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.

QuestionHow do governments determine when outflows enhance the service capacity or extend the useful life of an asset?

Explanation / Answer

SUMMARY OF STATEMENT NO. 34

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.

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.

Bringing in New Information

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.

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.

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.

The adoption of maintennace planning offers a number of benefits to both agencies and Government as a whole:

Benefits to agencies

• Assets perform at optimum levels, reducing service disruptions and losses due to asset failure;

• Risks to the agency posed by its assets can be identified and ameliorated;

• The costs of asset maintenance can be quantified and budgeted with confidence;

• The performance of the asset can be reviewed to suit service delivery needs;

• The plan provides a foundation for continuous process improvement;

• The plan provides feedback to improve future application of the maintenance process; and

• Reduced environmental impact by controlling resource usage.

Benefits to government

• Asset costs associated with service delivery can be identified and minimised in the long term;

• Risks to the Government can be identified and ameliorated;

• Alternative asset and non-asset solutions can be compared to best suit service delivery needs;

• Maintenance costs can be benchmarked across agencies and industries;

• The value of public sector assets can be protected, where appropriate; and

• Environmental responsibilities such as energy management, water usage, and pollution control can be

addressed.

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