GASB 34: New Requirements for General Capital Assets
By Walter Robbins and Amelia Baldwin
Phase-ins for New Accounting Standards
The Governmental Accounting Standards Board (GASB) issued Statement 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, and GASB Statement 37, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments: Omnibus, in order to establish financial reporting standards for public sector organizations. States, cities, towns, villages, and special-purpose governments such as school districts and public utilities, must now capitalize all general fixed assets, including general infrastructure assets. Such assets must now be reported in the government-wide Statement of Net Assets, and the annual cost of using such assets must now be charged to the Statement of Activities as an operating expense. GASB 34 allows a phase-in period for governments according to size; large governments must adopt the changes earlier than small governments.
GASB 34 permits latitude in how general capital assets are to be capitalized and reported, but many governments will expend significant effort dealing with the complexity of the capital asset requirements. Two provisions of GASB 34 mitigate this difficulty. First, the date for implementing all of the requirements of GASB 34 depends on a government’s total annual revenues (excluding extraordinary items) in the fiscal year ending after June 15, 1999. Governments with total annual revenues of $100 million or more must adopt the new rules for periods beginning after June 15, 2001. Governments with at least $10 million but less than $100 million in revenues should apply the new rules for periods beginning after June 15, 2002. Governments with less than $10 million in revenues should be in compliance for periods beginning after June 15, 2003.
Second, in the case of general infrastructure assets that must be retroactively capitalized, state and local governments have a grace period of four years after the adoption of the general provisions of GASB 34 to complete capitalization. These two provisions should provide state and local governments with sufficient time to properly plan and implement the new rules for general capital assets.
General Capital Assets
Governments acquire a variety of capital assets to support the delivery of public services to their constituents. GASB 34 defines capital assets as tangible or intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period. Capital assets include land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art, historical treasures, and infrastructure.
GASB 34 defines general capital assets as “capital assets of the government that are not specifically related to activities reported in proprietary or fiduciary funds. General capital assets are associated with and generally arise from governmental activities. Most often, they result from expenditures of governmental fund resources.” Capital assets used in providing services that are funded primarily by user fees rather than general tax dollars are not classified as general capital assets but rather as proprietary capital assets. Proprietary capital assets have always been capitalized and depreciated.
General capital assets can be either nondepreciable or depreciable. Nondepreciable capital assets would be inexhaustible, because their economic benefit or service potential is used up so slowly that its estimated useful life is extraordinarily long. These types of assets include land, right-of-ways, and certain types of collections and historical treasures. Depreciable capital assets are those assets that decline in service potential over time. Examples are buildings and improvements, vehicles, machinery, equipment, and collections or individual items (e.g., exhibits) that are exhaustible. Infrastructure assets are either inexhaustible, if nondepreciable, or exhaustible, if depreciable.
Pre–GASB 34 Capital Asset Reporting
Before GASB 34, general fixed assets were labeled property, plant, and equipment, with major subcategories of land, buildings, improvements other than buildings, machinery and equipment, and construction work-in-progress. Accounting and reporting for works of art or historical treasures were not specifically addressed. Except for general infrastructure assets, all fixed assets were capitalized in the General Fixed Asset Account Group. General capital assets were then reported in the Combined Balance Sheet under General Fixed Assets with no reference to any individual governmental fund (general, special revenue, debt service, and capital projects). In addition, GAAP did not allow depreciation charges in the Combined Statement of Revenues, Expenditures, and Changes in Fund Balance for governmental funds.
Governments generally opted not to capitalize general infrastructure assets when available.
New Guidelines for Non-Infrastructure Capital Assets
GASB 34 continues the requirement of capitalizing general fixed assets. In most cases, both depreciable and inexhaustible capital assets must be capitalized. Capitalized general fixed assets must be presented on the face of the government-wide Statement of Net Assets rather than as a general fixed assets column in the Combined Balance Sheet. Moreover, the presentation should report inexhaustible capital assets separately from other general capital assets.
GASB 34 generally requires the capitalization of works of art, historical treasures, and similar assets (e.g., exhibits, monuments, etc.) and provides special rules for their capitalization and depreciation. For those collections that are capitalized, governments should segregate the collection between those being depreciated and those that are not. Only exhaustible collections whose useful lives diminish over time, because of displays or uses in educational or research programs, should be depreciated. In those instances where a government protects and preserves a collection with cultural, aesthetic, or historical value, such assets generally have extraordinarily long useful lives and would be considered inexhaustible.
A collection is exempt from capitalization if it is—
A government may treat all works of art, historical treasures, and similar assets as a single group or as individual collections. When collections are not capitalized, a description of the collection and the reasons such assets are not capitalized should be presented in the financial report notes.
Historical cost continues to be the appropriate basis for recording general capital assets. This amount would include all initial expenditures plus any ancillary charges necessary to place the asset into its intended location and condition for use, such as freight and transportation charges, site preparation costs, and professional fees. Although GASB 34 required interest incurred on tax-exempt borrowing during construction of general capital assets to be capitalized as part of an asset’s cost, GASB 37 eliminates this requirement. General fixed assets acquired by donation, with no purchase or construction cost, should be capitalized at their estimated fair values at the time of donation, plus any ancillary charges.
Another new requirement of GASB 34 is that governments must report their depreciable general capital assets net of accumulated depreciation. Similar to the process followed in the business sector, accumulated depreciation consists of the total amount of annual depreciation charges on depreciable assets since the date they were put into service. Accumulated depreciation must be reported on the face of the Statement of Net Assets, but may be netted against capital assets or simply reported as a separate line item.
Exhibit 1 shows the process of implementing GASB 34 capitalization and reporting requirements for general capital assets other than infrastructure assets. If capital assets have not been recorded in the past, an inventory would need to be developed and the assets capitalized. This initial capitalization should be treated as a correction of an error since noncapitalization was a departure from GAAP. The inventory should identify the assets, their associated cost (if purchased) or market value (if donated), their use, and their location. Information provided by the inventory would serve as the bases for capitalization. If accumulated depreciation on exhaustible capital assets has not been recorded, such amounts will need to be established retroactively.
Capitalization of Infrastructure Assets
GASB 34 defines infrastructure assets as long-lived capital assets that normally are stationary in nature and can be preserved for a significantly greater number of years than most other capital assets. Examples of infrastructure assets include roads, bridges, tunnels, drainage systems, water and sewer systems, dams, lighting systems, and (in the case of coastal governments) piers and bulkheads. Governments must begin capitalizing general infrastructure assets and reporting the cost of using such assets in the government-wide financial statements.
Proprietary fund activities have always been required to record and depreciate their infrastructure assets. For instance, a water and sewer utility would capitalize and depreciate its water and sewer piping system, pumping stations, and other associated infrastructure assets. The only change GASB 34 poses for proprietary fund infrastructure reporting is the option to forgo depreciation on such assets if they qualify for, and government officials select, the modified approach for reporting the annual cost of using infrastructure assets.
GASB 34 requires the capitalization of general infrastructure both prospectively and retroactively. With prospective application, governments must begin capitalizing newly acquired infrastructure assets in the fiscal year GASB 34 is adopted. Retroactive application requires governments to capitalize major infrastructure assets that they acquired in fiscal years ending after June 30, 1980, or that received major renovations, restorations, or improvements during that period. Exhibit 2 illustrates the steps for retroactive capitalization of infrastructure assets.
Prospective capitalization. Prospective capitalization of general infrastructure assets should not impose any undue burden on governments because supporting documentation will be generated as asset acquisitions occur. Prospectively acquired general infrastructure assets should be recorded at historical cost, and should include any ancillary charges necessary to place assets in their intended location and condition for use. Donated infrastructure assets should be reported at their estimated fair value at the time of acquisition plus ancillary charges, if any.
Retroactive capitalization. Governmental units have a phase-in period of four years after the adoption of the general provisions of GASB 34 to complete retroactive capitalization (Exhibit 3). Although the phase-in period of four years is standard, the start date of the period varies according to government size. The largest governments have the earliest start date, while the smallest units have no requirement to retroactively capitalize general infrastructure assets, although they are encouraged to do so.
Mandatory retroactive capitalization is limited only to “major” general infrastructure assets acquired, significantly reconstructed, or that received significant improvements in fiscal years ending after June 30, 1980. In cases where determining actual historical cost is not practicable because of inadequate records, historical cost may be estimated by using an acceptable estimation procedure.
Major General Infrastructure Assets
Rather than requiring the capitalization of all general infrastructure assets that were purchased, constructed, or donated during the retroactive period, GASB allows governments to capitalize only major general infrastructure assets. Major general infrastructure assets are determined within the context of networks or subsystems of networks, defined in GASB 34 as follows:
A network of assets is composed of all assets that provide a particular type of service for a government. A network of infrastructure assets may be only one infrastructure asset that is composed of many components. For example, a network of infrastructure assets may be a dam composed of a concrete dam, a concrete spillway, and a series of locks.
A subsystem is represented by separate but related groups of assets within a single network of assets. GASB 34 describes a subsystem as follows:
A subsystem of a network of assets is composed of all assets that make up a similar portion or segment of a network of assets. For example, all the roads of a government could be considered a network of infrastructure assets. Interstate highways, state highways, and rural roads could each be considered a subsystem of that network.The first step in identifying major general infrastructure assets is to take an inventory of infrastructure assets existing as of the government’s first fiscal year ending after June 15, 1999, and categorizing them into appropriate networks or subsystems of networks. GASB allows governments to select whether general infrastructure assets are networks or subsystems. Next, preliminary cost estimates for each network or subsystem of networks must be made.GASB observes that preliminary cost estimates may be made in a variety of ways, as long as they are precise enough to permit determination of whether the network or subsystem would be considered major. For example, a city could make a preliminary cost estimate for a particular subsystem of its roads by multiplying the number of lane-miles by the current replacement cost per lane-mile.After preliminary estimates for all networks or subsystems have been made, GASB 34 provides for their capitalization if:
The percentages are applied against the total cost of all general capital assets reported by a governmental unit at the end of its first fiscal year ending after June 15, 1999. This total cost would be the amount reported as general capital assets in the general fixed asset account group of the government’s combined balance sheet. The 10% test is applied if networks are not subdivided into subsystems, while the 5% test is applied to divisions of subsystems. Any network or subsystem that exceeds the percentage threshold qualifies to be capitalized.
Estimating Cost to Capitalize
GASB 34 requires the retroactive capitalization of infrastructure assets at transition to be recorded at historical cost. In those cases where governments have not kept records of their infrastructure assets, or such records are incomplete, determining actual historical cost may not be practical. Consequently, GASB allows governments to estimate historical cost.
One suggested estimation approach is the deflated replacement method. With this method, the current replacement costs, calculated for determining qualifying major networks or subsystems, would be deflated to the year of acquisition. This process requires a government to know the age of its qualifying infrastructure assets. In instances where infrastructure assets are grouped by network or subsystem, an average age for the group may be used. A weighted-average calculation may also be used for greater precision.
To illustrate the weighted-average approach, assume that Sullivan County determined that it had 65 lane-miles of roads in its rural road subsystem of a highway network constructed since 1980, and the rural road subsystem qualifies as major infrastructure and must be capitalized. Based on the following data, the county calculates an average age of approximately 15 years (985/65) for its rural road subsystem. This average is determined by weighting the ages with miles of road.
Age in 1999
Year Miles of road (years) (miles at age)
1980 30 (18) 540
1983 15 (15) 225
1988 20 (11) 220
The final step in the deflation process requires the government to select a price-level index to remove the effects of price-level changes from current prices. GASB permits a variety of price-level indices. For instance, information on construction indices published by McGraw-Hill can be found at www.enr.com/cost/cost1.asp. Another index is the Price Trend Information for Federal-Aid Highway Construction, published by the U.S. Department of Transportation.
To illustrate the final step in the deflation process, again consider Sullivan County. The average age of the rural road subsystem in 1999 is approximately 15 years, making 1984 the calculated year of acquisition. Assume a composite index for 1984 construction costs to be 92.6 and a composite index for 1999 construction costs of 136.5. The 1984 construction costs would be 67.84% of 1999 costs (92.6/136.5). If the current replacement cost of the subsystem were $65 million, then the estimated historical cost would be $44,095,238 ($65 million ¥ 0.6784).
To Depreciate or Not
A major provision of GASB 34 requires annual depreciation charges on depreciable general capital assets in the government-wide Statement of Activities. For depreciable infrastructure assets, however, governments are allowed to depreciate such assets or apply the modified approach. If depreciation expense is taken, it should be included as direct expenses of the function that the government normally associates with capital outlays for and maintenance of infrastructure, such as the public works or transportation function.
Following the depreciation method will require assigning a useful life to infrastructure assets and estimating their salvage or residual values. GASB observes, however, that most infrastructure assets will have no salvage or residual value because of the cost of demolition or removal of such assets at the end of their useful lives. In such cases, the full historical cost would be subject to depreciation.
GASB 34 does not identify required or preferred depreciation methods. GASB 34 instead requires that the method selected should result in cost allocations that are systematic and rational. Most state and local governments are likely to apply the straight-line depreciation method.
GASB recognized that recording depreciation on infrastructure assets such as roads and bridges might not be the most appropriate method of reporting the annual cost of using such capital assets because they are generally maintained at a determined level of service over indefinite useful lives. Consequently, GASB 34 allows governments to adopt the modified approach as an alternative to the reporting of annual depreciation expense.
Exhibit 4 illustrates the difference between the depreciation and modified methods to account for the cost of using general infrastructure assets: The accounting for preservation costs, defined by GASB 34 as any expenditure that extends the useful life of an infrastructure asset beyond its original estimated useful life without increasing its capacity or efficiency, is the primary difference.
Preservation costs are capitalized if the depreciation approach is applied but expensed under the modified method. In contrast, maintenance costs, which occur on a regular basis as necessary for infrastructure assets to continue to be used during their originally established useful life without extending it, are expensed under both the depreciation and modified approaches. Additions or improvements to infrastructure assets are capitalized regardless of method.
Qualifying for the Modified Approach
In order to qualify to use the modified approach, governments must meet two requirements. First, they must manage their eligible infrastructure assets using an asset management system, and second, they must document that the infrastructure assets are being preserved at (or above) a condition level established by the government.
An asset management system is a formal process of maintaining, upgrading, and operating physical assets cost-effectively. It combines engineering principles with solid business practices and economic theory, and it facilitates an organized, logical approach to decision-making. GASB identifies the following characteristics of an asset management system that would support the use of the modified approach:
The second requirement for the modified method is to document that eligible infrastructure assets are being preserved approximately at (or above) a condition level established and disclosed by the government. While GASB observes that professional judgment will be necessary when determining the adequacy of documentation, it also states that governments should document the following:
A condition assessment measures the collective condition of assets within a network or subsystem. An assessment of individual assets is not necessary, but may be performed using statistical or other sampling methods. Trained individuals using prescribed forms or analytical techniques should undertake condition assessments. GASB does not specify attributes of infrastructure assets that should be measured when performing assessments. Consequently, governments may use an attribute or any combination of attributes that they consider appropriate. For example, cracking and rutting could be used to measure pavement distress.
Capital Asset Disclosures
GASB 34 requires general disclosures about capital assets and specific disclosures about infrastructure assets in Management’s Discussion and Analysis (MD&A), the notes to the financial statements, and the Required Supplementary Information (RSI).
Management’s discussion and analysis. While the minimum MD&A disclosure covers a range of components, two disclosures are required for capital assets. First, a discussion should be presented of any significant capital asset activities during the year. Because detailed information about capital asset activities is presented in footnote disclosures, the MD&A discussion should only summarize that information.
The second MD&A disclosure deals specifically with governments using the modified approach for infrastructure assets. They must disclose:
Footnote disclosure. Capital asset disclosures in footnotes should be presented by major classes of capital assets and divided into those associated with governmental activities and those associated with business activities. A separate presentation should also be made for nondepreciable capital assets.
Certain note disclosures about capital assets occur in the summary of significant accounting policies, while other information appears in general capital asset disclosures and transition period disclosures. GASB suggests the following disclosures according to major capital asset classes:
Required supplemental information. GASB 34 requires governments following the modified approach to present the following information and discussions:
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