Governments determine what assets they will record as capital assets by using a capitalization policy, which is sometimes called a capitalization threshold. The purpose of using a capitalization policy is to avoid recording minor, short-lived assets. To determine what assets will be treated as capital assets (regardless of whether it is a capital asset used in governmental or business-type activities or a capital asset of a proprietary fund) in practice, governments typically set monetary and usefullife thresholds for when assets may be considered for capitalization.

For example, a government may determine that in order to be treated as a capitalized asset, an asset should cost at least $5,000 and have a useful life of five years. Note that this threshold applies only to items that are appropriately capitalizable by their nature. For example, a repair or maintenance expenditure of $7,000 would not be capitalized even if the threshold were $5,000. The threshold would apply to items that would normally be capitalized and is used to prevent too many small
assets from being capitalized, which becomes difficult for governments to manage. Continuing the $5,000 threshold example, a personal computer purchased for $4,000 would not be capitalized.

However, ten personal computers purchased as part of the installation of an integrated computer network would be eligible for capitalization in this example. Governments are notorious for having capitalization thresholds that, are too low. Perhaps in their zeal to provide account ability for assets purchased with public resources, large governments exist that have capitalization thresholds of $100 to $500.

Often, these thresholds have been in place for many years (sometimes from when the government first recorded capital assets) and have not been adjusted for inflation. This presents a waste of resources in accounting for the details of these numerous small assets. Governments should periodically review their capitalization thresholds to make sure that they make sense, given their significance to the government’s financial statements.

To address the accountability issue that is likely to arise in raising these thresholds, keep in mind that assets do not have to be recorded as capital assets to be safeguarded. In considering these accountability issues, the government must also consider that accountability standards may be imposed on the government from outside sources. For example, some federal and state contracts or grants may specify a capitalization level for tracking capital assets that are acquired with funds provided under the contract or grant. Although this level must be adhered to for contract or grant management purposes, the level should not determine the capitalization threshold established for financial reporting purposes.

GASB 34 implementation has resulted in a number of governments reviewing their capitalization threshold and in many cases significantly increasing the threshold.

Taken From : Governmental Accounting Made Easy

This entry was posted on Monday, September 21st, 2009 at 2:16 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.