I.         Definition of Intangible Assets

           A.       Intangible Assets

Intangible assets are assets that are:

           (1)       Identifiable – Either the assets:

(a)       Can be separated or divided from the District and sold, transferred, licensed, rented or exchanged; or

(b)       Arose from some legal right (i.e., a contractual right), regardless of whether those rights are separable or dividable;

           (2)       Lacking physical substance;

(3)       Non-financial in nature – The assets are not in a monetary form, such as cash or investment securities; and

(4)       Possessing a useful life that extends beyond a single financial reporting period.[1]

Examples of intangible assets include the following:

(1)       Easements or land use rights (i.e., water rights, timber rights and mineral rights);

(2)       Patents, trademarks and copyrights; and

(3)       Computer software or websites that are purchased, licensed or internally generated.

Examples of assets that are not intangible assets for purposes of this Policy include only the following:

(1)       Assets acquired or created primarily for purposes of obtaining income or profit, as these are considered investment assets;

(2)       Assets from capital lease transactions reported by lessees, except licensing agreements to lease commercially available computer software; and

(3)       Goodwill established or created between the District and another entity.

           B.       Outlays Associated with Internally Generated Intangible Assets

Intangible assets that are generated or created internally likely have outlay expenses associated with the generation or creation.  Intangible assets are considered to be generated or created internally if they are:

(1)       Created by the District;

(2)       Created by a third-party contracted by the District; or

(3)       Acquired by the District from a third-party and require more than minimal incremental effort on the part of the District to begin to achieve the expected level of service capacity.

C.       Outlays Associated with Internally Generated Computer Software

Computer software that is generated or created internally likely has outlay expenses associated with the generation or creation.  Computer software is considered to be generated or created internally if it is:

1. Developed by the District;
2. Developed by a third-party contracted by the District; or
3. Commercially available software acquired, purchased or licensed by the District from a third-party that is modified using more than minimal incremental effort before being put into operation.

 

II.        Measuring of Intangible Assets

           A.       Threshold for Capitalization of Intangible Assets

The District shall adopt an intangible asset capitalization threshold policy to govern the amount at and above which intangible assets must be reported in the District’s annual reporting statements and audits.  More specifically, the policy shall provide a threshold to be applied to individual intangible assets and shall prohibit the aggregation of items, including intangible assets and outlays, to meet the threshold.[2]  The policy shall be approved by the Board of Education prior to its adoption.

[Note: The District’s policy regarding intangible asset capitalization threshold should generally be designed to capture eighty percent (80%) of the total cost of the District’s intangible assets.  Therefore, prior to creating a policy regarding intangible asset capitalization threshold, the District must know the total value of its intangible assets.]

           B.       Recognition of Intangible Assets

The District shall record individual intangible assets exceeding the threshold amount outlined in the District’s intangible asset capitalization threshold policy as follows:

1. Intangible assets received in an exchange transaction or purchased shall be recorded at actual historical cost, which includes direct costs, and excludes indirect costs;          
2. Intangible assets in the form of business activities and enterprise funds received in an exchange transaction or purchased shall be recorded at actual historical cost, which includes direct costs, specifically capitalized interest and ancillary charges, and excludes indirect costs; and
3. Intangible assets received in a non-exchange transaction or donated shall be recorded at estimated fair market value at the time of acquisition, which requires implementation of a rational method to determine or estimate the value at which the asset could be exchanged between willing parties not involved in a forced sale.
4. Intangible assets reported retroactively[3] shall be recorded at actual historical cost,[4] regardless of whether the asset is fully amortized prior to June 30, 2009.  If an intangible asset reported retroactively is fully amortized prior to June 30, 2009, the District shall record the value of the intangible asset separately from the value of the amortization.

 

III.       Accounting for Intangible Assets

A.       Intangible Assets

Intangible assets exceeding the threshold shall be accounted for as capital assets.  Therefore, all financial requirements concerning capital assets, including, but not limited to, all accounting and reporting requirements, such as those associated with recognition, measurement, presentation and disclosure, shall be followed.

           B.       Outlays Associated with Internally Generated Intangible Assets

Outlays from internally generated intangible assets exceeding the threshold shall not be accounted for as capital assets until they are identifiable and the “specified conditions criteria” have occurred (see below).  Outlays exceeding the threshold not meeting these requirements and/or incurred prior to these criteria occurring shall be accounted for as an expense when the expense is incurred.

Outlays from internally generated intangible assets exceeding the threshold shall be accounted for as capital assets if they occur after such time as:

1. The assets are identifiable – See the definition outlined in Section I of this Policy; and
2. The “specified conditions criteria” have occurred, as follows:

(a)       Determination of the specific objective of the project and the nature of the service capacity that is expected to be provided by the intangible asset upon completion of the project;

(b)       Demonstration of the technical or technological feasibility for completing the project so that the intangible asset will provide its expected service capacity; and

(c)       Demonstration of the current intention, ability, and presence of effort to complete or, in the case of a multiyear project, continue development of the intangible asset.

C.       Outlays Associated with Internally Generated Computer Software

Outlays from internally generated computer software developed by the District or by a third-party contracted by the District exceeding the threshold shall be accounted for as follows:

(1)       During the preliminary project stage, all outlays exceeding the threshold shall be accounted for as an expense when the expense is incurred.  The preliminary project stage involves the conceptual formulation and evaluation of alternatives, the determination of the existence of needed technology and the final selection of alternatives for development of the software.

(2)       During the application development stage, outlays that occur before the specified conditions criteria have occurred and exceed the threshold shall be accounted for as an expense when the expense is incurred; outlays that occur after the specified conditions criteria have occurred[5] and exceed the threshold[6] shall be accounted for as capital assets; and outlays that occur after the computer software is substantially complete and operational and exceed the threshold shall be accounted for as an expense when the expense is incurred.  The application development stage involves the design of the chosen path, including, but not limited to the purchase of the software or license;[7] the software configuration and the software interfaces; the coding; the installation to hardware; the testing; any minor modifications made to the software before it is placed into operation;[8] and the data conversion, if such was deemed necessary in order to make the software operational.

(3)       During the post-implementation and operation stage, all outlays exceeding the threshold shall be accounted for as an expense when the expense is incurred.  The post-implementation and operation stage includes the data conversion, if such was not deemed necessary during the application development stage in order to make the software operational; the application training; and the software maintenance.

Outlays from internally generated computer software extensively modified by the District or by a third-party contracted by the District exceeding the threshold shall be accounted for as follows:

(1)       All outlays from the modification of computer software exceeding the threshold shall be accounted for as capital assets if the one of the following conditions exist:

(a)       The modification causes an increase in the functionality of the software (the software is able to perform tasks that it was previously incapable of performing);

(b)       The modification causes an increase in the efficiency of the software (the software offers an increased level of service without the need for an increased performance of tasks); or

(c)       The modification extends the estimated useful life of the software.

(2)       All outlays from the modification of computer software exceeding the threshold shall be accounted for as an expense when the expense is incurred if none of the above conditions exists.

 

IV.      Amortization of Intangible Assets

In amortizing an intangible asset that is capitalized because it exceeds the threshold and meets the requirements above,[9] the following general rules shall apply:

(1)       The useful life of an intangible asset generally shall be estimated.  Therefore, the intangible asset has a determinable useful life, even if it must be estimated, and shall be amortized using the straight-line method.

(2)       The useful life of an intangible asset that arises from and is limited by contractual or other legal rights shall not exceed the period of the intangible asset’s service capacity provided under the contract or other legal provision.  Therefore, the intangible asset has a determinable useful life, even if it must be estimated, and shall be amortized using the straight-line method.

(3)       The useful life of an intangible asset that is not limited by any legal, contractual, regulatory, technological or other factors shall be indefinite.  Therefore, the intangible asset has no determinable useful life and shall not be amortized.

In considering changes in circumstances that affect the amortization of an intangible asset, the following rules shall apply:

(1)       An intangible asset that arises from and is limited by contractual or other legal rights shall take into consideration contract renewal periods for purposes of determining its useful life and its amortization schedule only if the following requirements are met:

(a)       There is evidence that the District will seek and be able to achieve contract renewal; and

(b)       The anticipated outlay for contract renewal is nominal in relation to the level of service capacity obtained by the contract renewal.

(2)       An intangible asset that was once not limited by any legal, contractual, regulatory, technological or other factors, but now is limited by such factors due to changes in conditions, shall be tested for impairment[10] because the expected duration of the useful life of the asset has changed, and then the following rules shall apply:

(a)       If an impairment is determined not to exist, the intangible asset has a determinable useful life and shall be amortized using the straight-line method.

(b)       If an impairment is determined to exist, the following must occur:

(i)        The loss due to the impairment shall be accounted for as a loss;

(ii)       The intangible asset has a useful life that must be estimated and is determinable; and

(iii)      The carrying value, or the value remaining after accounting for the impairment, shall be amortized using the straight-line method over the remaining estimated useful life.

 

V.       Selling or Disposing of Intangible Assets

In selling or disposing of intangible assets, the District shall calculate and report a gain or loss on the sale or disposal.  The gain or loss shall be calculated by subtracting the net book value, which consists of the historical cost less any accumulated amortization, from the net amount realized on the sale or disposal.

 

VI.      Application of Policy

The requirements of this Policy shall apply to all financial statements covering periods beginning after June 30, 2009.  Consequently,

The requirements of this Policy shall apply retroactively to intangible assets that were in existence from July 1, 1980, through June 30, 2009.[11]  However, the following intangible assets shall not be retroactively reported as capital assets:

(1)       Intangible assets considered to have an indefinite useful life as of June 30, 2009;

(2)       Intangible assets considered to be internally generated as of June 30, 2009;

(3)       Outlays from internally generated computer software incurred in the application development stage on or prior to June 30, 2009;[12]

(4)       Any intangible asset held by a “Phase 3” District, characterized as such for purposes of implementing GASB Statement 34.  [Note: The District needs to include a specific statement regarding whether the District was classified as “Phase 3” for purposes of implementing GASB Statement 34.]

[Note: This effectively means that the District, which is on an accrual basis of accounting, will be required to restate its beginning net assets, fund balances, or fund net assets in order to fully report, as of July 1, 2009, the beginning of fiscal year 2010, the appropriate value and amortization of certain intangible assets that were in existence from July 1, 1980 to June 30, 2009.]

 

General

The board strives to maintain adequate fund balances and reserves in order to:

1.              Provide sufficient cash flow for daily financial needs;

2.              Secure and maintain investment-grade bond ratings;

3.              Offset significant economic downturns or revenue shortfalls; and

4.              Provide funds for unforeseen expenditures related to emergencies.

Reporting Fund Balances

The board shall engage in accounting and financial reporting procedures in compliance with the Governmental Accounting Standards Board’s Statement No. 54 (“GASB 54”) or successor.

Pursuant to GASB 54, governmental fund balances shall be identified for purposes of reporting as one of the following types of funds:

1.              “Nonspendable”- fund balances that can never be spent because the balances are either not in spendable form because they cannot currently be spent or cannot ever be spent (i.e., supply inventory funds, prepaid items, long-term loans receivables (including from loans to other funds of the District) and non-financial assets held for resale) or the District is legally or contractually required to maintain the balances in-tact (i.e., principal of an endowment fund).

2.              “Restricted”- fund balances that can be used only for the specific purposes permitted in externally enforceable legal restrictions, including, but not limited to, the constitution, enabling legislation or external resource providers (i.e., PPEL funds, Debt Service funds, Capital Project funds, state grant carryover funds, categorical funds including for example, per pupil supplement funds, special education funds, drop-out prevention funds).

3.              “Committed”- fund balances that can be used only for the specific purposes determined by a formal action of the Board.

4.              “Assigned”- fund balances that are constrained by the District’s intent to use the funds for specific purposes determined by the Board and/or designee, but which are neither restricted nor committed (i.e., cash flow fund, funds for book fairs or field trips that are within the general fund).

5.              “Unassigned”- fund balances that have not been restricted, committed or assigned (i.e., residual classification for the general fund or a deficit balance from overspending for specific purposes for which amounts have been restricted, committed or assigned for other funds).

Governmental fund balances shall first be distinguished based upon whether the fund balance is nonspendable, as defined above, and then shall be distinguished based upon whether the fund balance is restricted, classified, assigned or unassigned, all as defined above. 

Governmental fund balances shall be identified at the highest category of identification possible, regardless of whether the fund balance also fits into a lower category of identification (i.e., a PPEL fund balance should be reported as “restricted,” even if a separate Board action “committed” a portion of the PPEL fund balance to a specific purpose).

Governmental fund balances identified as committed fund balances after the end of the fiscal year, the amount shall be reflected as assigned on the balance sheet for that year.

Authority to Commit or Assign Fund Balances

The Board shall have the authority to determine whether a governmental fund balance in the District’s general fund is committed and/or assigned, both as defined above.  The Board delegates to the [superintendent and/or the Board secretary] the authority to assign a fund balance in the District’s general fund to be used for a specific purpose.

The Board shall take formal board action prior to committing a fund balance, modifying the commitment of a fund balance or removing the commitment of a fund balance.  The Board shall approve by a majority vote the commitment of a fund balance, the modification of the commitment of a fund balance and the removal of the commitment of a fund balance.  The Board shall take action to commit a fund balance prior to the end of each fiscal year in which the original committed amount is determined.  The Board may take action to commit a fund balance without determining the exact amount of the committed fund balance prior to the end of the fiscal year, provided the intended committed purpose is identified prior to the end of the fiscal year and the exact amount of the committed fund balance is determined after the end of the fiscal year.

Spending Fund Balances

Pursuant to GASB 54 and absent any other specific direction in place at the District, the District shall spend and/or reduce governmental fund balances in the following order: restricted fund balance, committed fund balance, assigned fund balance and unassigned fund balance.