M E M O R A N D U M

 

TO:

Agency GAAP Contact Persons

FROM:

Central State Financial Reporting Division

DATE:

June 14, 2001

SUBJECT:

GASB 34—-Capital Assets Policy Clarifications and Revisions

 

INTRODUCTION

The Comptroller General’s Office issued policies for reporting capital assets other than infrastructure on February 13, 2001.  As a result of discussions with agency accountants, exposure to the policies of other states, and a review of professional literature, the Comptroller General’s Office has determined that it needs to revise certain capital assets policies and to address several issues that were not previously addressed.  The following two sections of this memorandum discuss specific capital assets policies that differ from the original policies issued in the memorandum of February 13, 2001.  The remainder of this memorandum addresses capital assets issues that were not included in the original policy memorandum.

DEFINITION OF A CAPITALIZABLE BUILDING IMPROVEMENT

The Comptroller General’s Office stated in the “Useful Lives for Depreciation of Capital Assets” document issued with its February 13 memorandum that a building improvement should be capitalized only if the improvement increases the useful life of the original building.  As discussed in the GASB 34 training sessions held on April 30 and May 2, the Comptroller General’s Office has revised this policy.  Agencies should capitalize an improvement that meets any one of the following three criteria:

1.

The improvement adds square footage to the existing building.

2.

The improvement is a major renovation that prepares an existing building for a new use.

3.

The improvement extends the useful life of the existing building.  (If practicable, the  Office of the Comptroller General recommends that your agency obtain an engineering assessment as to whether the building’s useful life has been extended by an improvement costing more than $10 million.)

SEPARATE CAPITALIZATION OF BUILDINGS AND BUILDING IMPROVEMENTS

The Comptroller General’s Office stated in the above referenced document on useful lives that a building improvement should be capitalized as part of the cost of the existing building and that the existing building’s useful life should be extended based on the additional service life that the improvement provides.  The Comptroller General’s Office has revised this policy to require separate capitalization of building improvements.  When a building is improved, the improvement should be capitalized as a separate asset from the original building and assigned its own useful life, which may or may not be the same as the original building’s useful life.  The Comptroller General’s Office chose to revise this policy to provide a better audit trail as costs are reclassified from  “construction in progress” to other capital assets accounts.

USEFUL LIVES FOR DEPRECIATION OF CAPITAL ASSETS

Agencies must use the useful lives schedule provided in the February 13 memorandum to assign useful lives to their capital assets.  Select a useful life that falls within the range provided for the type of asset (for example, three to seven years for computer equipment).  If you disagree with the range of useful lives for a particular type of asset as listed on the useful lives schedule, please contact the Comptroller General’s Office (see contact information at the end of this memorandum) so that we may agree on an appropriate useful life.

If your agency owns a type of asset not listed on the useful lives schedule, please select a useful life that falls within the range provided for the broad category of capital assets under which the asset in question will be reported.  For example, if the type of asset in question belongs in “Machinery and Equipment” but is not listed on the schedule, choose a useful life that falls within the range of 2 to 25 years (i.e., the range from the shortest to the longest useful life allowable for “Machinery and Equipment”).  Please restrict the use of this procedure, however, to situations where the type of asset is not listed on the useful lives schedule.  Also, when using this procedure, you should prepare and maintain documentation of the reasoning for your specific useful life decision (for example, a statement that, in your agency’s experience, the type of asset in question generally lasts for X years as well as any other documentation you may have to support this statement).

PERIODIC REVIEW OF ASSETS’ USEFUL LIVES

At some point in time after an agency has placed a capital asset into service, the agency may realize that the asset will not last for the remaining assigned useful life.  Many factors may contribute to an asset not meeting its originally estimated useful life, including damage to the asset or failure to perform periodic maintenance.  It is important for the useful life of an asset to approximate its true service life because the purpose of depreciation is to spread an asset’s cost over the period of time in which it is used.  Agencies are required to re-evaluate the useful lives of their reported assets annually and adjust them downward if necessary to reflect the remaining service life.

A change in the estimated useful life of a capital asset is considered a change in accounting estimate, which must be accounted for prospectively (i.e., the change in estimate is accounted for and reported in current and future periods).  The following example demonstrates the proper way to account for a change in the estimated useful life of a capital asset:

Assume you purchased equipment for $50,000 in FY 99 and assigned it a useful life of 10 years.  Depreciation expense would be $5,000 per year ($50,000 divided by 10 years).  At June 30, 2002, the asset has a net book value of $30,000, calculated as follows:

  Original cost                                        $50,000

   Accumulated depreciation ($5,000/year x 4 years)     (20,000)

   Net book value                                       $30,000

During FY 03, you realize that the asset’s usefulness will end during FY 06 (total useful life is expected to be only 7 years instead of the original estimate of 10 years).  Depreciation expense for FY 03 and later years is calculated as follows:

 

  Book  value  at  beginning  of  FY 03 ($30,000)

                                                   = $10,000/year

   Remaining life based on new estimate (3 years)

 

By recognizing depreciation expense of $10,000 per year for the remainder of the asset’s useful life, the accumulated depreciation will reach $50,000 in FY 05.  (Remember that because we took a full year of depreciation in the year of acquisition, we do not take depreciation in the year of disposition.)  The asset will be fully depreciated after 7 years instead of the original estimate of 10 years.

RIGHTS-OF-WAY AND EASEMENTS

Rights-of-way and easements should be identified and reported separately from any related infrastructure or land improvements.  Agencies are required to report rights-of-way and easements in the “land” category.

LEASEHOLD IMPROVEMENTS

A leasehold improvement is a capitalizable improvement to a leased building rather than to an owned building.  Agencies are required to report leasehold improvements in the “buildings and improvements” category and to depreciate the cost over the life of the improvement or the lease term, whichever is shorter.

CAPITALIZATION LIMIT APPLIED TO INDIVIDUAL ITEMS

The Government Finance Officers Association (GFOA) discourages governments from “capitalizing as a group smaller items that would not individually meet their capitalization threshold.”[1]  As recommended by GFOA, the Comptroller General’s Office is requiring agencies to apply the capitalization limits set forth in the February 13 memorandum to individual items rather than to groups.  For example, agencies should apply the $5,000 capitalization limit for movable property to individual library books rather than to a group of books.  Therefore, nearly all library books will be expensed, not capitalized, because individually the books do not meet the capitalization limit.

CONTROL LISTING OF ITEMS BELOW CAPITALIZATION LIMITS

The February 13 memorandum included a requirement that agencies exercise certain controls over equipment costing between $1,000 and $5,000.  These controls include tagging of the assets and maintenance of a listing of such assets for control purposes.  Computer software costing between $1,000 and $100,000 that is purchased after June 30, 2001, also should be included on this control listing; tags should be applied to software only if practicable.

QUESTIONS?

Please contact Betsy Lawson by telephone at (803) 734-2617 or by e‑mail at blawson@cg.state.sc.us  if you have any questions.  Thank you.

 

BCH:bg

 

2001-04-30



[1] Page 223 of the 2001 edition of Governmental Accounting, Auditing, and Financial Reporting (the “Blue Book”).