Appendix 1

Relevant extract from Police Scotland Finance Capital Accounting  Guidance policy

2. Accounting Regulatory Framework

2.1 The accounting framework governing the recording and reporting of capital transactions is covered by guidance from:

• HM Treasury’s Financial Reporting Manual (FReM);
• Scottish Government’s Scottish Public Finance Manual (SPFM);
• International Accounting Standards (IAS);
• International Financial Reporting Standards (IFRS).

2.2 FReM is based on the appropriate application of IAS and IFRS in the context of the public sector.

3. Categories of Asset

3.1 The reporting of Capital Assets under IFRS requires that expenditure is split into three distinct areas:

• Property, Plant and Equipment
• Intangible Assets (generally ICT software and long-term licenses)
• Assets Held for Resale

3.2 Property, Plant and Equipment are further split into:

• Land
• Buildings
• Dwellings
• Investment Properties
• Motor Vehicles
• Furniture and Fittings
• ICT Hardware
• Plant and Machinery
• Assets Under Construction

3.3 Assets should be further distinguished between owned and leased assets, or those held under a Private Finance Initiative (PFI).

4. Recognition of Capital Assets

 4.1 Items which give rise to future economic benefits flowing to the organisation for a period in excess of one year, will be viewed, subject to limitations, as being suitable for capitalisation.

4.2 Long-term service contracts do not fall within the scope of being capital.

4.3 In accordance with IAS16, all property, plant and equipment must initially be measured at cost which should also reflect its fair value provided that it was acquired in an arm’s length transaction and no impermissible costs have been capitalised.

4.4 Cost is defined as “…the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of the other IFRSs, for example, IFRS 2 Share-based Payment”. Other consideration could, for example, include an asset given up in exchange.

4.5 The cost of an item of property, plant and equipment comprises:

• The purchase price, including import duties and non-refundable purchase taxes less any trade discounts and rebates;
• Directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and
• The initial estimate of costs of dismantling and removing the item and restoring the site on which it is located (‘decommissioning costs’) where there is a corresponding obligation recognised as a provision under IAS 37, ‘Provisions, contingent assets and contingent liabilities’.

4.6 Subject to de minimis limits (see section 5 below), all directly attributable expenditure on the acquisition or creation of the asset should be capitalised on an accruals basis.

4.7 Typically, expenditure on property, plant and equipment will involve:

• Acquisition, construction, preparation or replacement of buildings and other structures and their associated fixtures and fittings
• Acquisition, installation or replacement of movable or fixed plant, machinery, vehicles and vessels

4.8 In addition to the direct costs of purchase or construction, other directly attributable expenditure that should be capitalised will include:

• Acquisition costs (such as stamp duty, import and non-refundable purchase taxes);
• Reclamation or laying out of land;
• Site preparation and clearance;
• Initial delivery and handling costs;
• Installation and assembly costs;
• Professional fees (such as legal, architects’ and engineers’ fees); and
• The costs of employee benefits as defined in IAS 19, ‘Employee Benefits’ that arise directly from the construction or acquisition of the item.

4.9 Only the costs that are ‘directly attributable’ to the item of property, plant and equipment, and not the general operating costs, may be capitalised.

4.10 IAS 16 specifically says that the following are ‘non-directly attributable’ costs and so should be charged directly to the Operating Cost Statement rather than capitalised.

• costs of opening a new facility;
• costs of introducing a new product or service (including costs of advertising and promotional activities);
• costs of conducting business in a new location or with a new class of customer (including costs of staff training);
• administration and other general overhead costs;
• costs incurred while an item capable of operating in the manner intended by management, has yet to be brought into use or is operated at less than full capacity;
• initial operating losses, such as those incurred while demand for the item’s output builds up;
• costs of relocating or reorganising part or all of an entity’s operations;
• employee costs not related to the specific asset (such as site selection activities);
• operating losses that occur because a revenue activity has been suspended during the construction of the asset; and
• abnormal costs e.g. costs relating to: design errors; industrial disputes; idle capacity; wasted materials, labour or other resources; and production delays.

4.11 Where ‘non-directly attributable’ costs form part of the total expenditure of a ‘capital’ project, the amounts not directly attributable will require to be charged to operating costs. The overall funding requirement for the project should be discussed with the relevant Business Partner.

4.12 Acquisition, installation or replacement of movable or fixed plant and machinery relating to private dwellings will not be recognised as part of capital expenditure.

5. Capitalisation Threshold – de minimis limits

5.1 In considering items to be capitalised, the SPA has adopted a threshold of £5,000 (exclusive of VAT).

5.2 There are instances where the single purchase of an item would not meet the de minimis criteria but a multiple purchase or a number of assets grouped together would meet the requirement. Also, de minimis limits do not apply to Land, as all holdings of land will be recognised. Further guidance is available for each class of asset from the Statutory Reporting Team.

5.3 ‘Grouped assets’ are a collection of assets which individually may be valued at less than £5,000 but which together form a single collective asset with a group value in excess of £20,000, excluding VAT. The items must fulfil all the following criteria: · the items are functionally interdependent; · the items are acquired at about the same date and are planned for disposal at about the same date; · the items are under single managerial control; and · each individual asset has a material value.

5.4 Assets acquired in the course of the initial setting up of a new building or on refurbishment may also to be treated as ‘grouped’ for capitalisation purposes.

5.5 See Section 15 for assets held under finance lease or Private Finance Initiative.

6. Measurement

6.1 Assets will be held at cost, less any depreciation attributed to it. This is termed the “net book value”.

6.2 The value of an asset may be adversely affected at any time. This will give rise to a downward adjustment in value, which is termed as Impairment.

6.3 Impairment reviews are carried out annually by the Estates department on Land, Buildings and Investment Properties.

6.4 Following the cyclical revaluation exercise any increase in value will be treated as a revaluation gain and credited the Revaluation Reserve.

7. Depreciation and Amortisation

 7.1 There is a requirement to reflect the consumption of the asset over its estimated useful life by way of depreciation for property, plant and equipment and amortisation for intangible assets.

7.2 Assets Under Construction, Investment Properties, Land and Assets Held For Sale will not be depreciated. Any other assets with an indefinite life will not be depreciated.

7.3 The class of asset will determine the useful life. Summaries of useful lives are provided in Appendix A, with further details available from the Statutory Reporting Team.

7.4 Where appropriate, a residual value will be established and the asset written down to that value over its intended life.

7.5 Useful lives shall be subject to periodic review to ensure that the estimated depreciation and/or amortisation rate applied, is appropriate.

7.6 Adjustments to depreciation and/or amortisation arising from changes to the estimated useful life of an asset will be spread over the remaining useful life of the asset.

7.7 Depreciation will commence in the month after which the asset is first brought into use and will cease in the month prior to disposal.

7.8 An asset leased under finance lease or PFI should be depreciated over the shorter of the lease term and its useful life, unless there is a reasonable certainty the lessee will obtain ownership of the asset by the end of the lease term in which case it should be depreciated over its useful life. Further details are held within Section 15.

8. Derecognition of an Asset

8.1 There will be occasions where an asset is no longer in use and/or the net book value is £nil.

8.2 Where an asset is no longer in use, an assessment of future economic benefits should be made. If no future economic benefits are deemed to be available, the asset will be derecognised, with the balance being transferred to profit/loss on disposal or write off.

8.3 Once an asset’s net book value has remained at £nil for a period of 3 years assessed at year end, then the asset will be derecognised, with a nil effect on the profit/loss on disposal or write off. This applies to the following categories / sub-categories of asset:

• Furniture & fittings
• Vehicle commissioning costs
• Plant & machinery
• ICT PC’s, laptops and screens
• ICT peripherals e.g. cabling, keyboards

In respect of: motor vehicles; major ICT infrastructure equipment (e.g. servers); software and major infrastructure plant & machinery (e.g. clean room), these assets should always be reviewed to establish whether they are in current use before de-recognition.

8.4 When an asset has been de-recognised, it must not be used for Police Scotland business and should be disposed of or transferred immediately to storage for timely disposal in accordance with guidance for the relevant reporting category