INTERNAL AUDIT REPORT 
Operational Audit 
Capitalization of Assets 

March 2021  August 2021 


Issue Date: November 24, 2021 
Report No. 2021-12

Capitalization of Assets 


TABLE OF CONTENTS 

Executive Summary ................................................................................................................................................ 3 
Background ............................................................................................................................................................. 4 
Audit Scope and Methodology ............................................................................................................................... 5 
Schedule of Findings and Recommendations ....................................................................................................... 6 
Appendix A: Risk Ratings ....................................................................................................................................... 8 












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Capitalization of Assets 
Executive Summary 
Internal Audit (IA) completed an audit of Capitalization of Assets for the period March 2021 through
August 2021. The audit was performed at the request of Management to review newly established 
controls, which were designed to assure the accurate transfer of assets from construction work-inprocess
(CWIP) to capital assets. 
As of December 31, 2019 CWIP and Capital Assets were $1.085 billion and $8.334 billion. As of
December 31, 2020, CWIP increased to $1.347 billion and decreased slightly to $8.164 billion. Port
Accounting Policy AC-8b establishes standards for capitalization of major expenses related to the
acquisition, construction, and modification of tangible capital assets. Construction costs, according to
the Policy, are recorded against CWIP when they satisfy following criteria: 
The Port has ownership and control over the capital asset. 
The capital asset has a useful life of three years or more. 
The total capital project costs must be $20,000 or more. 
In 2021, the Port's external auditor, Moss Adams, reported on a control deficiency which resulted in
$19.2 million of assets that were placed in service in 2019, but were not properly transferred to Capital
Assets until 2020. In February 2021 management documented and adopted a new standard operating
prodecure  (SOP).  Our  audit  was  designed  to  review  the  newly  adopted  SOP  and  provide
recommendations that might reduce the risk of of future misstatements. The Capitization of Assets
processes involve many individuals, and is dependent on them to accurately record information and
report on that information in a timely manner. Our audit identified three areas where internal controls
could be further strengthened. These are reflected in the below issue and are discussed in more detail
beginning on page six of this report. 
1.  (Low)  A Standard Operating Procedure (SOP) was documented and adopted in February
2021. However, internal controls need to be enhanced whereby, project leads formally review
and approve their work, a year end re-confirmation is performed, and a final notification is sent
out to all stakeholders. Doing so will reduce the likelihood that assets are not transferred from
CWIP to capital assets in the correct period. 


Glenn Fernandes, CPA 
Director, Internal Audit 



Responsible Management Team 
Jeffrey Brown, Chief Operating Officer, Aviation 
Rudy Caluza, Director, Accounting and Financial Reporting 
Wayne Grotheer, Director-PMG, Aviation 
Lance Lyttle, Managing Director, Aviation 

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Capitalization of Assets 
Background 
The Port's Annual Financial Report, reflects construction-work-in process (CWIP) of $1.347 billion and
capital assets of 8.164 billion as of December 31, 2020. As of December 31, 2019, CWIP was $1.085
billion and captial assets were $8.334 billion. 
Accounting Policy AC-8b (Capital Assets: Tangible Assets) establishes "standards for capitalization of
major expenses related to the acquisition, construction, and modification of tangible capital assets,
and for the deprecation of such assets." 
Capital construction costs that do not meet requirements one through three below are recorded as
operating expenses. Otherwise, construction costs are recorded against construction work-in-process
(CWIP) when they satisfy following criteria: 
1) The Port has ownership and control over the capital asset. 
2) The capital asset has a useful life of 3-years or more. 
3) The total capital project costs must be $20,000 or more. 
Tangible assets are captured into five categories: 
Land  Real property owned by the Port that is recorded in King County with a parcel ID. Cost
include the initial acquisition cost, legal and title fees, survey and apraisal fees, and land
preparation costs. 
Land Improvements  Consists of depreciable betterments (not including buildings) with a limited
useful life. Examples of improvements include site preparation costs, retaining walls, parking
lots, fencing, gates, and landscaping. 
Buildings  Permanent structures including  wharfs, marinas, administrative building, parking
garage, passenger terminal, transit shed, warehouses. 
Infrastructure  Stationary in nature and normally preserved for a significant number of years.
Examples include roads (airport taxi way and runway), utility systems (heating, ventilation and
air-conditioning, sanitary and storm sewer system) and other structures (baggage system,
central control system, subway, tunnel, satellite transit, floats, docks, piers, bulkheads). 
Furnishing, Equipment and Vehicles  Represents moveable assets such as furniture, computer
equipment, office equipment, survey equipment, cranes, snow plows, passenger loading
bridges, cars and trucks. 
Leasehold Tenant Improvements  A contractual understanding between the Port and a tenant 
where the Port grants the tentant the right to use or improve specific Port property for a specific
period of time. 
Moveable collections of works of art and historical treasures  Assets of historical, natural,
cultural, educational significance, or articistic importance not permanently affixed to a building. 
Valuation and Costs 
Assets directly purchased or construction (by the Port or third party) are recorded at historical/original
cost less discounts at time of acquisition. Grants, donations, and contributions are recorded at fair
market value. Captalized costs include direct labor and materials, indirect labor, architects, engineers,
electricians and carpenters. Preliminary costs are expensed and not capitalized. These costs are
incurred during the initial stage of construction or aqcuisition, such as a feasability study. Preaqcuisition
costs, acquisition or construction costs, and acillary costs are capitalized. 
Prior to the issuance of the 2019 external audit, Port management identified approximately $12 million
in CWIP that should have been reclassified to Capital Assets. In January 2021, Port management
identified an additional $19.2 million of assets that were placed in service in 2019 but not transferred to
Capital Assets until 2020. 

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Capitalization of Assets 
Audit Scope and Methodology 
We conducted the engagement in accordance with Generally Accepted Government Auditing Standards 
and the International Standards for the Professional Practice of Internal Auditing. Those standards
require that we plan and conduct an engagement to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our engagement objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and conclusions based on our
engagement objectives. 
The period audited was March 2021 through August 2021 and included the following procedures: 
Evaluated the Aviation division Standard Operating Procedures (SOPs) to determine whether
sufficient internal controls were embedded within the capitalization of assets process and whether
it was aligned with Port Policy AC-8b. 
Determined whether Maritime and Economic Development divisions had developed SOPs. 
Performed analytical procedures to obtain the values of CWIP and capital assets in the Aviation,
Maritime, and Economic Development divisions. 
Assessed whether assets capitalized complied with documented procedures as per the SOPs and
the Port Policy. 
Obtained a schedule of assets transferred from CWIP to a capital asset between March and August
2021 and calculated the number of days between the in-use date and the date it was communicated
to Capital Services (AFR). We also calculated the number of days between the date it was
communicated to Capital Services and the date it was recorded. 
Obtained a sample of projects in CWIP and interviewed project managers to determine whether the
projects are correctly classified as CWIP. 
Evaluated the design of the process and recommended primary and secondary internal controls to
be implemented. 
Conducted discussions with key management and staff to gain a comprehensive understanding of 
roles and responsibilities. 







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Capitalization of Assets 
Schedule of Findings and Recommendations 
1) Rating: Low 
A Standard Operating Procedure (SOP) was documented and adopted in February 2021.
However, internal controls need to be enhanced whereby, project leads formally review and
approve their work, a year end re-confirmation is performed, and a final notification is sent out
to all stakeholders. Doing so will reduce the likelihood that assets are not transferred from CWIP
to capital assets in the correct period. 
Aviation Project Management Group (AVPMG) documented and implemented a SOP in February 2021 
at the request of a previous review conducted in 2020. We reviewed the SOP together with Port Policy
AC-8b Capital Assets  Tangible Assets, to gain an understanding of the process and to evaluate
whether  the  SOP  was  designed  with  sufficient  controls.   During   this  review,   Internal 
Audit made the following recommendations that if implemented will help assure assets are transferred
from CWIP to Capital Assets in a complete, accurate and timely manner. 
Recommendations: 
1.  Annual Review Process 
This is a relatively new process that is facilitated by Projects Control. Project Managers are
responsible for this process and should coordinate with other stakeholders to validate that the
information contained in the asset plans is accurate. Internal Audit recommends: 
Program Leads should formally review and approve the information before it is submitted to
Capital Services for booking of assets in the financial system. 
This process should be documented in the SOP highlighting the responsible individuals and
the expected outcomes.
2.  Facility Asset Review Meeting 
In addition to regularly scheduled meetings, a meeting should also be scheduled close to year
end so that key stakeholders, e.g., Capital Services, Projects Control, Maintenance and Facilities
& Infrastructure have an opportunity to re-confirm information relating to the assets. 
3.  Complete Workflow for the Notification Process 
As per the SOP, a notification should be sent by AFR Capital Services to key stakeholders to
complete the capitalization of assets process. Internal Audit recommends completion of the
workflow for this process to inform all the relevant stakeholders that the process is complete and
provides an opportunity for Project Controls to validate that all asset transfers have been
recorded. 




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Capitalization of Assets 

Management Response/Action Plan: 

Aviation Management appreciates Internal Audit reviewing the newly defined Aviation SOP to help
mitigate risk associated with the late identification and communication of assets. Our response to the
individual recommendations is below: 

1.  Annual Review Process 
Management agrees with the recommendation to document the Annual Review Process in the
SOP including roles, responsibilities, and next steps depending on the outcome of the asset
review (i.e., all reported/no changes, something missed, etc.). All projects being reviewed will
also include a review and sign-off from the appropriate Program Leads upon the completion of
the review. 
2.  Facility Asset Review Meeting 
Management disagrees with recommendation that a Facility Asset Review meeting should be
scheduled at the end of the year to reconfirm assets for every project. While a comprehensive
evaluation measure may appear attractive, Accounting Policy AC-8B requires a more frequent
turnover cadence. Considering the number of assets and project-specific complexities
commonly experienced, a large-scale year-end review may not yield intended results or be an
efficient use of personnel across multiple departments. Consequently, a year-end Facility Asset
Review meeting will likely not be effective. 
Instead, Management will evaluate making a Facility Asset Review meeting required for
qualifying projects in the design phase, where preliminary asset plans are developed, and 
again during construction, prior to asset plan submission, to ensure a timely, coordinated asset
plan final submission. 
This evaluation will begin Q1 2022 to coincide with the one-year anniversary of the SOP.
Decisions will be communicated to Internal Audit relative to management's decision. 
3.  Complete Workflow for the Notification Process 
Management agrees with this recommendation. AFR Capital Services has committed to begin
notifying project stakeholders after recording the assets identified in the submitted asset plans.
This process will begin prior to December 31, 2021, via email notification while a formal workflow
process is developed (to be completed and enacted in 2022). 

DUE DATE: 03/31/2022 




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Capitalization of Assets 
Appendix A: Risk Ratings 
Findings identified during the audit are assigned a risk rating, as outlined in the table below. Only one
of the criteria needs to be met for a finding to be rated High, Medium, or Low. Findings rated Low will
be evaluated and may or may not be reflected in the final report. 
Financial      Internal                                               Commission/
Rating                                   Compliance      Public 
Stewardship  Controls                                         Management 
High probability
Non-compliance
Missing or not                       for external audit   Requires
with Laws, Port
High       Significant     followed                          issues and / or     immediate
Policies, 
negative public     attention 
Contracts 
perception 
Moderate
Partial
Partial controls                        probability for
compliance with
external audit       Requires
Medium   Moderate                  Laws, Port
Not functioning                      issues and / or      attention 
Policies 
effectively                               negative public
Contracts 
perception 
Low probability
Functioning as   Mostly complies                      Does not
for external audit
intended but     with Laws, Port                        require
Low      Minimal                                   issues and/or
could be        Policies,                             immediate
negative public
enhanced       Contracts                          attention 
perception 











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