GASB 34: New Requirements for General Capital Assets

The Governmental Accounting Standards Board (GASB) Statement 34 initiated a transformation in financial reporting for government entities. This standard was designed to enhance the utility and clarity of annual reports issued by state and local governments. A component of this overhaul involved new rules for how governments account for and present their general capital assets. These changes provide a more complete picture of a government’s financial position and the full cost of its services.

Defining General Capital Assets

General capital assets are the long-term, tangible assets of a government used in its daily operations but not tied to a specific, self-supporting fund. These assets are associated with governmental activities financed by taxes and other non-exchange revenues. They include a wide range of items such as land, buildings, public safety vehicles, office equipment, and extensive infrastructure networks like roads, bridges, and sewer systems. An item must have a useful life beyond a single reporting period to be classified as a capital asset.

These assets are distinct from those held in proprietary or fiduciary funds. For example, machinery used by a city-owned electric utility is a capital asset of that enterprise fund, not a general capital asset. Enterprise funds function like businesses, charging fees for services, and their assets are accounted for within that fund.

Governments establish capitalization thresholds, meaning an asset’s cost must meet a minimum dollar amount to be recorded as a capital asset. Items falling below this threshold are treated as expenses in the year of purchase. This practice avoids cluttering financial statements with low-value items.

Required Financial Statement Reporting

GASB 34 requires reporting general capital assets on the government-wide Statement of Net Position, which is similar to a private-sector balance sheet. Before this standard, these assets were recorded in a separate account group and excluded from the primary governmental fund balance sheet. This omission meant a significant portion of a government’s resources was not reflected in its main financial statements.

The initial value of these assets is based on their historical cost, which includes the purchase price plus any charges to place the asset into service. If historical cost records are unavailable, governments can use an estimated historical cost. A common method is to determine the current replacement cost of a similar asset and deflate that amount to the acquisition year using a price-level index. Donated capital assets are reported at their estimated fair value at the time of acquisition.

Another requirement is the depreciation of most general capital assets over their estimated useful lives, though inexhaustible assets like land are not depreciated. This depreciation expense is reported on the government-wide Statement of Activities. This systematic allocation of an asset’s cost over its life recognizes that capital assets are consumed in the delivery of services.

Accumulated depreciation, the sum of all depreciation charges, is reported on the Statement of Net Position. It is shown as a reduction from the historical cost of the capital assets, resulting in a net book value. This offers a clearer view of the remaining service potential of the government’s assets.

The Modified Approach for Infrastructure Assets

For infrastructure assets, GASB 34 provides an alternative to depreciation known as the modified approach. This option allows governments to expense preservation costs as they are incurred instead of recording annual depreciation. Infrastructure assets are long-lived assets that are part of a larger network, such as road systems or sewer networks. Additions and improvements that increase capacity or efficiency are still capitalized.

To be eligible to use the modified approach, a government must meet two criteria. First, it must have an asset management system with a complete inventory of the eligible infrastructure assets. This system must also perform regular condition assessments of the assets, summarizing the results using a consistent measurement scale. For instance, a government might rate its roads on a scale from excellent to poor based on factors like cracking or rutting.

The second criterion requires the government to document that the assets are being preserved at or above a condition level that the government has formally established. This involves estimating the annual amount needed to maintain this level and demonstrating that the amounts actually spent are sufficient.

Instead of a steady depreciation charge, the financial statements will show the actual amount spent on maintenance, which can lead to more fluctuation in reported expenses. If a government using the modified approach fails to meet the criteria in any year, it must revert to the standard depreciation method for those assets and report the change as a change in accounting estimate.

Required Disclosures

GASB 34 mandates detailed disclosures about general capital assets in the notes of the financial report to provide context and transparency. The disclosures must be organized by major classes of capital assets and separated between governmental and business-type activities. Major classes include:

• Land
• Buildings
• Equipment
• Infrastructure

A requirement is a schedule that reconciles the beginning and ending balances of capital assets for each major class. This schedule must detail all additions and disposals that occurred during the fiscal year, providing a clear picture of the government’s capital asset activity. The disclosures must also separately identify capital assets that are not being depreciated from those that are. For depreciable assets, the government must disclose the total depreciation expense charged to each governmental function for the period.

Recent standards have expanded these requirements, mandating separate disclosure for right-to-use assets from leases and IT arrangements, as well as for other intangible assets. Specific disclosure requirements are also in place for capital assets classified as “held for sale.”

Governments that elect to use the modified approach for eligible infrastructure assets have additional disclosure requirements. They must disclose the condition level at which they have chosen to maintain the assets. They also need to present a comparison of the estimated amount required to maintain this level with the actual amount of expense incurred for the past five years.