GASB Capital Assets: Accounting and Reporting Rules

The Governmental Accounting Standards Board (GASB) establishes the principles for financial accounting and reporting for U.S. state and local governments. These standards, known as Generally Accepted Accounting Principles (GAAP) for governments, ensure that financial information is consistent and transparent. A significant area governed by these standards is the treatment of capital assets, which represent major investments of public funds into long-term resources like buildings, roads, and equipment. Proper accounting for these assets is fundamental to public accountability, allowing stakeholders to understand how public money is being used to acquire and maintain essential infrastructure.

Defining and Categorizing Capital Assets

A capital asset is formally defined as a tangible or intangible item with an initial useful life that extends beyond a single reporting period. To be recorded on the financial statements, the asset’s cost must meet or exceed a government’s capitalization threshold. This threshold is a dollar amount set by the government, below which items are treated as current-period expenses rather than long-term assets. Amounts commonly range from $5,000 to $25,000, depending on the government entity.

GASB standards organize capital assets into several distinct categories to provide clarity in financial reporting.

• Land
• Buildings and Improvements, which include structures and enhancements that extend their useful life
• Machinery and Equipment, which covers items like vehicles, computers, and other operational hardware
• Infrastructure, which encompasses long-lived assets such as roads, bridges, tunnels, and sewer systems

Another classification is Construction in Progress, which is used to accumulate the costs of construction projects until they are completed and placed into service. Governments also recognize intangible assets, which lack physical substance but provide a future economic benefit. Examples include permanent easements, water rights, and certain computer software.

Initial Measurement and Valuation

When a government acquires a capital asset, it must be recorded at its historical cost. This cost includes not only the purchase price but also all ancillary charges necessary to place the asset into its intended location and condition for use. Such charges can include freight and transportation costs, site preparation expenses, and professional fees for architects or engineers.

In situations where an asset is acquired but historical cost records are unavailable, GASB allows for the use of an estimated historical cost. This estimate can be developed by using available information, such as the cost of similar assets at the time of acquisition or by applying a deflation index to the current replacement cost.

Governments often receive capital assets as donations. For these contributed capital assets, the valuation is based on the acquisition value at the date of the gift. Acquisition value is the fair value of the asset, which is the price that would be received to sell an asset in an orderly transaction between market participants. This ensures that donated assets are recorded at a value that reflects their economic significance to the government.

Depreciation and the Modified Approach

The cost of a capital asset is allocated over its estimated useful life through a process called depreciation. Land is considered to have an indefinite life and is not depreciated. While any systematic and rational method is permissible, the straight-line method, which allocates an equal amount of depreciation expense to each period, is the most widely used by governmental entities.

For eligible infrastructure assets, GASB provides an alternative to depreciation known as the Modified Approach. To use this method, a government must meet two requirements. First, it must have an asset management system in place that includes an up-to-date inventory of the assets and performs periodic condition assessments. These assessments must use a consistent measurement scale to be comparable over time.

Second, the government must document that the eligible infrastructure assets are being preserved at or above a condition level that it has formally established and disclosed. If these criteria are met, the government does not record depreciation expense for these assets. Instead, the costs incurred to maintain and preserve the assets are expensed in the period they occur. Costs for additions and improvements that increase the capacity or efficiency of the asset are capitalized.

Reporting and Disclosure Requirements

Capital asset information is prominently featured in a government’s annual financial report. In the government-wide Statement of Net Position, capital assets are reported, typically showing the total cost less the accumulated depreciation to arrive at a net book value.

The notes to the financial statements must provide detailed disclosures as mandated by GASB. This includes a schedule showing the beginning and ending balances for each major class of capital asset, such as land, buildings, and equipment. The schedule must also detail the additions, sales, or other dispositions that occurred during the fiscal year. Furthermore, the depreciation expense for the current period must be disclosed for each major asset class, along with the accumulated depreciation.

Governments are also required to disclose which assets are not being depreciated, such as those accounted for under the Modified Approach. For those using the Modified Approach, additional disclosures are necessary. These include the assessed physical condition of the assets from the last three condition assessments, the established condition level at which the government intends to preserve the assets, and a comparison of the estimated annual amount needed to maintain that condition with the actual expenses incurred for the past five years. Recent standards also require separate disclosures for certain right-to-use assets, such as those from leases or subscription-based IT arrangements, and for capital assets held for sale.