Question

Facts: When GASB Statement No. 34, Basic Financial Statements, was issued, it became one of the most critical governmental accounting standards available, covering a wide range of issues on government financial statement preparation. One of the biggest issues that state and local governments faced, in adopting this guidance, was the requirement that infrastructure (such as roads, bridges, sewer systems, and rail lines) be capitalized. This standard has since been codified in the GASB Codification; therefore, any references you make to the authoritative literature should refer to the updated GASB Codification.

Required: Act as though you are a local government accountant and write a brief memo to your accounting supervisor explaining the requirement from the GASB Codification that requires infrastructure to be capitalized, and explain the options available for subsequently measuring infrastructure. Emphasize that the town must select between these two options, and include your recommendation. Cite from authoritative literature as support for any conclusions.

Answer 1

The following extract is the information regarding inclusion of Infrastructure projects into the financial reports of the Government, with reference to the Paragraphs relating to General Accounting Standards Board. As per Section 1400 of GASB 34, Capital assets and the depreciation are to accounted as follows:
Infrastructure of Government such as roads, bridges, sewer systems, and rail lines is to be categorised as Capital Assets as per the Paragraph 19 of GASB 34 stating that the infrastructure assets are long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets.
Vide paragraph 18, Capital assets should be reported at historical cost. The cost of a capital asset should include capitalized interest and ancillary charges necessary to place the asset into its intended location and condition for use. Ancillary charges include costs that are directly attributable to asset acquisition—such as freight and transportation charges, site preparation costs, and professional fees. Donated capital assets should be reported at their estimated fair value at the time of acquisition plus ancillary charges, if any.
But as per the modified approach, Infrastructure assets that are part of a network or subsystem of a network are not required to be depreciated as long as two requirements are met.
1. the government manages the eligible infrastructure assets using an asset management system that has the characteristics set forth below
a. Have an up-to-date inventory of eligible infrastructure assets
b. Perform condition assessments of the eligible infrastructure assets and summarize the results using a measurement scale
c. Estimate each year the annual amount to maintain and preserve the eligible infrastructure assets at the condition level established and disclosed by the government.
2. The government documents that the eligible infrastructure assets are being preserved approximately at (or above) a condition level established and disclosed by the government. To meet the first requirement, the asset management system should:
But the documentation of the above needs Professional Judgement in order to make them eligible for categorisation.
Depreciation expense should be measured by allocating the net cost of depreciable assets (historical cost less estimated salvage value) over their estimated useful lives in a systematic and rational manner. It may be calculated for
(a) a class of assets,
(b) a network of assets,
(c) a subsystem of a network, or
(d) individual assets. (Composite methods may be used to calculate depreciation expense).
On primary basis, it is based on type of infrastructure; the asset can be placed into depreciable or non-depreciable assets such as lands, and
It is based on the availability of the documentation and the transparency in the class of assets, we can ensure that the capital asset is depreciable or not.
Capital assets that are being or have been depreciated should be reported net of accumulated depreciation in the statement of net assets. Capital assets that are not being depreciated, such as land or infrastructure assets reported using the modified approach should be reported separately if the government has a significant amount of these assets. Capital assets also may be reported in greater detail, such as by major class of asset (for example, infrastructure, buildings and improvements, vehicles, machinery and equipment).
If eligible infrastructure assets are not depreciated, all expenditures made for those assets (except for additions and improvements) should be expensed in the period incurred. Additions and improvements to eligible infrastructure assets should be capitalized. Additions or improvements increase the capacity or efficiency of infrastructure assets rather than preserve the useful life of the assets.