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Business and Policy Areas
Business and Policy Areas

Capital Assets


Wayne Cate, chief business officer at Teachum State University, has been studying what was required for the university to prepare its annual financial report using the GASB 34 reporting model guideline. In his analysis he has made a list of questions that he would like to have answered. As all the questions pertain to capital assets, each of the questions is listed below together with its response.


1. What are capital assets?

Capital assets are land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure, and all other tangible and intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period. (Statement 34, paragraph 19)

2. What are infrastructure assets?

Infrastructure assets are long-lived capital assets that normally can be preserved for a significantly greater number of years than most capital assets and that normally are stationary in nature. Examples of infrastructure assets include roads, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems. Buildings, except those that are an ancillary part of a network of infrastructure assets, should not be considered infrastructure assets. (Statement 34, paragraph 19) Examples of buildings that may be an ancillary part of a network or subsystem include road maintenance structures such as shops and garages associated with a road system, and water pumping buildings associated with water systems.

3. What is the difference between a network and a subsystem of infrastructure assets?

A network of infrastructure assets is composed of all assets that provide a particular type of service for a government. A network may consist of only one infrastructure asset that is composed of many components. For example, a network of infrastructure assets may be a dam composed of a concrete dam, a concrete spillway, and a series of locks. A subsystem of a network of infrastructure assets is composed of all assets that make up a similar portion or segment of a network of assets. For example, the roads of a university could be considered a network. State highways, city streets, and rural roads could each be considered a subsystem of that network.

4. What is an inexhaustible capital asset?

An inexhaustible capital asset is one whose economic benefit or service potential is used up so slowly that its estimated useful life is extraordinarily long. Land and certain land improvements are inexhaustible capital assets.

5. What are land improvements?

Land improvements consist of betterments, other than buildings, that bring land up to the condition needed for its intended use. Examples of land improvements include site improvements i.e., excavation, fill, grading, and utility installation; removing, relocating, or reconstructing property of others, such as roads, railroads, and telephone and power lines; retaining walls; and landscaping.

6. What is estimated fair value?

Fair value is the amount at which the asset could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Estimated fair value may be calculated from manufacturers’ catalogs or price quotes in periodicals, recent sales of comparable assets, or other comparative information. Professional assistance from an appraiser may be helpful, but is not required.

7. What are preservation costs?

Preservation costs extend the useful life of an asset beyond its original estimated useful life, but do not increase the capacity or efficiency of the asset. Preservation costs should be capitalized and depreciated over the increase in estimated useful life. If preservation costs are related to a collection or historical treasure that is not capitalized, such costs should be expensed in the period incurred.

8. Should construction in progress be included in capital assets?

Construction in progress should be included in capital assets in the statement of net assets. It should be reported with other nondepreciable assets, such as land, land improvements and infrastructure accounted for using the modified approach.

9. How is accumulated depreciation reported on the statement of net assets?

Capital assets may be presented net of accumulated depreciation on the statement of net assets. If the capital assets are not presented net of accumulated depreciation, the accumulated depreciation can be reported separately as a line item or parenthetically.

10. Should nondepreciable assets be reported separately from depreciable assets?

Nondepreciable assets, including land, land improvements or infrastructure assets reported using the modified approach, should be reported separately.

11. If an existing parking lot is depreciated, how should the cost of removing and replacing or resurfacing the existing parking lot be capitalized?

If the separate components of the parking lot i.e., surface, drains and curbs, are separately identified and depreciated, the parking lot component costs should be capitalized separately and depreciated. If the parking lot was part of a group being depreciated using a composite rate, the cost of the replaced parking lot would be removed from the capital asset and accumulated depreciation accounts of the group. The cost of the new parking lot would be added to the capital asset account and depreciated at the composite rate.

The term inexhaustible was neither defined nor explained in GASB 34. The term can, however, be traced to FASB Standard No. 93 pertaining to the recognition of depreciation by not-for-profit organizations. Paragraph 6 of SFAS 93 indicated that consistent with the recognition practice for land used as part of a building site, works or art or historical treasures that are protected and preserved have economic benefit or service lives that are used so slowly so as to be considered inexhaustible. Given these considerations, FASB did not require capitalization.