Chapter 4.4: Assets

4.4.1 Cash and Cash Equivalents

Cash and cash equivalents are disclosed as a current asset on the school’s Balance Sheet.

‘Cash’ includes cash on hand and demand deposits. This includes:

• cash on hand
• cheque account
• call account.

‘Cash Equivalents’ includes short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk and change in value. This includes money deposited with a financial institution, with a maturity of three months or less from the date of acquisition.

(When money reaches ‘maturity’, it refers to the final date of repayment, where the interest and principal of a loan are to be paid in full).

4.4.2 Bank deposits (investments)

Bank deposits with a maturity greater than three months are classified as investments.

Schools that don’t qualify for differential reporting must also provide information about the weighted average effective interest rate and maturity dates for their bank deposit investments. Refer to the Kiwi Park Large School for an example of the necessary disclosure.

Example

Weighted average effective interest rate is calculated for the following short-term deposits:
$100,000 matures in six months with an interest rate of 7.95%
$75,000 matures in four months with an interest rate of 7.55%

The weighted average effective interest rate is 7.78%.
(0.0795 x 100,000/175,000) + (0.0755 x 75,000/175,000) = 7.78%

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4.4.3 Debtors/income accruals

Accrual accounting, adopted by the government and all Crown entities in 1989, recognises revenue that is earned for the financial year, regardless of whether any cash has changed hands.

Income earned but not received in a financial year is usually recorded as a debt, but there may be other year-end accrual or reversing Journal entry entries required.

Most schools will have a system to record and track debtors, manually or within their accounting software. A year-end review is necessary to ensure that all recorded debtors are expected to be collected. An adjustment may be necessary to recognise debts that won’t be collected – refer to Impairment of debtors below.

Other items may need a reversing Journal entry to recognise an asset or non-debtor income that has been incurred at year-end but cash has not been received.

Example

Property funding agreed by the Ministry of Education but not yet received.

Journal entry

4.4.4 Donated assets

The value of donated assets received must be recorded as income.

Example

If a parent donates a new computer to the school, and the current price for purchasing that computer is $2,000, the accounting entries required are:

Journal entry

4.4.5 Inventory/stock

Inventories are consumable items held for sale, for example stationery and school uniforms. They should be reported at the lower of cost and net realisable value (the amount the school expects to get from sales).

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4.4.6 Impairment of assets

Assets should be reported at their fair value. If the value of an asset has reduced then that asset has been impaired and its lower value should be reported. The reduction in value is an impairment expense.

Impairment of property, plant and equipment

Property, plant and equipment may reduce in value for a variety of reasons, including:

• physical damage or the asset wearing out earlier than expected – eg, assets damaged in a flood
• changes in technology that makes an asset obsolete – eg, computer software no longer of any use
• changes in the school curriculum – eg, obsolete text books.

Each year your school must consider:

• whether there are any indications that asset values have been impaired for each class of property, plant and equipment and intangible assets
• where indications of impairment exist then calculate the assets’ recoverable amount (ie, depreciated replacement cost  an estimate of the current replacement cost less allowances for physical deterioration and optimisation for obsolescence and surplus capacity)
• if the carrying amount/book value of the assets is higher than the depreciated replacement cost then recognise an impairment loss as an expense in the Income Statement.

Example

Kiwi Park School purchased a collection of 100 maths text books for its middle school two years ago. The collection has a gross book value of $10,000 (each book cost $100) and the depreciation rate is straight line over five years or 20%. This year the school changed its maths curriculum and the content of the text books is no longer applicable for teaching.

The change in school curriculum has reduced the value of the maths text books to zero because they are now obsolete.

The carrying value of the collection of maths text books in the school’s financial statements as at 31 December is $6,000 (two years depreciation is $6,000, 20% a year of $10,000). An impairment loss of $6,000 is recognised as an expense for the year as the carrying value ($6,000) is greater than the fair value of the text books ($0).

Journal entry

Example

Kiwi Park School sells school uniform jerseys. As at 31 December the school holds 200 jerseys at the total cost of $10,000 ($50 per jersey). During that year the school changed the school uniform and the jerseys are now only optional for the senior students at the school. The school has reduced the price at which they sell the jerseys to $25 per jersey and expects to be able to sell all 200 at this price. The jerseys’ net realisable value is now $5,000 ($25 per jersey).

A write down of $25 per jersey is required because the net realisable value for each jersey ($25) is less than the cost ($50).

Journal entry

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Impairment of loans

Some schools have received loans from the Ministry or borrowed funds from third parties with nil or below market interest rates.

Some schools may have made loans to third parties with nil or below market interest rates (Note: under section 73 of the Education Act these loans are likely to be unlawful).

Loans or borrowings with nil or below market interest rates must be valued at the present value of expected future loan repayments, discounted at the current market rate of return for a similar loan.

A calculation spreadsheet is available in the Resources section of this handbook to determine the net present value of the expected future cash flow at the end of each financial year, discounted at the market rate of return for a similar loan.

Example

After obtaining approval from the Ministry of Education, Kiwi Park School provided a $120,000 loan to the Kiwi Park Community Playground Development Fund on 1 January 2007. The loan has a zero interest rate and is repayable in full over three years. Kiwi Park School expects full repayment of the loan by 31 December 2009. The risk-free market rate at 31 December 2008 is 10% (the rate at which the school could borrow from a major bank).

The loan should be recognised at the discounted value when the loan was made:

Journal entry

During the year repayments received should be credited against the loan receivable asset balance.

Journal entry

At the end of the first year the repayable loan balance has reduced to $80,000 and the impairment of the loan has reduced.

Journal entry

At the end of the second year the repayable loan balance has reduced to $40,000 and the impairment of the loan has reduced again.

Journal entry

At the end of the third year the loan has been fully repaid and is no longer impaired.

Journal entry

Example

Kiwi Park School received an interest free loan of $120,000 from Kiwi Park Community Pub Charity on 1 January 2007, to be repaid over three years.

The accounting entries mirror those above.

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Impairment of Debtors

If your school has applied a general provision for doubtful debts to all debtors this must be based on objective evidence that the school will not be able to collect the amount owing.

Accounts receivable for schools are mostly current (received within 12 months) and relate to grant funding receivable from the Ministry. It is very unlikely that grant funding receivable will not be collected by the school and an impairment loss recognised. However, your school should assess annually for any objective evidence that other receivables are impaired.

Example

Twenty-five students of Kiwi Park School went on a school trip out of town in November. The cost for each student attending the trip was $200 to cover meals, accommodation and travel. At 31 December one family who had two students on the trip had moved to Australia and the students no longer attend the school. The family owes $400 for the trip but the school does not yet have a contact address for the family and it is unlikely the money will be collected.

At 31 December the present value of estimated cash flows is calculated as $0 as the school is unlikely to recover any of the receivable outstanding. The carrying amount is $400, which is the amount of the receivable. An impairment loss of $400 is recognised directly against the receivable in the Income Statement as follows:

Journal entry

Impairment of Investments

Impairment of investments that are deposits held at institutions are calculated the same way as for accounts receivable. Objective evidence of impairment would exist if the institution holding the deposit was in financial difficulty and the funds invested were not likely to be returned to the school. This is considered very unlikely as schools can only invest in approved registered institutions (such as banks).

Some schools also have approval for investments classified as available-for-sale financial assets including investments in shares. These investments are measured at fair value, or, where fair value cannot be reliably measured, at cost. Any objective evidence of impairment in the fair value or cost of investments is recognised as an expense in the Income Statement.

Your school should assess annually for any objective evidence that investments are impaired.

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4.4.7 Intangible assets

An intangible asset is an identifiable non-monetary asset without physical substance. Schools may have intangible assets, such as websites or software for student management or financial management.

Software

No intangible asset is recognised where a school pays an annual rental or licence fee rather than purchasing a software program (or where the software had only a minimal purchase price with a substantial annual licence fee).

When a school purchases a computer this will often include suite or day-to-day software. Schools are not required to separately identify software acquired when hardware is purchased (for example, Microsoft Office/Vista) unless the software is determined to be greater than the school’s threshold for capitalisation of an asset (the Ministry recommends $1,000 threshold). The operating system of a computer is not required to be identified as this is considered part of the hardware.

The Ministry recommends:

• software purchased is recognised as an expense in the Income Statement when it is less than the school’s threshold for capitalisation of an asset
• software purchased is recognised as an intangible asset when it is greater than the school’s threshold for capitalisation of an asset
• if the total gross book value of all software recognised as intangible assets is greater than 5% of the total gross book value of school’s property, plant and equipment, the Ministry believes it would be material enough to recognise in a separate intangible asset class. If it is less than 5%, the Ministry believes it is immaterial enough to be recognised within the information and communication technology asset class.

(If your school currently recognises software as intangible assets and wants to continue doing so, or if your school sees some benefit in recognising software as intangible assets, this recommendation need not be followed).

If your school is considering capitalising a software program that was developed internally you should consult your financial service provider or auditor. NZ IAS 38 provides certain circumstances where costs can be capitalised.

Example 1

Kiwi Park School purchased a laptop computer for $1,999 for use in its junior classroom. The laptop has a basic Microsoft office package installed that cost $150. This was included in the purchase price of $1,999. Kiwi Park School has adopted a $1,000 threshold for capitalisation of an asset.

The software portion is below the capitalisation threshold, therefore, it is not required to be separately identified as an intangible asset. The laptop computer is capitalised at the cost of $1,999 and recorded in the information and communication technology asset class.

Example 2

Kiwi Park School has purchased a school management system with a gross book value of $15,000. No other intangible assets have been recognised by the school and at year-end the total gross book value of all property, plant and equipment of the school is $758,000.

The software is an intangible asset. As the gross book value of all intangible assets is only 2% of the total gross book value of property, plant and equipment no separate intangible asset class is required.

Website costs

Schools can recognise their website as an intangible asset if they can demonstrate how the website will generate probable future economic benefits. A school website that promotes and advertises the school does not generate probable future economic benefits unless it is capable of generating revenues, including direct revenues from enabling orders to be placed (NZ IAS 38.57 (d)). For example, international student fees can be paid via the school’s website.

Schools should consult their financial service provider or auditor before any website costs are capitalised in accordance with NZ IAS 38.

Costs associated with developing and maintaining your school’s website, that does not generate probable future economic benefits, are to be expensed in the Income Statement when incurred.

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4.4.8 Investments

Boards of trustees are restricted in what investments they are allowed to make – refer to Chapter 2 - Financial Governance in this handbook.

All investments should be disclosed at fair value. Refer to Impairment of Assets – 4.4.6.

4.4.9 Library and teaching resources

A school’s library resources (including classroom libraries), teaching and curriculum resources are valuable assets that support teachers and enhance students’ learning opportunities. Schools are required to account for these resources as fixed assets if they cost more than their asset capitalisation limit.
This is consistent with generally accepted accounting practice.

Accounting for library resources

Changes in the quantity and value of library resources should be reconciled once a term with the school’s accounting records. This includes resources in all formats, eg, books, periodicals, kits, maps and posters, videos or CD-ROMs. It excludes library consumables, software and online subscriptions. This ensures that the figures are accurate and also provides more readily reconcilable figures for verification at the end of the financial year.

Multi-volume resources, such as encyclopaedias, change in value in the same way as single-volume items and should be included in the general book value calculation.

Rare items, which may have a unique value, should be excluded.

A record should be kept of all library resources donated and those purchased in sales. Many automated library systems provide for this information, together with a field for recording the value of such items. For those on manual systems, procedures will be necessary to value donated or sale-price purchases of library resources, so that appropriate Journal entries can be made in the accounting system. Appropriate valuation procedures should be specified and agreed with the school’s auditors. Any alternative method of accounting must conform to the NZ IAS 16.

Financial year-end procedures

At year end it is recommended that schools:

• ensure that the beginning of year values and quantities are the same as those for the end of the previous financial year
• add this year’s purchases and donations to the gross value of books
• carry out a stocktake to establish the value and number of books on hand and those lost or damaged, which must be written off
• calculate average resource values and calculate the cost of and depreciation on books written off
• calculate the depreciation for the current year on those books on hand at the end of the year.

Example

The following Library Resources Reconciliation Statement provides a summary of the items needed to ensure all library-related transactions are properly recorded in the accounting system. Below the statement are the steps required to complete the Library Resources Reconciliation Statement.

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Note 1

Note 2

Note 3

Note 4

Note 5

Note 6

Note 7

Note 8

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4.4.10 School houses

About 900 houses have been transferred to school ownership from the Ministry of Education since 2005. Most were transferred at the 2004 valuation amount provided by Quotable Value and were recognised at that cost in school Balance Sheets and Asset Registers.

Schools are encouraged to disclose the purchase of core school housing in the financial statements. The reason for this is that the acquisition of core school housing was funded by a capital injection payment by the Ministry of Education. This will have resulted in an increase to the school’s assets and an increase in equity on the school Balance Sheet for that year.

For a transfer occurring in the 2007 year, an example of a suitable note disclosure would be:

“The increase in equity relates to the transfer of a school house from the Ministry of Education to the school during the year. The transfer was initiated and the transfer value set during the 2004 financial year based on the market value of the house at that time”.

If the transfer took place during the 2006 year, the 2007 comparative figures will be impacted and the following disclosure should be made:

"The increase in equity during the 2006 year relates to the transfer of a school house from the Ministry of Education to the school during that year. The transfer was initiated and the transfer value set during the 2004 financial year based on the market value of the house at that time".

Under NZ IFRS schools can continue to use the ‘cost model’ for school houses and recognise the original cost less a depreciation charge each year.
If a school house becomes surplus to requirements then refer to Surplus Property Disposal Incentive Schemes and the Property Handbook under Qualifying for Funding.

4.4.11 Surplus property disposal incentive scheme

Please also refer to the Ministry of Education Property Handbook – Qualifying for Funding section.

Boards can release surplus property to the Ministry for disposal through the Surplus Property Disposal Incentive Scheme (SPDIS).

Under the Scheme:

• both land and buildings may be sold if they are surplus to the educational requirements of the school and will not be needed to meet roll growth forecasted in long-term projections. The Ministry will make the final decision whether the property is or is not required for roll growth
• housing (for example, core, non-core and caretaker) can be sold
• the property must go through the offer-back process and be assessed for any related Treaty of Waitangi claims or claims under the Sites of Significance process (see below). This means that a property cannot be sold to a preferential purchaser, for example, a house tenant
• once a property enters the offer back process, it is too late to pull out. Before deciding to dispose of surplus property, the board needs to be absolutely certain that it wants to go ahead with the disposal
• the board will receive 50% of the net proceeds of the sale, ie, half the amount left after all the costs of the transaction. Disposal costs average $12,000 per disposal
• funding will not be available until two months after the disposal and sale of the property
• schools that release non-core houses for sale qualify for advance payment of 40% of the estimated future net proceeds of the sale. Advance payments do not apply for the disposal of non-core houses for removal as the sale takes approximately two and half months to complete. If the house has been previously transferred to the school then no advance payment is made
• the Ministry reserves the right to investigate whether a property is worth disposing of in case disposal costs may exceed the sale value.

The board may only use its share of the proceeds for:

• capital works projects, in addition to any other capital funding entitlements
• capital purchases, such as furniture and equipment, including computing and other ICT equipment
• investment, using the interest to help with the operational running of the school. Investments must comply with section 73 of the Education Act.

The board needs to account to the Ministry within 12 months of receiving its SPDIS payment of how it has spent the money in terms of the above criteria.

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Crown disposal process

Once any Crown-owned property is declared surplus, the disposal process is governed by the Public Works Act 1981 and current government policy. The disposal process has four steps.

1. Transfer the property to another government department or territorial authority (council) if required for another public work.
2. If the property is not required for another public work, it may have to be offered back to the previous owner (or their beneficial successors).
3. If the property is not sold through the offer-back process then it is assessed under the Mäori Protection Mechanism (MPM) and the Sites of Significance process. If a claim is successful, the property is usually ‘land banked’, which means it is purchased by the Office of Treaty Settlements and held pending settlement of the claim by the government. Ownership may eventually transfer to the claimants. The Sites of Significance process protects surplus Crown land of particular significance to Mäori. It is administered by Te Puni Kokiri and operates in tandem with the Mäori Protection Mechanism.
4. If the property clears these three steps it may be sold on the open market.

Note: the Ministry is responsible for managing this entire disposal process. The board is not involved in the disposal process but continues to manage the property pending disposal.

How long does this process take?
If the property was acquired quite recently, former owners may be easy to locate and the offer-back process may be resolved quite quickly.

If the acquisition occurred many years ago, there are likely to be problems with identifying and locating former owners and/or their successors. Complex disposals involving subdivision, multiple titles (requiring amalgamation or separate offer backs) and Mäori land claims, involving disputed or collective ownership, often require Mäori Land Court decisions and will take longer.

The timeframe could be anywhere between six months and three years, depending on the circumstances.

What properties are currently under disposal?
The schedule of properties currently in the disposal process can be found here.

How boards qualify
To enter SPDIS boards must seek Ministry approval. If a territorial authority is interested, the property first has to be processed through the Mäori Protection Mechanism and Sites of Significance if not in a settled claim area – see step 3 above.

Example: Disposal of surplus land

A school applies to the Ministry for some of its land to be declared surplus under the Surplus Property Disposal Incentives Scheme. The land is not on the school’s Balance Sheet, it is on the Ministry of Education’s Balance Sheet. The school makes no accounting entry or recognition of future proceeds from the disposal of surplus land until the Ministry pays out the school’s 50% share of net sale proceeds.

Journal entry

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Example: Disposal of house and land

Situation 1 – School house and land on the Ministry’s Balance Sheet that is surplus to the school’s requirements and the Ministry pays money to the school in advance of the sale of the house and land. The Ministry approves the application and pays the school an estimated 40% of the net sale proceeds.

The nature of the money received by the school in advance of the sale of the house and land is effectively an increase in the school’s equity as its ultimate sale can be said to be fairly certain. The journal entry is therefore:

Journal entry

Note: that if the house is removed from the disposal process then the funds received have to be returned to the Ministry and this entry reversed.

If there is uncertainty about the retention of these monies by the school, there may be a liability component. NZ IFRS would require the liability and equity components to be accounted for separately. The equity component would be accounted for as per the above journal entry at the amount determined to be equity. The liability component would be measured at fair value (which would require discounting). The accounting would result in recognition of a liability (at a lower amount to face value) and recognition of revenue in year one. In year two, and any subsequent years, there would be an increase in the liability (up to face value) along with a discount unwind expense. If in doubt, contact your local regional Financial Advisor for advice.

Example: Disposal of house and land

Situation 2 – School house and land on the school’s Balance Sheet following earlier transfer from the Ministry, that is surplus to the school’s requirements, and the Ministry sells the house and land and pays 50% of the proceeds to the school.

1. Purchase of core school housing by the school from the Ministry
   We understand that the Ministry funded the purchase of core school housing through the physical payment to the school equal to the purchase price of the house. This payment was a one off capital injection. To settle the sale of the house, the school physically paid the funds back to the Ministry.
   
   In reviewing the ‘core school housing kit distributed to the board of trustees of schools’ during 2004 we note that schools were instructed by the Ministry to record the purchase of core school housing in their accounts using the following journals:
   
   Debit: Bank
   Credit: Public Equity
   To record the capital injection received to purchase the house
   
   Debit: Fixed Assets (buildings)
   Credit: Bank
   To record the purchase of the house
   
2. Sale of surplus core school housing by the school (originally purchased from the Ministry)
   Under the Surplus Property Disposal Incentive Scheme (‘SPDIS’) when surplus property is disposed of by the Ministry on behalf of the school, half of the net proceeds are to be paid to the board, with the Ministry retaining the other half.
   
   Given that the Ministry funded the board’s original purchase of the house, the portion of the net proceeds retained by the Ministry should be treated as a distribution (return of Public Equity) from the school back to the Ministry.
   
   Even though the Ministry physically receives the proceeds from the sale of the house, this is only because it is acting as the school’s agent when selling the house. The substance of the transaction is that the school has sold the house and, under the SPDIS, it is required to distribute 50% of the net proceeds of the sale back to the Ministry on behalf of the Crown (a return of public equity as the Ministry funded the initial purchase of the house).
   
   As the Ministry retains 50% of the net proceeds, instead of recording the entire net proceeds of the sale as a debit to the bank account or accounts receivable, the school should record this portion of the sale proceeds as a Distribution. The Distribution will flow through the Statement of Movements in Equity as it is a transaction with an ‘owner’.
   
   The difference between the original purchase price of the house and the net proceeds received by the board should be treated as a gain (loss) on disposal. Upon settlement of the sale, the following journals should be processed:
   
   Debit: Accounts Receivable (for the 50% of the net proceeds retained by the school)
   Debit: Distribution (for the 50% of the net proceeds retained by the Ministry)
   Credit: Fixed Assets Held for Sale (for the book value of the house held for sale as recorded in the school’s accounts)
   Credit: Gain on Sale (for the difference between the book value of the house held for sale and the entire net proceeds received upon the sale of the house)
   Once the school physically receives the funds from the sale of the house from the Ministry, the balance should be transferred from accounts receivable to the bank account.
   Debit: Bank
   Credit: Accounts Receivable
   In the rare situation where the net proceeds from the sale of the house are less than the book value of the house, the credit to Gain on Sale would instead be a debit to Loss on Sale.

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Example 1 - House sold for more than book value
The board of ABC School purchased a core school house from the Ministry in 2004 for $100,000. The school informed the Ministry that the house was surplus to its requirements in 2006. In 2007 after going through the disposal process the house is sold for $250,000 net of fees. Once the sale had settled the Ministry released $125,000 (50% of the net proceeds) to the board. At the date the house was declared surplus to requirements, the house had accumulated depreciation of $2,000 giving it a book value of $98,000. The journal entries to record the sale of the house would be as follows:

The board of XYZ School purchased a core school house from the Ministry in 2004 for $100,000. The school informed the Ministry that the house was surplus to its requirements in 2006. In 2007 after going through the disposal process the house is sold for $90,000 net of fees. Once the sale had settled the Ministry released $45,000 (50% of the net proceeds) to the board. At the date the house was declared surplus to requirements, the house had accumulated depreciation of $2,000 giving it a book value of $98,000. The journal entries to record the sale of the house would be as follows:

A narrative disclosure should be added to the property, plant and equipment note. An example of an appropriate narrative disclosure is:

Example one: The property has entered the disposal process but has not yet sold.

The board has decided to sell the house located at 11 Browns Terrace as it is surplus to requirements. The board advised the Ministry of Education of its intention to sell the house in October 2007, at which point the house was entered into the Crown disposal process and transferred from ‘Property Plant and Equipment’ to ‘Asset Held for Sale’ on the Balance Sheet.

The Ministry will manage the disposal on the board's behalf, as its agent.

All Crown property offered for disposal is subject to the requirements of the Public Works Act 1981 and the Protection Mechanism for Maori Interests and Surplus Crown Owned Land, which can take up to three years. Upon completion of the sale, the board will distribute 50% of the net sale proceeds to the Ministry on behalf of the Crown and retain the remaining 50% for future capital projects, which is in accordance with the Surplus Property Disposal Incentive Scheme managed by the Ministry.

Example two: The property has been sold

This note should be linked to the gain on sale line item on the Income Statement, the distribution line item on the Statement of Movements in Equity and the Assets held for Sale line item on the Balance Sheet.

The house located at 11 Browns Terrace was sold by the board in October as it was surplus to its requirements.

The house was originally purchased by the school for $100,000 in 2004 and sold for $250,000 in October this year. In accordance with the Surplus Property Disposal Incentive Scheme managed by the Ministry, the board has distributed 50% of the net sale proceeds to the Ministry on behalf of the Crown. This equated to $125,000 of the $152,000 gain on sale of disposal. The board has retained the remaining 50% for future capital projects.

Note: any funds received from this process can only be spent on capital works, a note on the balance sheet should acknowledge this commitment until the funds are spent.

4.4.12 Software and websites

Refer to 4.4.7 -Intangible Assets.