Do you know the key differences between managing fixed assets for a government agency and a private organization? Government agencies are required to follow the Government Accounting Standards Board (GASB) pronouncements to account for and manage fixed assets, whereas private organizations must adhere only to General Accepted Accounting Standards (GAAP).
This article explores how government accounting works for managing fixed assets, that includes the guidance of GASB pronouncements: GASB Statement No. 34, Basic Financial Statements for State and Local Governments; GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries; GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets.
What Is the GASB?
The Governmental Accounting Standards Board (GASB) was established in 1984 and serves as the authoritative source of Generally Accepted Accounting Principles (GAAP) for state and local governments. Because governments are fundamentally different from private organizations, GASB standards are tailored to the unique needs of government financial reporting. While GASB standards are not written into federal law, they are enforced either by state law or through the audit process.
Notice that the GASB pronouncements do not apply exclusively to state and local government agencies, but also to public organizations, such as:
- Public hospitals and healthcare systems;
- Public universities and colleges;
- Public utility companies;
- Public pension funds
What Is the Purpose of GASB?
The GASB pronouncements aim to improve financial reporting by reducing inconsistencies among government agencies and providing more clarity. These standards enable the comparison of financial statements of various state and local governments and agencies, promoting transparency and accountability in the public sector.
GASB 34: Depreciating Capital Assets
The Government Accounting Standards Board (GASB) is responsible for setting the accounting standards for state and local governments. GASB Statement 34, which was issued in 1999, is a significant standard that provides guidelines for how government entities should report their capital assets and infrastructure in financial statements.
One of the key requirements of GASB 34 is that governments must depreciate their capital assets, including fixed assets like buildings, vehicles, and equipment. Depreciation is the process of allocating the cost of an asset over its useful life, and it is an important aspect of financial reporting because it reflects the wear and tear of an asset over time.
GASB 34 requires governments to use the modified approach to depreciate capital assets. Under this approach, governments must record depreciation on all capital assets except for infrastructure assets. Infrastructure assets, such as roads, bridges, and water systems, are not depreciated because they are expected to last for a long time and provide services for many years.
Moreover, GASB 34 also requires governments to conduct a physical inventory of their capital assets and to record any additions or deletions to the inventory. This helps ensure that all capital assets are accounted for and properly valued in financial statements.
By implementing GASB 34, government entities can provide more accurate and reliable financial statements, which can help with decision-making and planning. It also enables better comparisons between different government entities, which is particularly important for investors and other stakeholders.
What Is a Capital Asset?
Capital assets are long-term assets that have a useful life beyond a single reporting period, including:
- Machinery and equipment
- Works of art and historical treasures
Note that infrastructure assets have long lives and are usually stationary, which involves roads, bridges, tunnels, sewer systems, and lighting systems. Buildings are not included in the infrastructure asset category, unless they are part of a network of infrastructure assets (such as a toll booth).
Reporting: Capital Assets
Capital assets are reported at historical cost, which includes the purchase price, freight, and any installation charges incurred to put the asset into operation. For donated assets, fair market value at the time of receipt should be recorded.
Depreciable assets are reported net of accumulated depreciation on the Statement of Net Assets, while non-depreciable assets are reported separately if they are significant enough to warrant it. Depreciation expense is reported in the Statement of Activities to reflect the wear and tear of the asset over its useful life.
To disclose the organization’s financial position accurately, assets should be displayed in the following categories:
- Amounts invested in capital assets, net of any related debt: This category shows the amount invested in capital assets, less any liabilities related to them. It provides insight into the organization’s financial health and its commitment to long-term investments.
- Restricted assets: These are assets that have constraints placed upon their use by external parties, such as grants or donations. The restrictions can be temporary or permanent.
- Unrestricted assets: These assets are not subject to any external restrictions and can be used for any lawful purpose.
Capital asset accounting is essential for accurate financial reporting. By satisfying GASB pronouncements, government agencies can ensure that their financial statements provide transparency, comparability, and reliability to the public.
Depreciation can be calculated on individual assets, on classes of assets, on networks of assets, or on subsystems of a network of assets. When calculating depreciation on a class of assets, similar assets are grouped together, and depreciation is calculated based on the average life expectancy of the assets in that group. This method is easier to apply than calculating depreciation for each individual asset.
On the other hand, depreciation on a network of assets, as mentioned earlier, refers to a group of assets that work together to provide a specific type of service. For instance, a water supply system consists of a treatment plant, pumping stations, pipelines, and storage tanks, all of which work together to provide clean water. Depreciation is calculated based on the useful life of the entire network.
GASB 42: Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries:
GASB Statement 42 provides guidance on the accounting and financial reporting of capital asset impairment losses and insurance recoveries by state and local governments. It requires governments to recognize and measure impairment losses on capital assets and insurance recoveries as part of their financial reporting process.
How to assess impairment?
When deciding if an impairment occurred, there are the following indicators to assess whether an asset should be tested for impairment or not:
- Physical damage to the asset
- The enactment of new regulations and standards or changes in environmental factors
- Technological advancement that makes an asset obsolete
- A change in manner or duration of the asset’s use
- The end of construction
Additionally, when testing for impairment, the estimated future cash flows of the asset or asset group should be compared to the carrying value (historical cost minus accumulated depreciation) to determine if the carrying value exceeds the expected future cash flows. If the carrying value exceeds the expected future cash flows, then the asset is impaired, and the difference between the carrying value and the fair value (if determinable) is recognized as a loss in the financial statements. If the fair value is not determinable, then the impairment loss is calculated as the carrying value minus the estimated salvage value.
However, if the carrying value is less than the expected future cash flows, no impairment has occurred. It is important to note that impairment testing is required annually for intangible assets, but for other capital assets, testing is only required when there are indicators of impairment.
What are the methods for measuring an impairment loss for assets?
The chosen method should be based on the nature of the asset and the availability of relevant data. The impairment loss is reported as a separate line item in the statement of activities and should be disclosed in the notes to the financial statements.GASB 42 provides three methods for measuring an impairment loss for assets:
- Fair value method: The difference between the fair value of the asset and its carrying value (net of accumulated depreciation) is recognized as an impairment loss.
- Service units method: The difference between the asset’s estimated future cash flows and its carrying value (net of accumulated depreciation) is recognized as an impairment loss.
- Restoration cost method: The difference between the restoration cost of the asset and its carrying value (net of accumulated depreciation) is recognized as an impairment loss. The restoration cost method is used only for infrastructure assets.
How to report impairment losses?
Impairment losses are reported in the financial statements in the following ways:
- The amount of the impairment loss should be reported in the Statement of Activities or the Statement of Revenues, Expenses, and Changes in Fund Net Assets.
- If reported as a program expense, an impairment loss should be reported as a direct expense of the program that used the impaired asset.
- A general description of the impairment loss and the financial statement classification should be disclosed in the financial statement notes if not readily apparent on the face of the statements.
Notice that impairment losses that are temporary, such as losses due to a decline in the fair value of investments, should not be reported in the financial statements.
Permanent vs. Temporary Impairments
In general, impairment losses are permanent, however, there are instances where they may be determined as temporary. This occurs when the indicator of impairment, such as a work stoppage or change in use, can be shown to be temporary in nature. In such cases, the asset is not written down.
Once an impairment loss is recognized, it should not be reversed, even if there is an unforeseen change in future years of the circumstances that caused the impairment. If there is an indication of an impairment, but impairment testing indicates no impairment loss, it is still recommended to reevaluate the asset’s remaining estimated useful life and salvage value and make changes if necessary.
GASB 42: impairment losses and insurance recoveries
When an impairment loss and an insurance recovery occur in the same year, the impairment loss should be reported net of the insurance recovery. However, if insurance recoveries are received in subsequent years, they should be reported separately as program revenue, nonoperating revenue, or as an extraordinary item, based on the circumstances. It is important to note that insurance recoveries should not be recognized until they are realized or realizable, which means that the insurance company has agreed to the claim.
GASB 51: Accounting for Intangible Assets
GASB Statement 51 provides guidance on the accounting and financial reporting requirements for intangible assets for state and local governments. Intangible assets are non-financial assets that lack physical substance but have value to an organization. Examples of intangible assets include patents, copyrights, trademarks, and goodwill.
Under GASB 51, intangible assets are classified as either capital or pre-production. Capital assets have useful lives greater than one year and are subject to depreciation, amortization, or depletion. Pre-production assets are in the development stage and have not yet entered production or use. These assets are not subject to depreciation until they enter production or use.
When an intangible asset is acquired or created internally, it should be recognized in the financial statements at its acquisition or creation cost. The cost of intangible assets may include acquisition costs, development costs, legal costs, and other directly attributable costs.
Intangible assets with finite useful lives should be amortized over their useful lives using the straight-line method, unless another method is more appropriate. Intangible assets with indefinite useful lives, such as goodwill, should not be amortized but should be tested annually for impairment.
Impairment of intangible assets should be assessed when there is evidence that the asset’s value may be impaired. Impairment is recognized when the carrying value of the asset exceeds its fair value. Impairment losses should be reported in the statement of activities and should not be reversed.
GASB 51 requires extensive disclosures about intangible assets, including their nature, method of acquisition, useful lives, and any impairments. These disclosures aim to provide users of the financial statements with sufficient information to understand the nature and financial impact of intangible assets on the government’s financial position and results of operations.
What Is an Intangible Asset Under GASB 51?
Under GASB 51, an intangible asset is defined as an asset that lacks physical substance and has all the following characteristics:
- Identifiability: The intangible asset can be identified and distinguished from goodwill.
- Control: The government has the ability to control the use of the intangible asset.
- Future economic benefit: The intangible asset provides a future economic benefit, such as revenue or cost savings, to the government.
Examples of intangible assets include patents, copyrights, trademarks, franchises, licenses, goodwill, and computer software (if it is not considered to be part of property, plant, and equipment).
What Is an Internally Generated Intangible Assets Under GASB 51?
Internally generated intangible assets are those that are developed or produced by the government itself, rather than being acquired from another entity. According to GASB 51, internally generated intangible assets can be recognized on the government’s financial statements if certain criteria are met.
To be recognized as an asset, the government must be able to demonstrate that the asset will provide probable future economic benefits, that it has the ability to reliably measure the cost of the asset, and that it has control over the asset.
Examples of internally generated intangible assets that may meet these criteria include software developed in-house, patents or copyrights developed by the government, and trade names or trademarks developed by the government.
Intangible assets: estimated useful lives
Estimated useful lives of intangible assets should be reviewed periodically and revised if necessary. If there is an indication that an intangible asset’s useful life is different from what was initially estimated, the remaining useful life should be revised accordingly, and any unamortized amount should be amortized prospectively over the new estimated useful life. The change in estimate should be accounted for as a change in accounting estimate and should be disclosed in the financial statements.
GASB Asset Accounting Advisory with CPCON
The most appropriate place to start is to reevaluate the organization’s GASB asset accounting compliance, that includes fixed asset review, reconciliation, impairment testing, and tracking systems.
Our Fixed Asset Advisory team has deep experience in managing fixed assets throughout entire lifecycle, from acquisition to disposal. Each year, we provide fixed asset management services to hundreds of clients in virtually every industry.
Contact us today to learn more.