Are capital assets recorded in proprietary fund accounting?
: The objective of this pre-agenda research is to review the existing standards applicable to capital asset accounting and financial reporting to evaluate whether the information reported about capital assets could: (1) be more comparable across governments and more consistent over time; (2) be more useful for making decisions and assessing government accountability; (3) be more relevant to assessments of a government’s economic condition, including its financial position, fiscal capacity, and service capacity; and (4) better reflect the capacity of those assets to provide service and how that capacity may change over time.
Status: Added to Research Agenda: August 2019
CAPITAL ASSETS—PROJECT PLANBackground: 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. However, capital assets are the primary focus of (or are significantly addressed in) multiple pronouncements, including:
…land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure, and all other tangible or intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period. Infrastructure assets are long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets. Examples of infrastructure assets include roads, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems. Show 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) that includes (1) assessed physical condition for the past three condition assessments, (2) a comparison of needed maintenance and preservation spending with actual spending for the past five fiscal years, and (3) notes to RSI describing the system of condition assessment used, the condition level at which the government intends to preserve its infrastructure, and changes in the system and other factors affecting the reported trends. During the development of Statement 34, the Board considered other alternatives to reporting depreciation expense for infrastructure assets. One such alternative was the preservation method, which proposed reporting a capital use charge in the statement of activities based on changes in an asset’s condition level. The Board heard from engineers and transportation finance officers at that time that although those approaches are of great value in managing infrastructure assets, they had not developed to the point at which consistent measurement methods or scales could be used to assess condition sufficiently for recognition in financial statements. The Board tabled the preservation method and did not include the option in Statement 34 due to measurement and other issues. Since the advent of comprehensive capital asset reporting under Statement 34, relatively limited research has been conducted regarding state and local government reporting of capital assets within the scope of audited annual financial statements. Some research has been conducted, however, on the modified approach, suggesting that its use is not widespread beyond state governments and varies significantly from government to government. An academic study of the use of the modified approach by state governments, Puerto Rico, and the District of Columbia, found that 23 of those governments (44 percent) use the modified approach to report some infrastructure assets, predominantly bridges and roadways.1 Two states have since changed accounting policies and now depreciate their infrastructure. One of the recipients of the 2011 Crain Memorial Research grants found less widespread usage of the modified approach among counties and cities. A review of the financial reports of 620 large and medium county and city governments found 37 governments (6 percent) use the modified approach. Insights into the value of modified approach information to financial statement users are found in a study published in 2016.2 The researchers compared bid spreads on secondary market auctions for the municipal bonds of states that use the modified approach versus states that use traditional depreciation. They found that the spreads were significantly narrower for the modified approach states, signaling a reduction in information asymmetry and an improvement in market efficiency. Two 2018 Crain Memorial Research grants focused on capital asset reporting. The first focused on the decisions made by county governments related to capital asset accounting policies and what factors drove those decisions, the extent to which counties employ asset management systems, and how capital asset information required by Statement 34 is being used in decision making. The second focused on decisions made by states and cities related to capital asset accounting policies, including what factors were used in setting those policies, how those policies have evolved, and consequences of those policies in terms of the government’s financial health and performance. This pre-agenda research activity was ranked highest in priority among all pre-agenda research activities, monitoring activities, and potential topics by members of the GASAC in 2021.
1Thomas E. Vermeer, Terry K. Patton, and Alan K. Styles, “Reporting of General Infrastructure Assets under GASB Statement No. 34.” Accounting Horizons 25, no. 2 (2011). 381-407. Major Research Issues: The following issues will be considered:
What is included in proprietary fund?Proprietary funds means those funds or subfunds that show actual financial position and the results of operations, such as actual assets, liabilities, reserves, fund balances, revenues, and expenses.
How are capital assets recorded in governmental funds?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.
How should assets acquired under a capital lease by a proprietary fund be accounted for?Assets acquired under a capital lease agreement by a governmental fund result in a debit to Expenditures and a credit to OFS-Capital Lease Agreements in the year of acquisition. Capital lease assets are capitalized in proprietary funds, and the associated long-term liability, Capital Lease Obligation, is credited.
Are capital assets the same as PPE?A company's financial statement will generally classify its assets into distinct categories, including fixed assets and current assets. Fixed assets, also known as property, plant, and equipment (PP&E) and as capital assets, are tangible things that a company expects to use for more than one accounting period.
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