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 related to physical condition of and maintenance/preservation spending on the infrastructure.

QuestionHow has the optional use of the modified approach affected the comparability of net position, expenses, and other financial statement information between governments that use it and those that do not?

Explanation / Answer

The use of modified approach is optionally allowed for infrastructure assets, where the asset has been maintained over time at a consistent physical condition level determined in advance by the government. In such cases, the governmet is allowed to report the actual maintenance expenses instead of depreciation.

Both the approaches have their pros and cons and the govenments need to carefully choose one depending on :

1) The expected longer term usage pattern of the asset.

2) The additional cost of the maintaining the asset at the predetermined condition.

3) The additional cost of presenting required supplementary information related to physical condition of and maintenance/preservation spending on the infrastructure.

With respect to the net position, expenses & other financial statement information, the differences between the two approaches would be as below:

Note 1 : Towards ensuring that the asset is being preserved at the predetermined condition. Also, the expenses incurred towards presenting required supplementary information related to physical condition of and maintenance/preservation spending on the infrastructure.

Item Standard Approach Modified Approach Net position The asset value would keep coming down owing to depreciation. Asset value wont change unless an impairment is required. Expenses Usually higher since the depreciation plus standard maintenance expenses would be incurred Relatively lower since only the Standard maintenance expenses plus some additional expenses(Refer Note1) would be incurred. Other financial statement information Not required to be reported Required to be collated, validated and reported

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