Capital assets and infrastructure: depreciation and the modified approach

• Identify which capital assets governments report and how they are measured
• Apply the two Statement 34 requirements for using the modified approach
• Distinguish preservation costs from additions and improvements under the modified approach
• Evaluate condition assessment evidence and the RSI that goes with it

What counts as a capital asset

Statement 34 paragraph 19 defines capital assets broadly: land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure and other tangible or intangible assets used in operations with initial useful lives beyond a single reporting period. Infrastructure assets are long-lived capital assets that normally are stationary and normally can be preserved for a significantly greater number of years than most capital assets, such as roads, bridges, tunnels, drainage systems, water and sewer systems and dams.

Paragraph 18 requires capital assets to be reported at historical cost, including ancillary charges needed to place the asset in its intended location and condition. Donated assets are reported at acquisition value. Capitalization thresholds are set by policy. Capital assets appear only in the government-wide and proprietary fund statements; governmental funds report the purchase as a capital outlay expenditure.

Depreciation

Paragraph 21 requires capital assets to be depreciated over their estimated useful lives unless they are inexhaustible (such as land and land improvements that do not wear out) or are infrastructure reported under the modified approach. Under paragraph 22, depreciation can be calculated for classes of assets, networks, subsystems or individual assets, and composite methods are allowed. In the statement of activities, depreciation is charged to the functions that use the assets; infrastructure depreciation is reported as a direct expense of the function the government associates with infrastructure outlays and maintenance, such as public works, or as a separate line (paragraph 45).

The modified approach

Paragraph 23 allows eligible infrastructure assets (those that are part of a network or a subsystem of a network) not to be depreciated if two requirements are met.

First, an asset management system that:

• has an up-to-date inventory of the eligible assets;
• performs condition assessments and summarizes results on a measurement scale; and
• estimates each year the annual amount needed to maintain and preserve the assets at the condition level the government has set and disclosed.

Second, documentation that the assets are being preserved approximately at or above that disclosed condition level. Paragraph 24 requires the government to document that complete condition assessments are performed in a consistent manner at least every three years, and that the results of the three most recent complete assessments give reasonable assurance the assets are preserved approximately at or above the level. Assessments must be replicable, meaning different measurers using the same methods would reach substantially similar results, and they may be done in-house or by contract. Statistical samples and cyclical assessments (for example a third of the network each year) are allowed.

Under paragraph 25, when the modified approach is used, all expenditures for those assets are expensed except additions and improvements, which increase capacity or efficiency and are capitalized. Paragraph 26 says that if the requirements are no longer met, depreciation applies for subsequent reporting periods.

Governments using the modified approach present RSI: the assessed condition for at least the three most recent complete assessments with their dates, and the estimated annual amount to maintain and preserve the assets compared with the amounts actually expensed, for each of the past five reporting periods.

Audit procedures

• Roll forward capital assets: beginning balance, additions, disposals, depreciation, ending balance. Vouch additions and test the repairs sweep.
• Test completeness of infrastructure additions, including assets contributed by developers.
• For the modified approach: read the condition assessment reports, check the dates and methods, compare results to the disclosed level, and evaluate whether the three most recent assessments still support the approach.
• Classify modified approach spending: preservation is expense, capacity or efficiency gains are capitalized.
• Read the condition disclosures that accompany the RSI: the basis for the condition measurement, the measurement scale and the condition level the government has set. A change in the target level or the scale needs an explanation in the RSI notes.
• For fiscal years beginning after June 15, 2025, check the capital asset note against GASB Statement No. 104: lease assets, subscription assets and other intangible assets disclosed separately, and capital assets held for sale disclosed with their historical cost, accumulated depreciation and any debt they secure.

Fund and government-wide effects

In a governmental fund, a $2,000,000 fire truck is a capital outlay expenditure in the year purchased and never appears as an asset. In the government-wide statements it is capitalized and depreciated over its useful life. The difference between capital outlay and depreciation is one of the largest lines in most reconciliations, so the capital asset rollforward is usually the first schedule tested.

Is the modified approach still supportable for Oak County roads?