Capital Assets The basic capital asset standards reside in Statement No. 34, Bas
ID: 2547246 • Letter: C
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.
QuestionShould a change in condition of capital assets have an impact on resource flows in the statement of activities and other resource flows statements? How would it be measured?
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.
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 sufficient 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.
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.
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.
Governments obtain property and equipment in the same manner as most privatesector business enterprises and
nonprofit organizations. Fixed or capital assets may be acquired by purchase, construction, lease, donation, or
foreclosure. Some intangible assets, a type of capital assets, may be internally generated (i.e., computer software).
The method of acquisition may dictate the valuation of, or accounting for, an asset. For example, a donated vehicle
would be reported at its fair value at the time of donation. A leased vehicle would be reported at the net present
value of required payments under a capital lease but would not be reported as an asset of the government under
an operating lease. This course includes examples of the accounting for a variety of property and equipment
transactions.
In the fund financial statements, the accounting and financial reporting for capital assets differs depending on the
type of fund that acquires the asset. The basic capitalization distinctions between governmental, proprietary, and
fiduciary funds and between fund financial statements and governmentwide financial statements are explained
later in this section.
With the implementation of GASBS No. 34, nearly all capital assets owned by state and local governments are
capitalized (and most are depreciated) in one or more of the required basic financial statements. This includes
capital assets associated with governmental activities, including general infrastructure assets.
Certain equipment and facilities related to municipal solid waste landfills (MSWLFs) should be accounted for as
specified by GASBS No. 18 (GASB Cod. sec. L10), Accounting for Municipal Solid Waste Landfill Closure and
Postclosure Care Costs. Certain outlays for property, plant, and equipment related to pollution remediation are
required to be reported as pollution remediation costs rather than capital assets as required by GASBS No. 49,
Accounting and Financial Reporting for Pollution Remediation Obligations.
LEARNING OBJECTIVES:
Completion of this lesson will enable you to:
Identify the basic elements of capital assets under GASBS No. 34, including the definition of and determining
the ownership of capital assets.
Describe the valuation of a government's tangible and intangible capital assets.
Recognize issues related to estimating useful lives, depreciation expense, and reporting works of art.
Differentiate between reporting capital assets in governmental funds and in proprietary and fiduciary funds.
Calculate the capitalization of interest costs.