Evaluation of the accounting treatment for capital assets in
governmental and not-for-profit organizations
Introduction
Accounting is the process of recording, classifying, selecting, verifying, summarizing,
interpreting and communicating financial information to internal and external users of the
information. The accounting treatment of capital assets in governmental and not-for-profit
organizations is significantly different from that of capital assets held by private sector, for-profit
entities. The primary goal of this paper is to evaluate the accounting treatment for capital assets
in governmental and not-for-profit organizations and compare it with the treatment for capital
assets held by private sector organizations.
Capital Assets in Governmental Accounting
Under governmental accounting standards, capital assets are defined as tangible or intangible
assets that are used in operations and that have an initial useful life that extends beyond a
single reporting period. Some examples of capital assets are land, infrastructure, buildings,
equipment, and intangible assets like computer software, easements, and water rights.
The basic accounting model for capital assets under governmental accounting standards is the
capital asset model, which is the recognition of the costs of capital assets as expenditures at the
time of acquisition. This is in contrast to the private sector accounting model of capitalization of
capital asset costs and depreciation of those costs over the useful lives of the assets acquired.
Under the capital asset model, all capital outlays for capital assets like land, infrastructure,
buildings, equipment, etc. are treated as expenditures in the year of acquisition, regardless of
their useful lives or materiality. No depreciation is recorded under this model. The capital asset
itself is not reported on the balance sheet, only the expenditure is reported on the statement of
revenues, expenditures and changes in fund balances or statement of activities for the year of
acquisition.
A full physical inventory of all capital assets needs to be conducted periodically, usually every
three to five years, to account for all assets owned by the governmental entity. This is done to
monitor losses or dispositions of assets. The inventories also help assess the need for
additional funding for maintenance or repair of existing assets or acquisition of new assets.
Some key advantages of the capital asset model are its simplicity and ease of application. As no
depreciation is involved, it avoids complex calculations of useful lives and salvage values. It is
also consistent with annual budgeting and annual financial reporting cycles in governments. The
disadvantages are that it does not properly align costs of using capital assets with the periods
that benefit from those assets. The costs are all recognized up front rather than being allocated
over the useful lives. It also fails to report the investment in long-lived assets on the balance
sheet.
Since the issuance of GASB Statement 34 in 1999, governments are now required to report
major general infrastructure assets like roads, bridges, tunnels, drainage systems, water and
sewer systems, dams, and lighting systems acquired or significantly renovated since 1980. They
are reported at historical cost in the capital assets note to the financial statements or in a
separate column in the government-wide statement of net position.
Depreciation is still not applied to general infrastructure assets. However, governments are
required to develop and disclose an asset management system to maintain and account for
these assets and assess the average useful lives and current condition/maintenance needs of
infrastructure assets to project future repair and replacement costs. This is a major change from
the previous capital asset model requirements.
Another significant change introduced by GASB Statement 34 requires governments to
capitalize and depreciate capital assets that are associated with enterprise/business-type
activities like water, sewer and electricity utilities that charge user fees. This makes
governmental accounting for these types of capital assets more consistent with private sector
accounting standards.
Overall, while the basic capital asset model is still followed for most governmental capital
assets, GASB Statement 34 brought governmental accounting more in line with private sector
standards by requiring capitalization and depreciation of certain categories of long-lived assets
and enhanced disclosures regarding capital assets and infrastructure.
Capital Assets in Not-for-Profit Accounting
Like governmental accounting standards, not-for-profit accounting standards are also
principles-based frameworks rather than rules-based like private sector GAAP. The basic model
for accounting for capital assets held by not-for-profit organizations is very similar to the
governmental capital asset model.
The FASB Accounting Standards Codification Topic 958-360 on "Not-for-Profit Entities –
Property, Plant and Equipment" provides guidance on accounting for not-for-profit capital
assets. Some key points:
- Capital assets are defined broadly as long-lived physical assets acquired or donated
specifically for the production or supply of goods and services, administration of the organization
or for its end product.
- Assets are recorded at historical cost if purchased or at fair value if donated. Interest costs
incurred during construction are not capitalized, unlike private sector standards.
- Expenditures that extend the useful life of existing assets or improve/enhance their
functionality are capitalized as improvements. Repairs and maintenance costs are expensed.
- No depreciation is recorded under the modified capitalization threshold method. Assets below
the organization's capitalization threshold are expensed.
- Assets are presented in the statement of financial position net of accumulated depreciation
under the full-cost method.
- GAAP encourages disclosing key details on capital assets in the notes, like descriptions,
useful lives, capitalization policy, etc. but does not require their recognition on the face of
financials.
- Periodic physical inventories are required to safeguard assets and ensure all assets are
properly accounted for.
Similar to governmental accounting, the not-for-profit capital asset model focuses on
expenditures/expenses of acquiring/improving assets rather than depreciation. This aligns better
with their annual operating budgets and financial reporting cycles. However, it fails to
communicate the full costs of delivering services and may result in undervaluing long-term
assets on the face of the statements.
Comparison of Models
While the governmental and not-for-profit models are very similar in focusing on expenditures
instead of depreciation, there are a few key differences from private sector accounting
standards:
Private Sector (GAAP) Model:
- Capitalize asset costs, record depreciation expense annually based on useful lives
- Record assets & accumulated depreciation on balance sheet
- Apply treatment consistently to all asset categories
Governmental Model:
- Expenditure treatment instead of depreciation for most assets
- Infrastructure & network assets capitalized without depreciation
- Enterprise assets treated like private sector model
Not-for-Profit Model:
- Expenditure focus but can use depreciation under full cost method
- Assets can include fair value of donated assets
- No interest capitalization in construction
The private sector model provides more consistency across all types of assets. Depreciation
allocation better matches costs to periods of benefit. Capitalization on the balance sheet
communicates full investment in long-term assets.
Governments and not-for-profits focus on annual budgets/grants, which their expenditure
models align with better. However, it undervalues long-term assets and shifts costs to future
periods. Disclosure of key infrastructure data partially remedies this issue for governments.
In summary, the governmental and not-for-profit capital asset models are appropriately suited
for their budget-driven operating environments. The private sector model achieves better
matching of costs and revenues while also providing a more comprehensive picture of long-term
assets. No model is clearly superior in all situations.
Impact of Recent Pronouncements
Recent updates issued by GASB and FASB are aiming to make nonprofit accounting more
consistent and comparable with private sector standards. A few key changes are:
- GASB 87 (Leases) will bring operating lease accounting in line with the private sector,
requiring governments to recognize lease assets/liabilities starting in FY2022.
- FASB ASU 2016-14 improved nonprofit financial reporting with enhanced net asset
classifications, liquidity/availability disclosures and standardized performance/cash flow
statements.
- GASB 96 (Subscription-Based IT Arrangements) addresses the accounting for long-term
subscription arrangements like cloud computing, which were previously exempt from
capitalization.
- GASB 87 and 96 expand the scope of capitalizable intangible assets for governments to now
include certain internally developed/leased software and SaaS arrangements.
- FASB ASU 2020-07 improved presentation and disclosure of contributed nonfinancial assets
like land, buildings, equipment by requiring separate line items.
- GASB 84 improved guidance on terminal reporting provisions and fiduciary activities. It
removed certain activities that were inappropriately reported as fiduciary like component units.
- GASB 87, 96 and FASB changes regarding capitalization scope will result in more long-term
assets being recognized for governments and NFPs, aligning them further to private standards
over time.
These pronouncements are positively impacting the relevance, consistency, comparability and
transparency of governmental and nonprofit financial reporting. More standardized accounting
treatment across sectors improves usefulness for external decision making. However, certain
expenditure-focused aspects unique to their operations will likely remain.
Conclusion
In conclusion, while the accounting models for capital assets in governmental and nonprofit
organizations differ in certain ways from private sector standards, they are well-suited for their
distinct operating environments and annual budgetary cycles.
Recent updates are gradually making nonprofit accounting more harmonized with private GAAP
standards, especially regarding balance sheet presentation, capitalization scope and improved
disclosures. However, the modified capital asset model focusing on annual expenditures still
underlies their financial reporting frameworks appropriately.
No single model is definitively superior across all entity types and situations. The governmental
and nonprofit frameworks balance relevance with practicality considering their unique public
sector missions supported through annual operating budgets and other funding sources.
Overall, the standards continue evolving to fulfill external user needs for transparent,
comparable and useful information.
Accounting is the process of recording, classifying, selecting, verifying, summarizing,
interpreting and communicating financial information to internal and external users of the
information. The accounting treatment of capital assets in governmental and not-for-profit
organizations is significantly different from that of capital assets held by private sector, for-profit
entities. The primary goal of this paper is to evaluate the accounting treatment for capital assets
in governmental and not-for-profit organizations and compare it with the treatment for capital
assets held by private sector organizations.
Capital Assets in Governmental Accounting
Under governmental accounting standards, capital assets are defined as tangible or intangible
assets that are used in operations and that have an initial useful life that extends beyond a
single reporting period. Some examples of capital assets are land, infrastructure, buildings,
equipment, and intangible assets like computer software, easements, and water rights.
The basic accounting model for capital assets under governmental accounting standards is the
capital asset model, which is the recognition of the costs of capital assets as expenditures at the
time of acquisition. This is in contrast to the private sector accounting model of capitalization of
capital asset costs and depreciation of those costs over the useful lives of the assets acquired.
Under the capital asset model, all capital outlays for capital assets like land, infrastructure,
buildings, equipment, etc. are treated as expenditures in the year of acquisition, regardless of
their useful lives or materiality. No depreciation is recorded under this model. The capital asset
itself is not reported on the balance sheet, only the expenditure is reported on the statement of
revenues, expenditures and changes in fund balances or statement of activities for the year of
acquisition.
A full physical inventory of all capital assets needs to be conducted periodically, usually every
three to five years, to account for all assets owned by the governmental entity. This is done to
monitor losses or dispositions of assets. The inventories also help assess the need for
additional funding for maintenance or repair of existing assets or acquisition of new assets.
Some key advantages of the capital asset model are its simplicity and ease of application. As no
depreciation is involved, it avoids complex calculations of useful lives and salvage values. It is
also consistent with annual budgeting and annual financial reporting cycles in governments. The
disadvantages are that it does not properly align costs of using capital assets with the periods
that benefit from those assets. The costs are all recognized up front rather than being allocated
over the useful lives. It also fails to report the investment in long-lived assets on the balance
sheet.
Since the issuance of GASB Statement 34 in 1999, governments are now required to report
major general infrastructure assets like roads, bridges, tunnels, drainage systems, water and
sewer systems, dams, and lighting systems acquired or significantly renovated since 1980. They
are reported at historical cost in the capital assets note to the financial statements or in a
separate column in the government-wide statement of net position.
Depreciation is still not applied to general infrastructure assets. However, governments are
required to develop and disclose an asset management system to maintain and account for
these assets and assess the average useful lives and current condition/maintenance needs of
infrastructure assets to project future repair and replacement costs. This is a major change from
the previous capital asset model requirements.
Another significant change introduced by GASB Statement 34 requires governments to
capitalize and depreciate capital assets that are associated with enterprise/business-type
activities like water, sewer and electricity utilities that charge user fees. This makes
governmental accounting for these types of capital assets more consistent with private sector
accounting standards.
Overall, while the basic capital asset model is still followed for most governmental capital
assets, GASB Statement 34 brought governmental accounting more in line with private sector
standards by requiring capitalization and depreciation of certain categories of long-lived assets
and enhanced disclosures regarding capital assets and infrastructure.
Capital Assets in Not-for-Profit Accounting
Like governmental accounting standards, not-for-profit accounting standards are also
principles-based frameworks rather than rules-based like private sector GAAP. The basic model
for accounting for capital assets held by not-for-profit organizations is very similar to the
governmental capital asset model.
The FASB Accounting Standards Codification Topic 958-360 on "Not-for-Profit Entities –
Property, Plant and Equipment" provides guidance on accounting for not-for-profit capital
assets. Some key points:
- Capital assets are defined broadly as long-lived physical assets acquired or donated
specifically for the production or supply of goods and services, administration of the organization
or for its end product.
- Assets are recorded at historical cost if purchased or at fair value if donated. Interest costs
incurred during construction are not capitalized, unlike private sector standards.
- Expenditures that extend the useful life of existing assets or improve/enhance their
functionality are capitalized as improvements. Repairs and maintenance costs are expensed.
- No depreciation is recorded under the modified capitalization threshold method. Assets below
the organization's capitalization threshold are expensed.
- Assets are presented in the statement of financial position net of accumulated depreciation
under the full-cost method.
- GAAP encourages disclosing key details on capital assets in the notes, like descriptions,
useful lives, capitalization policy, etc. but does not require their recognition on the face of
financials.
- Periodic physical inventories are required to safeguard assets and ensure all assets are
properly accounted for.
Similar to governmental accounting, the not-for-profit capital asset model focuses on
expenditures/expenses of acquiring/improving assets rather than depreciation. This aligns better
with their annual operating budgets and financial reporting cycles. However, it fails to
communicate the full costs of delivering services and may result in undervaluing long-term
assets on the face of the statements.
Comparison of Models
While the governmental and not-for-profit models are very similar in focusing on expenditures
instead of depreciation, there are a few key differences from private sector accounting
standards:
Private Sector (GAAP) Model:
- Capitalize asset costs, record depreciation expense annually based on useful lives
- Record assets & accumulated depreciation on balance sheet
- Apply treatment consistently to all asset categories
Governmental Model:
- Expenditure treatment instead of depreciation for most assets
- Infrastructure & network assets capitalized without depreciation
- Enterprise assets treated like private sector model
Not-for-Profit Model:
- Expenditure focus but can use depreciation under full cost method
- Assets can include fair value of donated assets
- No interest capitalization in construction
The private sector model provides more consistency across all types of assets. Depreciation
allocation better matches costs to periods of benefit. Capitalization on the balance sheet
communicates full investment in long-term assets.
Governments and not-for-profits focus on annual budgets/grants, which their expenditure
models align with better. However, it undervalues long-term assets and shifts costs to future
periods. Disclosure of key infrastructure data partially remedies this issue for governments.
In summary, the governmental and not-for-profit capital asset models are appropriately suited
for their budget-driven operating environments. The private sector model achieves better
matching of costs and revenues while also providing a more comprehensive picture of long-term
assets. No model is clearly superior in all situations.
Impact of Recent Pronouncements
Recent updates issued by GASB and FASB are aiming to make nonprofit accounting more
consistent and comparable with private sector standards. A few key changes are:
- GASB 87 (Leases) will bring operating lease accounting in line with the private sector,
requiring governments to recognize lease assets/liabilities starting in FY2022.
- FASB ASU 2016-14 improved nonprofit financial reporting with enhanced net asset
classifications, liquidity/availability disclosures and standardized performance/cash flow
statements.
- GASB 96 (Subscription-Based IT Arrangements) addresses the accounting for long-term
subscription arrangements like cloud computing, which were previously exempt from
capitalization.
- GASB 87 and 96 expand the scope of capitalizable intangible assets for governments to now
include certain internally developed/leased software and SaaS arrangements.
- FASB ASU 2020-07 improved presentation and disclosure of contributed nonfinancial assets
like land, buildings, equipment by requiring separate line items.
- GASB 84 improved guidance on terminal reporting provisions and fiduciary activities. It
removed certain activities that were inappropriately reported as fiduciary like component units.
- GASB 87, 96 and FASB changes regarding capitalization scope will result in more long-term
assets being recognized for governments and NFPs, aligning them further to private standards
over time.
These pronouncements are positively impacting the relevance, consistency, comparability and
transparency of governmental and nonprofit financial reporting. More standardized accounting
treatment across sectors improves usefulness for external decision making. However, certain
expenditure-focused aspects unique to their operations will likely remain.
Conclusion
In conclusion, while the accounting models for capital assets in governmental and nonprofit
organizations differ in certain ways from private sector standards, they are well-suited for their
distinct operating environments and annual budgetary cycles.
Recent updates are gradually making nonprofit accounting more harmonized with private GAAP
standards, especially regarding balance sheet presentation, capitalization scope and improved
disclosures. However, the modified capital asset model focusing on annual expenditures still
underlies their financial reporting frameworks appropriately.
No single model is definitively superior across all entity types and situations. The governmental
and nonprofit frameworks balance relevance with practicality considering their unique public
sector missions supported through annual operating budgets and other funding sources.
Overall, the standards continue evolving to fulfill external user needs for transparent,
comparable and useful information.
Accounting is the process of recording, classifying, selecting, verifying, summarizing,
interpreting and communicating financial information to internal and external users of the
information. The accounting treatment of capital assets in governmental and not-for-profit
organizations is significantly different from that of capital assets held by private sector, for-profit
entities. The primary goal of this paper is to evaluate the accounting treatment for capital assets
in governmental and not-for-profit organizations and compare it with the treatment for capital
assets held by private sector organizations.
Capital Assets in Governmental Accounting
Under governmental accounting standards, capital assets are defined as tangible or intangible
assets that are used in operations and that have an initial useful life that extends beyond a
single reporting period. Some examples of capital assets are land, infrastructure, buildings,
equipment, and intangible assets like computer software, easements, and water rights.
The basic accounting model for capital assets under governmental accounting standards is the
capital asset model, which is the recognition of the costs of capital assets as expenditures at the
time of acquisition. This is in contrast to the private sector accounting model of capitalization of
capital asset costs and depreciation of those costs over the useful lives of the assets acquired.
Under the capital asset model, all capital outlays for capital assets like land, infrastructure,
buildings, equipment, etc. are treated as expenditures in the year of acquisition, regardless of
their useful lives or materiality. No depreciation is recorded under this model. The capital asset
itself is not reported on the balance sheet, only the expenditure is reported on the statement of
revenues, expenditures and changes in fund balances or statement of activities for the year of
acquisition.
A full physical inventory of all capital assets needs to be conducted periodically, usually every
three to five years, to account for all assets owned by the governmental entity. This is done to
monitor losses or dispositions of assets. The inventories also help assess the need for
additional funding for maintenance or repair of existing assets or acquisition of new assets.
Some key advantages of the capital asset model are its simplicity and ease of application. As no
depreciation is involved, it avoids complex calculations of useful lives and salvage values. It is
also consistent with annual budgeting and annual financial reporting cycles in governments. The
disadvantages are that it does not properly align costs of using capital assets with the periods
that benefit from those assets. The costs are all recognized up front rather than being allocated
over the useful lives. It also fails to report the investment in long-lived assets on the balance
sheet.
Since the issuance of GASB Statement 34 in 1999, governments are now required to report
major general infrastructure assets like roads, bridges, tunnels, drainage systems, water and
sewer systems, dams, and lighting systems acquired or significantly renovated since 1980. They
are reported at historical cost in the capital assets note to the financial statements or in a
separate column in the government-wide statement of net position.
Depreciation is still not applied to general infrastructure assets. However, governments are
required to develop and disclose an asset management system to maintain and account for
these assets and assess the average useful lives and current condition/maintenance needs of
infrastructure assets to project future repair and replacement costs. This is a major change from
the previous capital asset model requirements.
Another significant change introduced by GASB Statement 34 requires governments to
capitalize and depreciate capital assets that are associated with enterprise/business-type
activities like water, sewer and electricity utilities that charge user fees. This makes
governmental accounting for these types of capital assets more consistent with private sector
accounting standards.
Overall, while the basic capital asset model is still followed for most governmental capital
assets, GASB Statement 34 brought governmental accounting more in line with private sector
standards by requiring capitalization and depreciation of certain categories of long-lived assets
and enhanced disclosures regarding capital assets and infrastructure.
Capital Assets in Not-for-Profit Accounting
Like governmental accounting standards, not-for-profit accounting standards are also
principles-based frameworks rather than rules-based like private sector GAAP. The basic model
for accounting for capital assets held by not-for-profit organizations is very similar to the
governmental capital asset model.
The FASB Accounting Standards Codification Topic 958-360 on "Not-for-Profit Entities –
Property, Plant and Equipment" provides guidance on accounting for not-for-profit capital
assets. Some key points:
- Capital assets are defined broadly as long-lived physical assets acquired or donated
specifically for the production or supply of goods and services, administration of the organization
or for its end product.
- Assets are recorded at historical cost if purchased or at fair value if donated. Interest costs
incurred during construction are not capitalized, unlike private sector standards.
- Expenditures that extend the useful life of existing assets or improve/enhance their
functionality are capitalized as improvements. Repairs and maintenance costs are expensed.
- No depreciation is recorded under the modified capitalization threshold method. Assets below
the organization's capitalization threshold are expensed.
- Assets are presented in the statement of financial position net of accumulated depreciation
under the full-cost method.
- GAAP encourages disclosing key details on capital assets in the notes, like descriptions,
useful lives, capitalization policy, etc. but does not require their recognition on the face of
financials.
- Periodic physical inventories are required to safeguard assets and ensure all assets are
properly accounted for.
Similar to governmental accounting, the not-for-profit capital asset model focuses on
expenditures/expenses of acquiring/improving assets rather than depreciation. This aligns better
with their annual operating budgets and financial reporting cycles. However, it fails to
communicate the full costs of delivering services and may result in undervaluing long-term
assets on the face of the statements.
Comparison of Models
While the governmental and not-for-profit models are very similar in focusing on expenditures
instead of depreciation, there are a few key differences from private sector accounting
standards:
Private Sector (GAAP) Model:
- Capitalize asset costs, record depreciation expense annually based on useful lives
- Record assets & accumulated depreciation on balance sheet
- Apply treatment consistently to all asset categories
Governmental Model:
- Expenditure treatment instead of depreciation for most assets
- Infrastructure & network assets capitalized without depreciation
- Enterprise assets treated like private sector model
Not-for-Profit Model:
- Expenditure focus but can use depreciation under full cost method
- Assets can include fair value of donated assets
- No interest capitalization in construction
The private sector model provides more consistency across all types of assets. Depreciation
allocation better matches costs to periods of benefit. Capitalization on the balance sheet
communicates full investment in long-term assets.
Governments and not-for-profits focus on annual budgets/grants, which their expenditure
models align with better. However, it undervalues long-term assets and shifts costs to future
periods. Disclosure of key infrastructure data partially remedies this issue for governments.
In summary, the governmental and not-for-profit capital asset models are appropriately suited
for their budget-driven operating environments. The private sector model achieves better
matching of costs and revenues while also providing a more comprehensive picture of long-term
assets. No model is clearly superior in all situations.
Impact of Recent Pronouncements
Recent updates issued by GASB and FASB are aiming to make nonprofit accounting more
consistent and comparable with private sector standards. A few key changes are:
- GASB 87 (Leases) will bring operating lease accounting in line with the private sector,
requiring governments to recognize lease assets/liabilities starting in FY2022.
- FASB ASU 2016-14 improved nonprofit financial reporting with enhanced net asset
classifications, liquidity/availability disclosures and standardized performance/cash flow
statements.
- GASB 96 (Subscription-Based IT Arrangements) addresses the accounting for long-term
subscription arrangements like cloud computing, which were previously exempt from
capitalization.
- GASB 87 and 96 expand the scope of capitalizable intangible assets for governments to now
include certain internally developed/leased software and SaaS arrangements.
- FASB ASU 2020-07 improved presentation and disclosure of contributed nonfinancial assets
like land, buildings, equipment by requiring separate line items.
- GASB 84 improved guidance on terminal reporting provisions and fiduciary activities. It
removed certain activities that were inappropriately reported as fiduciary like component units.
- GASB 87, 96 and FASB changes regarding capitalization scope will result in more long-term
assets being recognized for governments and NFPs, aligning them further to private standards
over time.
These pronouncements are positively impacting the relevance, consistency, comparability and
transparency of governmental and nonprofit financial reporting. More standardized accounting
treatment across sectors improves usefulness for external decision making. However, certain
expenditure-focused aspects unique to their operations will likely remain.
Conclusion
In conclusion, while the accounting models for capital assets in governmental and nonprofit
organizations differ in certain ways from private sector standards, they are well-suited for their
distinct operating environments and annual budgetary cycles.
Recent updates are gradually making nonprofit accounting more harmonized with private GAAP
standards, especially regarding balance sheet presentation, capitalization scope and improved
disclosures. However, the modified capital asset model focusing on annual expenditures still
underlies their financial reporting frameworks appropriately.
No single model is definitively superior across all entity types and situations. The governmental
and nonprofit frameworks balance relevance with practicality considering their unique public
sector missions supported through annual operating budgets and other funding sources.
Overall, the standards continue evolving to fulfill external user needs for transparent,
comparable and useful information.
Accounting is the process of recording, classifying, selecting, verifying, summarizing,
interpreting and communicating financial information to internal and external users of the
information. The accounting treatment of capital assets in governmental and not-for-profit
organizations is significantly different from that of capital assets held by private sector, for-profit
entities. The primary goal of this paper is to evaluate the accounting treatment for capital assets
in governmental and not-for-profit organizations and compare it with the treatment for capital
assets held by private sector organizations.
Capital Assets in Governmental Accounting
Under governmental accounting standards, capital assets are defined as tangible or intangible
assets that are used in operations and that have an initial useful life that extends beyond a
single reporting period. Some examples of capital assets are land, infrastructure, buildings,
equipment, and intangible assets like computer software, easements, and water rights.
The basic accounting model for capital assets under governmental accounting standards is the
capital asset model, which is the recognition of the costs of capital assets as expenditures at the
time of acquisition. This is in contrast to the private sector accounting model of capitalization of
capital asset costs and depreciation of those costs over the useful lives of the assets acquired.
Under the capital asset model, all capital outlays for capital assets like land, infrastructure,
buildings, equipment, etc. are treated as expenditures in the year of acquisition, regardless of
their useful lives or materiality. No depreciation is recorded under this model. The capital asset
itself is not reported on the balance sheet, only the expenditure is reported on the statement of
revenues, expenditures and changes in fund balances or statement of activities for the year of
acquisition.
A full physical inventory of all capital assets needs to be conducted periodically, usually every
three to five years, to account for all assets owned by the governmental entity. This is done to
monitor losses or dispositions of assets. The inventories also help assess the need for
additional funding for maintenance or repair of existing assets or acquisition of new assets.
Some key advantages of the capital asset model are its simplicity and ease of application. As no
depreciation is involved, it avoids complex calculations of useful lives and salvage values. It is
also consistent with annual budgeting and annual financial reporting cycles in governments. The
disadvantages are that it does not properly align costs of using capital assets with the periods
that benefit from those assets. The costs are all recognized up front rather than being allocated
over the useful lives. It also fails to report the investment in long-lived assets on the balance
sheet.
Since the issuance of GASB Statement 34 in 1999, governments are now required to report
major general infrastructure assets like roads, bridges, tunnels, drainage systems, water and
sewer systems, dams, and lighting systems acquired or significantly renovated since 1980. They
are reported at historical cost in the capital assets note to the financial statements or in a
separate column in the government-wide statement of net position.
Depreciation is still not applied to general infrastructure assets. However, governments are
required to develop and disclose an asset management system to maintain and account for
these assets and assess the average useful lives and current condition/maintenance needs of
infrastructure assets to project future repair and replacement costs. This is a major change from
the previous capital asset model requirements.
Another significant change introduced by GASB Statement 34 requires governments to
capitalize and depreciate capital assets that are associated with enterprise/business-type
activities like water, sewer and electricity utilities that charge user fees. This makes
governmental accounting for these types of capital assets more consistent with private sector
accounting standards.
Overall, while the basic capital asset model is still followed for most governmental capital
assets, GASB Statement 34 brought governmental accounting more in line with private sector
standards by requiring capitalization and depreciation of certain categories of long-lived assets
and enhanced disclosures regarding capital assets and infrastructure.
Capital Assets in Not-for-Profit Accounting
Like governmental accounting standards, not-for-profit accounting standards are also
principles-based frameworks rather than rules-based like private sector GAAP. The basic model
for accounting for capital assets held by not-for-profit organizations is very similar to the
governmental capital asset model.
The FASB Accounting Standards Codification Topic 958-360 on "Not-for-Profit Entities –
Property, Plant and Equipment" provides guidance on accounting for not-for-profit capital
assets. Some key points:
- Capital assets are defined broadly as long-lived physical assets acquired or donated
specifically for the production or supply of goods and services, administration of the organization
or for its end product.
- Assets are recorded at historical cost if purchased or at fair value if donated. Interest costs
incurred during construction are not capitalized, unlike private sector standards.
- Expenditures that extend the useful life of existing assets or improve/enhance their
functionality are capitalized as improvements. Repairs and maintenance costs are expensed.
- No depreciation is recorded under the modified capitalization threshold method. Assets below
the organization's capitalization threshold are expensed.
- Assets are presented in the statement of financial position net of accumulated depreciation
under the full-cost method.
- GAAP encourages disclosing key details on capital assets in the notes, like descriptions,
useful lives, capitalization policy, etc. but does not require their recognition on the face of
financials.
- Periodic physical inventories are required to safeguard assets and ensure all assets are
properly accounted for.
Similar to governmental accounting, the not-for-profit capital asset model focuses on
expenditures/expenses of acquiring/improving assets rather than depreciation. This aligns better
with their annual operating budgets and financial reporting cycles. However, it fails to
communicate the full costs of delivering services and may result in undervaluing long-term
assets on the face of the statements.
Comparison of Models
While the governmental and not-for-profit models are very similar in focusing on expenditures
instead of depreciation, there are a few key differences from private sector accounting
standards:
Private Sector (GAAP) Model:
- Capitalize asset costs, record depreciation expense annually based on useful lives
- Record assets & accumulated depreciation on balance sheet
- Apply treatment consistently to all asset categories
Governmental Model:
- Expenditure treatment instead of depreciation for most assets
- Infrastructure & network assets capitalized without depreciation
- Enterprise assets treated like private sector model
Not-for-Profit Model:
- Expenditure focus but can use depreciation under full cost method
- Assets can include fair value of donated assets
- No interest capitalization in construction
The private sector model provides more consistency across all types of assets. Depreciation
allocation better matches costs to periods of benefit. Capitalization on the balance sheet
communicates full investment in long-term assets.
Governments and not-for-profits focus on annual budgets/grants, which their expenditure
models align with better. However, it undervalues long-term assets and shifts costs to future
periods. Disclosure of key infrastructure data partially remedies this issue for governments.
In summary, the governmental and not-for-profit capital asset models are appropriately suited
for their budget-driven operating environments. The private sector model achieves better
matching of costs and revenues while also providing a more comprehensive picture of long-term
assets. No model is clearly superior in all situations.
Impact of Recent Pronouncements
Recent updates issued by GASB and FASB are aiming to make nonprofit accounting more
consistent and comparable with private sector standards. A few key changes are:
- GASB 87 (Leases) will bring operating lease accounting in line with the private sector,
requiring governments to recognize lease assets/liabilities starting in FY2022.
- FASB ASU 2016-14 improved nonprofit financial reporting with enhanced net asset
classifications, liquidity/availability disclosures and standardized performance/cash flow
statements.
- GASB 96 (Subscription-Based IT Arrangements) addresses the accounting for long-term
subscription arrangements like cloud computing, which were previously exempt from
capitalization.
- GASB 87 and 96 expand the scope of capitalizable intangible assets for governments to now
include certain internally developed/leased software and SaaS arrangements.
- FASB ASU 2020-07 improved presentation and disclosure of contributed nonfinancial assets
like land, buildings, equipment by requiring separate line items.
- GASB 84 improved guidance on terminal reporting provisions and fiduciary activities. It
removed certain activities that were inappropriately reported as fiduciary like component units.
- GASB 87, 96 and FASB changes regarding capitalization scope will result in more long-term
assets being recognized for governments and NFPs, aligning them further to private standards
over time.
These pronouncements are positively impacting the relevance, consistency, comparability and
transparency of governmental and nonprofit financial reporting. More standardized accounting
treatment across sectors improves usefulness for external decision making. However, certain
expenditure-focused aspects unique to their operations will likely remain.
Conclusion
In conclusion, while the accounting models for capital assets in governmental and nonprofit
organizations differ in certain ways from private sector standards, they are well-suited for their
distinct operating environments and annual budgetary cycles.
Recent updates are gradually making nonprofit accounting more harmonized with private GAAP
standards, especially regarding balance sheet presentation, capitalization scope and improved
disclosures. However, the modified capital asset model focusing on annual expenditures still
underlies their financial reporting frameworks appropriately.
No single model is definitively superior across all entity types and situations. The governmental
and nonprofit frameworks balance relevance with practicality considering their unique public
sector missions supported through annual operating budgets and other funding sources.
Overall, the standards continue evolving to fulfill external user needs for transparent,
comparable and useful information.
Accounting is the process of recording, classifying, selecting, verifying, summarizing,
interpreting and communicating financial information to internal and external users of the
information. The accounting treatment of capital assets in governmental and not-for-profit
organizations is significantly different from that of capital assets held by private sector, for-profit
entities. The primary goal of this paper is to evaluate the accounting treatment for capital assets
in governmental and not-for-profit organizations and compare it with the treatment for capital
assets held by private sector organizations.
Capital Assets in Governmental Accounting
Under governmental accounting standards, capital assets are defined as tangible or intangible
assets that are used in operations and that have an initial useful life that extends beyond a
single reporting period. Some examples of capital assets are land, infrastructure, buildings,
equipment, and intangible assets like computer software, easements, and water rights.
The basic accounting model for capital assets under governmental accounting standards is the
capital asset model, which is the recognition of the costs of capital assets as expenditures at the
time of acquisition. This is in contrast to the private sector accounting model of capitalization of
capital asset costs and depreciation of those costs over the useful lives of the assets acquired.
Under the capital asset model, all capital outlays for capital assets like land, infrastructure,
buildings, equipment, etc. are treated as expenditures in the year of acquisition, regardless of
their useful lives or materiality. No depreciation is recorded under this model. The capital asset
itself is not reported on the balance sheet, only the expenditure is reported on the statement of
revenues, expenditures and changes in fund balances or statement of activities for the year of
acquisition.
A full physical inventory of all capital assets needs to be conducted periodically, usually every
three to five years, to account for all assets owned by the governmental entity. This is done to
monitor losses or dispositions of assets. The inventories also help assess the need for
additional funding for maintenance or repair of existing assets or acquisition of new assets.
Some key advantages of the capital asset model are its simplicity and ease of application. As no
depreciation is involved, it avoids complex calculations of useful lives and salvage values. It is
also consistent with annual budgeting and annual financial reporting cycles in governments. The
disadvantages are that it does not properly align costs of using capital assets with the periods
that benefit from those assets. The costs are all recognized up front rather than being allocated
over the useful lives. It also fails to report the investment in long-lived assets on the balance
sheet.
Since the issuance of GASB Statement 34 in 1999, governments are now required to report
major general infrastructure assets like roads, bridges, tunnels, drainage systems, water and
sewer systems, dams, and lighting systems acquired or significantly renovated since 1980. They
are reported at historical cost in the capital assets note to the financial statements or in a
separate column in the government-wide statement of net position.
Depreciation is still not applied to general infrastructure assets. However, governments are
required to develop and disclose an asset management system to maintain and account for
these assets and assess the average useful lives and current condition/maintenance needs of
infrastructure assets to project future repair and replacement costs. This is a major change from
the previous capital asset model requirements.
Another significant change introduced by GASB Statement 34 requires governments to
capitalize and depreciate capital assets that are associated with enterprise/business-type
activities like water, sewer and electricity utilities that charge user fees. This makes
governmental accounting for these types of capital assets more consistent with private sector
accounting standards.
Overall, while the basic capital asset model is still followed for most governmental capital
assets, GASB Statement 34 brought governmental accounting more in line with private sector
standards by requiring capitalization and depreciation of certain categories of long-lived assets
and enhanced disclosures regarding capital assets and infrastructure.
Capital Assets in Not-for-Profit Accounting
Like governmental accounting standards, not-for-profit accounting standards are also
principles-based frameworks rather than rules-based like private sector GAAP. The basic model
for accounting for capital assets held by not-for-profit organizations is very similar to the
governmental capital asset model.
The FASB Accounting Standards Codification Topic 958-360 on "Not-for-Profit Entities –
Property, Plant and Equipment" provides guidance on accounting for not-for-profit capital
assets. Some key points:
- Capital assets are defined broadly as long-lived physical assets acquired or donated
specifically for the production or supply of goods and services, administration of the organization
or for its end product.
- Assets are recorded at historical cost if purchased or at fair value if donated. Interest costs
incurred during construction are not capitalized, unlike private sector standards.
- Expenditures that extend the useful life of existing assets or improve/enhance their
functionality are capitalized as improvements. Repairs and maintenance costs are expensed.
- No depreciation is recorded under the modified capitalization threshold method. Assets below
the organization's capitalization threshold are expensed.
- Assets are presented in the statement of financial position net of accumulated depreciation
under the full-cost method.
- GAAP encourages disclosing key details on capital assets in the notes, like descriptions,
useful lives, capitalization policy, etc. but does not require their recognition on the face of
financials.
- Periodic physical inventories are required to safeguard assets and ensure all assets are
properly accounted for.
Similar to governmental accounting, the not-for-profit capital asset model focuses on
expenditures/expenses of acquiring/improving assets rather than depreciation. This aligns better
with their annual operating budgets and financial reporting cycles. However, it fails to
communicate the full costs of delivering services and may result in undervaluing long-term
assets on the face of the statements.
Comparison of Models
While the governmental and not-for-profit models are very similar in focusing on expenditures
instead of depreciation, there are a few key differences from private sector accounting
standards:
Private Sector (GAAP) Model:
- Capitalize asset costs, record depreciation expense annually based on useful lives
- Record assets & accumulated depreciation on balance sheet
- Apply treatment consistently to all asset categories
Governmental Model:
- Expenditure treatment instead of depreciation for most assets
- Infrastructure & network assets capitalized without depreciation
- Enterprise assets treated like private sector model
Not-for-Profit Model:
- Expenditure focus but can use depreciation under full cost method
- Assets can include fair value of donated assets
- No interest capitalization in construction
The private sector model provides more consistency across all types of assets. Depreciation
allocation better matches costs to periods of benefit. Capitalization on the balance sheet
communicates full investment in long-term assets.
Governments and not-for-profits focus on annual budgets/grants, which their expenditure
models align with better. However, it undervalues long-term assets and shifts costs to future
periods. Disclosure of key infrastructure data partially remedies this issue for governments.
In summary, the governmental and not-for-profit capital asset models are appropriately suited
for their budget-driven operating environments. The private sector model achieves better
matching of costs and revenues while also providing a more comprehensive picture of long-term
assets. No model is clearly superior in all situations.
Impact of Recent Pronouncements
Recent updates issued by GASB and FASB are aiming to make nonprofit accounting more
consistent and comparable with private sector standards. A few key changes are:
- GASB 87 (Leases) will bring operating lease accounting in line with the private sector,
requiring governments to recognize lease assets/liabilities starting in FY2022.
- FASB ASU 2016-14 improved nonprofit financial reporting with enhanced net asset
classifications, liquidity/availability disclosures and standardized performance/cash flow
statements.
- GASB 96 (Subscription-Based IT Arrangements) addresses the accounting for long-term
subscription arrangements like cloud computing, which were previously exempt from
capitalization.
- GASB 87 and 96 expand the scope of capitalizable intangible assets for governments to now
include certain internally developed/leased software and SaaS arrangements.
- FASB ASU 2020-07 improved presentation and disclosure of contributed nonfinancial assets
like land, buildings, equipment by requiring separate line items.
- GASB 84 improved guidance on terminal reporting provisions and fiduciary activities. It
removed certain activities that were inappropriately reported as fiduciary like component units.
- GASB 87, 96 and FASB changes regarding capitalization scope will result in more long-term
assets being recognized for governments and NFPs, aligning them further to private standards
over time.
These pronouncements are positively impacting the relevance, consistency, comparability and
transparency of governmental and nonprofit financial reporting. More standardized accounting
treatment across sectors improves usefulness for external decision making. However, certain
expenditure-focused aspects unique to their operations will likely remain.
Conclusion
In conclusion, while the accounting models for capital assets in governmental and nonprofit
organizations differ in certain ways from private sector standards, they are well-suited for their
distinct operating environments and annual budgetary cycles.
Recent updates are gradually making nonprofit accounting more harmonized with private GAAP
standards, especially regarding balance sheet presentation, capitalization scope and improved
disclosures. However, the modified capital asset model focusing on annual expenditures still
underlies their financial reporting frameworks appropriately.
No single model is definitively superior across all entity types and situations. The governmental
and nonprofit frameworks balance relevance with practicality considering their unique public
sector missions supported through annual operating budgets and other funding sources.
Overall, the standards continue evolving to fulfill external user needs for transparent,
comparable and useful information.
