Capital Assets (3)
It was mentioned earlier that there are two exceptions to calculating and recording depreciation on capital assets. The first involves specific accounts that are not depreciation—land and construction work-in-progress. Land is not depreciated because it is not “used up” by the government—it retains its value and usefulness even though things added to the land, such as a building, do decline in value and are depreciated. Construction work-in-progress represents a capital asset that is being built by a government over a period of time that extends over more than one fiscal year. As costs are incurred, they are recorded as an asset called construction work-in-progress, or something similar. Whatever is being built would not be depreciated until the construction is completed and the capital asset is placed in use.
The second large exception to depreciating capital assets involves infrastructure assets. GASBS 34 gave governments the option to depreciate infrastructure assets as they would their other capital assets, or to adopt something called the modified approach and not depreciate the assets. The modified approach attempts to reflect the notion that infrastructure assets do not decline in usefulness or value. Rather, the government is likely to maintain these assets by incurring additional repair and maintenance costs over the life of the asset, resulting in an almost indefinite life for some assets. As long as the government spends the money (and accounts for these costs as expenses) to maintain the infrastructure asset at a level established by the government, depreciation is not required on these infrastructure assets. The modified approach is one of the specific capital asset topics that is addressed in Chapter 7.
One other, relatively new, fancy accounting term related to capital assets is asset impairment. This concept reflects the fact that sometimes events happen or circumstances change in a way that negatively affects the value or usefulness of a capital asset to a government. If an asset is impaired, even with the accumulated depreciation that may have already been recorded on that asset, the net book value of the asset on the statement of net assets is overstated. The GASB recently issued Statement No. 42, “Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries,” which sets the rules for when and how governments should record impairments of capital assets. Capital asset impairment is another specialized area relating to capital assets that is discussed in Chapter 7.
Taken From : Governmental Accounting Made Easy