "Property of ______________________________ (Name of Municipality)." Items deleted from property inventory lists must have their inventory numbers removed from the items. Items required by this rule to be included on property inventory lists will continue to be labeled with numbered tags or other permanently affixed numbering such as enamel paint.

For the purposes of these rules, "property" is defined as all furniture, vehicles, equipment and other personal property having a useful life expectancy of at least one year and with a cost of $500 or more. "Property" does not include the following: carpeting, draperies, installed floor-to-ceiling partitions, window shades or blinds, mattresses and box springs, hot water heaters, installed drinking fountains, museum accessions, library books, films or archival collections.

Other Fixed Assets Accounting Procedures

All other fixed assets, property rights and/or limitations not accounted for within the system defined in this chapter should be accounted for in supplemental accounting records. The supplemental accounting records should be designed in accordance with local policy to provide a permanent record of rights and limitations. Examples of an other fixed asset rights and limitations are mineral rights and land use reversion clauses.

Capital Assets Financial Reporting Procedures

In addition to accounting for property for compliance with the state auditor's property accountability regulations, municipalities must also maintain records for financial reporting purposes (see section IV of this guide). The municipality's legal reporting requirements and additional reporting initiatives of the board or council will require the adoption of additional property record policies.

These policies include capital asset thresholds for financial reports, useful lives of property, and salvage values of property. Capital asset threshold refers to the value a piece of property must have for it to be included in the financial report, useful life is the amount of time a piece of property is productive, and salvage value is the worth of the property at the end of its useful life .

Financial reporting polices should be developed with a clear understanding of legal requirements, cost and benefits. For example, Section 21-35-31 and State Auditor's regulations may qualify a municipality for a financial audit report that does not require property reporting. In this case these additional records may not be required. This office recommends municipalities consult with the preparers and auditors of their financial report; and the users of their financial statements to determine their financial reporting policies and capital assets accounting requirements..

Recommended Thresholds, Useful Lives, and Salvage Values for Financial Reporting

This office recommends the following capital asset thresholds, useful lives and salvage values for financial reporting purposes.

Recommended Depreciation Rates For Financial Reporting

Depreciation of property accounted for financial reporting (within the "Capital Asset Threshold") is also necessary. Depreciation is defined as the allocation of the cost of the asset over its useful life. Factors to consider in the calculation of depreciation are: cost, useful life, salvage value.

Depreciation may be calculated in different ways but the easiest and most efficient is the straight-line method. A full year's depreciation expense should be taken for all purchases and sales of capital assets during the fiscal year. Depreciation may be calculated at the end of the fiscal year.

Listed below are the suggested useful lives, salvage value and depreciation rate for fixed assets:

Property Number System

There are many methods of numbering fixed assets. The primary rule in any numbering scheme is to select a logical and uniform procedure.

Categorize the several classifications of general fixed assets and assign blocks of numeric codes to each category.

SAMPLE CLASSIFICATION SYSTEM

Determine a means of tagging equipment. The identification tags may be self-adhesive metal tags, stencils or other suitable tags on which a permanent number can be affixed and the tag attached to an item of equipment.

Note: Only items of equipment are to be physically tagged with property numbers. For internal control purposes, fixed assets such as buildings, improvements other than buildings and land are assigned property numbers in the accounting records. However, the asset is not physically tagged with this number.

Order the identification tags well in advance of the date on which the initial inventory of fixed assets is to begin.

Each fixed asset should be assigned a unique fixed asset property control number. When assigning a number to "land and buildings," use only the property number. When assigning a number to "equipment and improvements other than buildings," the number should indicate both the department to which the asset is assigned and the property number of the asset within the appropriate asset category.

Department heads should assign a property control number to each fixed asset inventoried. The control number assigned should then be entered on the fixed asset inventory form along with a detailed description of the asset (Exhibits G through I). An identification tag should be attached to each item of equipment inventoried.

Property Tagging System

Physical tagging is one of the most important aspects of physical asset control. The municipality should investigate the many commercial methods of attaching property numbers. Different tagging procedures should be used depending upon the type of equipment to be tagged. For example (but not limited to), animals may be tagged electronically or by an attachment to a collar.

Select the next sequential fixed asset property number of the appropriate category of asset to be tagged. Enter the number on the fixed asset ledger (Exhibits G through I). Provide the necessary information concerning each item to be inventoried.

Attach the identification tag or stencil the identification number on each item of equipment. The following are guidelines for tagging equipment:

Upon completion of the inventory, recheck to be sure asset property numbers were assigned to each item included in the inventory.

Annual Inventory System

At the end of each fiscal year a thorough inventory of all fixed assets owned by the municipality must be made. The board or council should assign general responsibility to oversee the inventory to the finance officer, comptroller, city administrator, municipal clerk or other responsible officer. The purpose of the inventory is necessary to verify the existence of all fixed assets. However, other information, such as the condition of the asset may be documented.

The municipality's auditor should also be consulted prior to inventory. Auditors may observe the inventory and request additional procedures.

Inventory Procedure:

At the close of each fiscal year, furnish each department head with a supply of blank forms for the fixed asset inventory (Exhibit A).

Each department head should list each item of equipment in his department, including a brief description of the item, its condition, and its property number, taken from the actual piece of equipment.

Return completed inventory forms to the municipal clerk's office.

Verify the information listed on the new inventory forms with previous inventory records. Include any changes in fixed assets, such as land, buildings and other improvements.

If a fixed asset included in the previous inventory is not listed in the new inventory, investigate the reason for the discrepancy.

If any property number tags are missing, replace them.

Note in the records any transfers between departments not previously recorded.

Correct the permanent inventory records (land, buildings, improvements other than buildings, construction-in-progress, road equipment, other furniture and equipment, and lease purchases) to reflect actual changes in the inventory.

Prepare fixed asset ledger based on the inventory (Exhibit B).

How do you audit land and building?

How do you audit a fixed asset?

How do you audit property plant and equipment?

How should an auditor verify fixed assets?