Capital Assets The basic capital asset standards reside in Statement No. 34, Bas

Question

Capital Assets The basic capital asset standards reside in Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, paragraphs 18–29, as amended (though capital assets are addressed in multiple other pronouncements as well). In general, governments are required to report capital assets at the historical cost and to depreciate that historical cost in a systematic and rational manner over the estimated useful lives of the assets. Capital assets are reported at their historical cost net of accumulated depreciation in financial statements using the economic resources measurement focus and the accrual basis of accounting. The primary exceptions to the depreciation requirement are land (which is considered inexhaustible), construction in progress, and infrastructure assets reported using the modified approach. The modified approach is an optional reporting method available to governments that meet certain criteria demonstrating that the qualifying infrastructure assets are being maintained over time at a consistent physical condition level determined in advance by the government. Instead of depreciation, governments employing the modified approach report annual expenses for the cost of maintaining and preserving the assets at the predetermined condition level. Those governments are required to present required supplementary information (RSI) related to physical condition of and maintenance/preservation spending on the infrastructure.

QuestionWhat choices do governments make with respect to their capital asset-related accounting policies, such as capitalization thresholds, depreciation methods, and estimated useful lives? Why do governments select these policies?

Explanation / Answer

BASIC FINANCIAL STATEMENTS—AND MANAGEMENT'S DISCUSSION AND ANALYSIS—FOR STATE AND LOCAL GOVERNMENTS

(ISSUED 6/99)

Preface

This Statement establishes new financial reporting requirements for state and local governments throughout the United States. When implemented, it will create new information and will restructure much of the information that governments have presented in the past. We developed these new requirements to make annual reports more comprehensive and easier to understand and use.

The GASB's first concepts Statement,* issued in 1987 after extensive due process, identifies what we believe are the most important objectives of financial reporting by governments. Some of those objectives reaffirm the importance of information that governments already include in their annual reports. Other objectives point to a need for new information. For this reason, this Statement requires governments to retain some of the information they currently report, but also requires them to reach beyond the familiar to new and different information. This Statement will result in reports that accomplish many of the objectives we emphasized in that concepts Statement.

Retaining the Familiar

Annual reports currently provide information about funds. Most funds are established by governing bodies (such as state legislatures, city councils, or school boards) to show restrictions on the planned use of resources or to measure, in the short term, the revenues and expenditures arising from certain activities. Concepts Statement 1 noted that annual reports should allow users to assess a government's accountability by assisting them in determining compliance with finance-related laws, rules, and regulations. For this reason and others, this Statement requires governments to continue to present financial statements that provide information about funds. The focus of these statements has been sharpened, however, by requiring governments to report information about their most important, or "major," funds, including a government's general fund. In current annual reports, fund information is reported in the aggregate by fund type, which often makes it difficult for users to assess accountability.

Fund statements also will continue to measure and report the "operating results" of many funds by measuring cash on hand and other assets that can easily be converted to cash. These statements show the performance—in the short term—of individual funds using the same measures that many governments use when financing their current operations. For example, if a government issues fifteen-year debt to build a school, it does not collect taxes in the first year suffcient to repay the entire debt; it levies and collects what is needed to make that year's required payments. On the other hand, when governments charge a fee to users for services—as is done for most water or electric utilities—fund information will continue to be based on accrual accounting (discussed below) so that all costs of providing services are measured.

Showing budgetary compliance is an important component of government's accountability. Many citizens—regardless of their profession—participate in the process of establishing the original annual operating budgets of state and local governments. Governments will be required to continue to provide budgetary comparison information in their annual reports. An important change, however, is the requirement to add the government's original budget to that comparison. Many governments revise their original budgets over the course of the year for a variety of reasons. Requiring governments to report their original budget in addition to their revised budget adds a new analytical dimension and increases the usefulness of the budgetary comparison. Budgetary changes are not, by their nature, undesirable. However, we believe that the information will be important—in the interest of accountability—to those who are aware of, and perhaps made decisions based on, the original budget. It will also allow users to assess the government's ability to estimate and manage its general resources.

The financial managers of governments are knowledgeable about the transactions, events, and conditions that are reflected in the government's financial report and of the fiscal policies that govern its operations. For the first time, those financial managers will be asked to share their insights in a required management's discussion and analysis (referred to as MD&A) by giving readers an objective and easily readable analysis of the government's financial performance for the year. This analysis should provide users with the information they need to help them assess whether the government's financial position has improved or deteriorated as a result of the year's operations.

Financial managers also will be in a better position to provide this analysis because for the first time the annual report will also include new government-wide financial statements, prepared using accrual accounting for all of the government's activities. Most governmental utilities and private-sector companies use accrual accounting. It measures not just current assets and liabilities but also long-term assets and liabilities (such as capital assets, including infrastructure, and general obligation debt). It also reports all revenues and all costs of providing services each year, not just those received or paid in the current year or soon after year-end.

These government-wide financial statements will help users:

Assess the finances of the government in its entirety, including the year's operating results

Determine whether the government's overall financial position improved or deteriorated

Evaluate whether the government's current-year revenues were sufficient to pay for current-year services

See the cost of providing services to its citizenry

See how the government finances its programs—through user fees and other program revenues versus general tax revenues

Understand the extent to which the government has invested in capital assets, including roads, bridges, and other infrastructure assets

Make better comparisons between governments.

In short, the new annual reports should give government officials a new and more comprehensive way to demonstrate their stewardship in the long term in addition to the way they currently demonstrate their stewardship in the short term and through the budgetary process.

Summary

This Statement establishes financial reporting standards for state and local governments, including states, cities, towns, villages, and special-purpose governments such as school districts and public utilities. It establishes that the basic financial statements and required supplementary information (RSI) for general purpose governments should consist of:

Management's discussion and analysis (MD&A). MD&A should introduce the basic financial statements and provide an analytical overview of the government's financial activities. Although it is RSI, governments are required to present MD&A before the basic financial statements.

Basic financial statements. The basic financial statements should include:  

Government-wide financial statements, consisting of a statement of net assets and a statement of activities. Prepared using the economic resources measurement focus and the accrual basis of accounting, these statements should report all of the assets, liabilities, revenues, expenses, and gains and losses of the government. Each statement should distinguish between the governmental and business-type activities of the primary government and between the total primary government and its discretely presented component units by reporting each in separate columns. Fiduciary activities, whose resources are not available to finance the government's programs, should be excluded from the government-wide statements.

Fund financial statements consist of a series of statements that focus on information about the government's major governmental and enterprise funds, including its blended component units. Fund financial statements also should report information about a government's fiduciary funds and component units that are fiduciary in nature. Governmental fund financial statements (including financial data for the general fund and special revenue, capital projects, debt service, and permanent funds) should be prepared using the current financial resources measurement focus and the modified accrual basis of accounting. Proprietary fund financial statements (including financial data for enterprise and internalservice funds) and fiduciary fund financial statements (including financial data for fiduciary funds and similar component units) should be prepared using the economic resources measurement focus and the accrual basis of accounting.

Notes to the financial statements consist of notes that provide information that is essential to a user's understanding of the basic financial statements.

Required supplementary information (RSI). In addition to MD&A, this Statement requires budgetary comparison schedules to be presented as RSI along with other types of data as required by previous GASB pronouncements. This Statement also requires RSI for governments that use the modified approach for reporting infrastructure assets.

Government

Accounting for Fixed

Assets

To manage fixed assets for a governmental agency, you need to follow the

guidance issued by the Governmental Accounting Standards Board (GASB).

Established in 1984, GASB is the source of Generally Accepted Accounting

Principles (GAAP) for state and local governments. Not only are governments

fundamentally different from for-profit businesses, but the readers of government

financial statements are different from those of private companies. Although

GASB standards are not written into federal law, they are enforced either by state

law or through the audit process. .

It is important to know that GASB’s pronouncements apply not only to state and

local government agencies but also to:

• Public benefit corporations and authorities.

• Public employee retirement systems.

• Public utilities.

• Public hospitals and other healthcare providers.

• Public universities and colleges.

Even though this paper refers to state and local governments throughout, it also

applies to all of the above.

GASB statements improve financial reporting by reducing inconsistencies that

may have developed among government agencies and provide more clarity.

They make possible the comparison of the financial statements of various state

and local governments and agencies.

The three principal GASB pronouncements that affect how such organizations

manage their fixed assets are:

• GASB Statement No. 34: Basic Financial Statements Financial Statements—and

Management’s Discussion and Analysis—for State and Local

Governments (Issued 6/1999).

• GASB Statement No. 42: Accounting and Financial Reporting for

impairment of Capital Assets and for Insurance Recoveries (Issued

11/2003).

• GASB Statement No. 51: Accounting and Financial Reporting for

intangible Assets (Issued 7/2007).

GASB Statement No. 34:

depreciating capital assets

Statement No. 34 requires, for the first time, that all government entities use accrual

accounting and depreciate their capital assets. Its effective dates were based on

the entity’s annual revenues and were done in three phases: Those with total annual

revenues of $100 million or more had to comply by the first fiscal year beginning

after June 15, 2001, those with total annual revenues of at least $10 million but less

than $100 million had to comply by the first fiscal year beginning after June 15,

2002, and those with annual revenues of less than $10 million had to comply by the

first fiscal year beginning after June 15, 2003.

Assets are depreciated over their estimated useful lives in any systematic and rational

manner. Examples of depreciation methods that may be used are straight-line and

declining-balance. Common declining-balance methods are double declining-balance

and 150% declining-balance.

When determining the estimated useful life of an asset, the government agency can

use:

• Published guidelines from professional organizations or industries.

• Available information for comparable assets used by other governments.

• Internal information based on past experience.

Always consider the asset’s current condition and how long it is expected to be of

service.

Depreciation may be calculated on individual assets, on classes of assets, on networks

of assets, or on subsystems of a network of assets. A “network of assets” simply

means a group of assets that together provide a specific type of service. A dam, for

example, consists of a concrete dam, a spillway, and a series of locks. A “subsystem”

of a network of assets consists of all the assets that make up a segment of a network

of assets. For example, all government roads are a network of infrastructure assets,

consisting of interstate highways, state highways, and rural roads, each of which is

considered to be a subsystem of the network.

Defining capital assets

Capital assets have a useful life beyond a single reporting period and include:

• Land and land improvements.

• Easements.

• Buildings.

• Vehicles.

• Machinery and equipment.

• Works of art and historical treasures.

• Infrastructure*.

*Infrastructure assets have long lives and are usually stationary. Examples are

roads, bridges, tunnels, sewer systems, and lighting systems. Unless part of a

network of infrastructure assets (such as a toll booth), buildings are not included in

this category.

Estimated useful life:

If an asset is under contract, its useful life should not exceed the contractual

obligation. Any renewal periods may be considered as long as it can be determined the

government will seek and achieve the contract’s renewal.

At times, an intangible asset is considered to have an indefinite useful life. A permanent

easement is one example. When this is the case, the asset should not be amortized. If

conditions occur that change the asset’s life, however, it should be tested for

impairment. Whether or not an impairment loss is recorded, once the asset’s life can

be determined, amortization should then be claimed. The asset’s current carrying

value should be amortized over its remaining useful life. (This would be considered a

change in accounting estimate.)

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