Changes in Accounting Standards for Capital Assets Can Help Preserve the Infrastructure

Article excerpt

The Governmental Accounting Standards Board's (GASB) Statement 34, Basic Financial Statements -- and Management's Discussion and Analysis -- for State and Local Governments, issued in June 1999, makes sweeping changes in the form and content of government financial statements and modifies many underlying accounting standards. An earlier Journal article summarized the principal features of Statement 34.(1) This article looks closely at some important changes in the standards for general capital assets, such as eliminating the accounting mechanism known as the general fixed assets account group (GFAAG) and adding a requirement for reporting depreciation as a cost of "using up" the assets.

The article also focuses on certain provisions in Statement 34 that encourage better management of a government's infrastructure assets-its roads, bridges, tunnels, dams, drainage systems, water and sewer systems, lighting systems and other long-lived capital assets. Although lasting much longer than other capital assets, infrastructure assets nevertheless deteriorate and will eventually need costly replacement unless they are systematically maintained and preserved. Statement 34 requires that infrastructure assets be capitalized, and it allows a state or local government having an asset management system with certain features to use a "modified approach" for reporting infrastructure assets in lieu of reporting depreciation. Under the modified approach, the government must report detailed information about the condition of the infrastructure and what is being spent to maintain it.

Does Statement 34 mean our streets and highways will have fewer potholes? While only a politician would make this promise, it seems safe to say that the new standards will promote the preservation of infrastructure assets and decrease the likelihood they will be allowed to deteriorate.

Eliminating the GFAAG

A capital asset is a tangible or intangible asset with a useful life extending beyond a single reporting period. Statement 34 classifies the capital assets of a government as a whole, as distinguished from those related to its proprietary and fiduciary funds, as general capital assets (formerly, general fixed assets). In addition to infrastructure, they include customary fixed assets such as land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures.

The intricacies of fund accounting complicate the accounting for general capital assets. A state or local government usually finances the acquisition and construction of general capital assets through a governmental fund, either the general fund, a special revenue fund, a capital projects fund, a debt service fund or a permanent fund. Because the measurement focus of governmental funds is limited to the government's current financial resources, capital assets are not capitalized in those funds.Rather, their cost is charged as a fund expenditure of the year in which the assets are acquired. Although this practice effectively controls current financial resources, it ignores the long-lived nature of general capital assets and the need to report them in the balance sheet of the government as a whole.

The GFAAG was created to remedy fund accounting's shortcomings for capital assets. Traditional GFAAG accounting entries serve to:

* capitalize the original cost of general fixed assets acquired or constructed through governmental funds,

* remove the original cost without recognizing gain or loss (depreciation for general fixed assets has not been required) when the assets are sold, traded or abandoned and

* provide offsetting credit balances that classify the government's net investment in general fixed assets according to the source of funding, such as general fund operating revenues, general obligation bonds or grants.

In a government's combined balance sheet for all funds and account groups, the amounts in the GFAAG are displayed in a separate column labeled as general fixed assets. …