Depreciation isn't the most frequently discussed topic in emergency services departments, nor is it likely to be in the future. But it will be important for public emergency service providers to become more knowledgeable about this topic and open a dialogue with city or county accountants in the future.

Recent changes in governmental accounting rules require government entities to determine depreciation, which is calculated by determining the value of capital assets, establishing their useful life, and then calculating and deducting the expired services of the asset.

Financial statements published per the new rules include the expenditures made in the current year, as well as the cost of using assets purchased in prior years, a long-required practice for private-sector entities. The prior theory held that since government agencies weren't organized to make a profit, matching the cost of expiring services to the period of use wasn't necessary. Increasing demands for accountability and performance reporting make that theory obsolete.

Calculating depreciation

Prior to the new rules, if a department purchased an engine in 2000 for $200,000, it would be reported in the financial statements for FY 2000 as a $200,000 capital asset. In the 2001 financial statements, no expense would be shown for the decline in value of this asset given its use and the passage of time.

There are a number of acceptable methods of calculating depreciation on capital assets. The simplest and most popular is the straight-line method, which assumes that a $200,000 vehicle expected to be in use for 10 years with no residual value loses $20,000 a year in value due to use. Some equipment may decline in value more significantly in its earlier years, so an accelerated depreciation method might be more appropriate. Better depreciation results are likely if those with equipment expertise work together with accountants.

Establishing the useful life of apparatus and buildings has become as important in governmental entities as it is in the private sector. Departments must determine how many years of service can be expected from vehicles or stations without significant additional investment, because it's unlikely that funds for replacement will be available prior to the end of the predicted useful life. Because a change in the calculation of depreciation requires disclosure in the notes to the financial statements, the initial decision becomes critical.

Emergency services managers will need to gather reliable information about fleet and building histories and values to discuss this important matter with those responsible for the accounting and reporting functions. One of the first questions to ask is whether the fixed assets are already being depreciated. This change in reporting standards provides a great opportunity to discuss the advantages of a fleet replacement fund with the accounting professionals in the organization.

Some accounting departments will seek outside professional assistance when establishing the current value of their assets, especially those not currently reporting infrastructure assets. Some governmental entities will group like assets to reduce the number of calculations required to report depreciation. This could present problems if an entity were to group fire or EMS apparatus with other vehicles that have useful lives longer than emergency vehicles. As is the case in many emergency situations, a conservative estimate is likely to have a better outcome than an optimistic one.

Reporting standards

Accounting and financial reporting standards for federal, state and local governments are established by the Governmental Accounting Standards Board, a private, nonprofit organization. The goal of these standards is to provide reliable, helpful information for citizens, investors, creditors, elected officials and employees. The recent focus has been to make financial statements “easy reading,” so that a citizen can readily identify what services a governmental entity provides and at what cost. In addition, the GASB continues to work to develop standards for performance measures that will have the same reliability and comparability as financial statements.

These new reporting rules, known as GASB Statement 34, are to be phased in over a three-year period, according to the revenue of the governmental entity. Governments with revenues of $100 million or more are required to prepare the new financial statements beginning with FY 2002; those with revenues of $10 million to $100 million in 2003 and the remainder in 2004.

Let's look at one of the effects this change will have on a typical small emergency service department that has personnel expenditures costing $3.7 million and O&M expenses of $1.3 million.

Under existing reporting rules, the total expenditure for emergency services would be $5 million. When the organization reports the same experience using the new model, factoring in depreciation of $0.25 million, the cost of the service is $5.25 million, even though there was no actual change in the amount of funds expended.

If the department, which made 4,000 emergency responses, had used these figures to make a simple calculation of the cost per response, the calculated cost would have risen from $1,250 to $1,314.

Many other reporting changes are included in GASB 34. One of importance to emergency services departments is known as Management's Discussion and Analysis, the purpose of which is to provide a narrative introduction and overview to help users interpret the basic financial statements. It includes an analysis of the key data in the financial statements, which could be information about a substantial emergency purchase, a sudden increase or decrease in revenue, a major bond initiative, or other facts. The MD&A isn't subject to audit, so management has more flexibility in the message it writes. These will vary according to organization and year.

The new model also requires new supplementary information, which is a budgetary comparison of actual expenditures to the original appropriated budget as well to the final amended version of the budget.

One simple way for non-accountants to learn more about governmental financial reporting is to review the GASB publication What You Should Know About Your Local Government's Finances, available for $9.95 by calling 800-748-0659.

Pay attention to changes

Sometimes professionals are focused on providing outstanding service and are too busy to pay much attention to changes outside that arena, even though they may have a significant impact on the department. Changes made by the GASB certainly could fall into this category, as they seldom are headline news.

For example, it hasn't been that long since almost all governments allowed employees to accrue an unlimited amount of unused sick leave for payment upon retirement. When the governmental accounting standard was changed to require the reporting of a liability for these days, the amount was readily discernible and governmental entities quickly began to limit the total that employees could accrue.

Mandatory changes such as those in GASB 34 can lead to better cooperation with accounting professionals and improved reporting for departments. In addition, it's an opportunity to work on improved performance measures that describe outcomes.

The GASB continues to work to develop standards that enable citizens to better determine how good a job its government is doing and how it compares to others. The involvement of emergency service professionals in the process will definitely improve the outcome.

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Diane Breedlove is a certified public accountant and teaches at the National Fire Academy and the Emergency Services Training Institute at Texas A&M University. She was the Director of Finance and Administration for the City of Sugar Land, Texas, from 1999 to 2000. Before that, she had been chief of the Sugar Land Fire Department since 1989. She has practiced accounting and was training officer for the Klein Volunteer Fire Department in Spring, Texas.