To be classified as a capital asset, a specific item must have a life longer than one year and have significant value.
What constitutes significant value varies depending on the size of the city and the class of capital asset. The threshold for capitalization can vary among types of capital assets. A city may classify equipment costing more than $1,000 as capital while using a $5,000 minimum limit for buildings. Your threshold could be set at the limit at which bids are required before purchase. Cities may exercise the option to include as a capital asset any borderline items over which it wishes to maintain accounting control. Groups of items that may not qualify individually can be capitalized when the total purchase exceeds your threshold.
The municipal governing body should set the capitalization threshold for all classes of capital assets via resolution or ordinance.
A cost test may be applied to aggregates of units of similar type or purpose rather than to the unit itself. Whether an expenditure is classified as an operating expense or capitalized often is determined by its relationship to some existing asset. The amounts specified above are rather arbitrary. Your city could establish threshold values for capital asset accounting different than those suggested.
The following classifications for capital assets are recommended for purposes of accounting and financial statement presentation:
- Land includes investment in real estate other than structures, improvements and land acquired and used for street and road purposes. All land, as defined above, should be capitalized without regard to significant value. Include legal and surveying fees, damage payments and site preparation costs, including removal of old buildings, etc. Receipts from the sale of salvage should be credited against the land cost.
- Building includes costs incurred directly to put the building into its intended state of use, including construction or purchase price, architects’ fees, accident or injury costs, payments for damage and insurance during construction. The costs should be reduced for discounts, insurance recoveries and other credits.
- Improvements Other than Buildings are costs incurred directly to place the improvement into its intended state of use. It includes storage tanks, parking areas, landscaping, connector driveways, traffic lights, parking meters, and other improvements.
- Equipment includes moveable personal property such as furniture, machines, tools and vehicles. The price should include the total purchase cost before any trade-in allowance minus any discounts. It also should include other costs required to place the equipment in its intended state of operation, such as dealer add-ons or modifications.
- Infrastructure Assets include roads, bridges and tunnels. Before GASB 34, these items were not considered capital assets. During implementation of GASB 34, many cities were required to capitalize major infrastructure items acquired since 1980. Other cities picked up infrastructure assets prospectively. Infrastructure assets are classified into networks and subsystems of networks. For example, city streets may be classed as a network, while bridges would be a subsystem.
- Construction Work in Progress represents a temporary accumulation of labor, materials, equipment and overhead costs (excluding administrative overhead) of a construction project. Upon completion of the work, the total cost is transferred to one or more of the above classes of capital assets.
- Intangibles include costs incurred to acquire assets such as patents, trademarks, water rights, road easements, timber rights and computer software. GASB Statement No. 51 had a phase-in similar to GASB 34. Phase 1 and 2 cities must go back to 1981 and pick up intangible assets that were internally generated and those that have a definite life due to contractual or legal limitations. Intangible assets with an indefinite useful life may be retroactively reported. Phase 3 cities do not have to retroactively report any intangible asset.