Capital Assets

Research Description: 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.

Added to Research Agenda: August 2019


Background: 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:
  • Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries
  • Statement No. 44, Economic Condition Reporting: The Statistical Section
  • Statement No. 51, Accounting and Financial Reporting for Intangible Assets
  • Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements
  • Statement No. 72, Fair Value Measurement and Application
  • Statement No. 87, Leases
  • Statement No. 91, Conduit Debt Obligations.
  • Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements
  • Statement No. 96, Subscription-Based Information Technology Arrangements.
Paragraph 19 of Statement 34, as amended, defines capital assets as including the following (footnotes omitted):
…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.
In general, governments are required to report capital assets at their 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) 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.
2Rebecca Bloch, Justin Marlowe, and Dean Michael Mead, “Infrastructure Asset Reporting and Pricing Uncertainty in the Municipal Bond Market.” Journal of Governmental & Nonprofit Accounting 5, no. 1 (2016). 53-70.

Major Research Issues: The following issues will be considered:
  • What choices do governments make with respect to their capital asset-related accounting policies, such as capitalization thresholds, depreciation methods, and estimated useful lives? Why do governments select those policies?
  • How do governments determine when outflows enhance the service capacity or extend the useful life of an asset?
  • How do governments report transactions that include one capital asset being “exchanged” for another capital asset, regardless of whether the transactions include additional compensation?
  • How does the reduction in net book value over time and the estimated useful lives of capital assets compare with the actual diminution of service capacity and their actual useful lives, respectively?
  • How has the incidence of reporting infrastructure assets using the modified approach changed since prior studies were conducted, if at all (see the next section)? Which networks or subsystems is it being applied to? What methods are used to assess condition? What condition levels are set?
  • Why did governments using the modified approach choose to do so in lieu of depreciation? If governments have ceased to use the modified approach, why did they change their reporting method?
  • How do users utilize capital asset information? How do they use the modified approach RSI?
  • How has the optional use of the modified approach affected the comparability of net position, expenses, and other financial statement information between governments that use it and those that do not?
  • How has state and local government usage of asset management systems that meet the criteria in Statement 34, paragraph 23, changed since the issuance of Statement 34?
  • Should 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?
  • What information do governments collect and report about deferred maintenance? How is deferred maintenance estimated and do those estimates possess the characteristics of information reported in general purpose external financial reports?
  • Pre-agenda research approved: August 2019
  • Consultative group appointed? Yes
Current Developments: The staff developed survey instruments for users, preparers, and auditors. The staff provided an update to the Board on the status of the research at the April 2022 meeting.

Research Work Plan:

Board Meetings

Research Activities
September 2022 Develop protocol and other materials for roundtables to discuss potential paths forward.
October 2022 Conduct roundtables to discuss potential paths forward.
November 2022–January 2023 Conclude analysis of results of research and draft capstone research memorandum.
February 2023 Discuss research memorandum with the Board.