RECORDING AND VALUING CAPITAL ASSETS (2)
Note Governments sometimes set or keep abnormally low capitalization rates because of sensitivity to their stewardship responsibilities for public resources. Other reasons, however, are more practical. For example, some governments can only issue general long-term debt for the acquisition or construction of capital assets. Therefore, the lower the capitalization threshold, the more assets can be purchased (for example, by a capital projects fund, which obtains its funds from the issuance of general long-term debt). These somewhat low dollar-amount items can be purchased and paid for over the life of the general longterm debt, with no impact on general fund resources, which are
generally more subject to political sensitivities.
As a general rule, capital assets are initially recorded at cost. Cost is defined as the consideration that is given or received, whichever is more objectively determinable. In most instances, cost will be based on the consideration that the government gave for the capital asset, because that will provide the most objective determination of the cost of the asset.
The cost of a capital asset includes not only its purchase price or construction cost, but also any ancillary costs incurred that are necessary to place the asset in its intended location and in condition where it is ready for use. Ancillary charges will depend on the nature of the asset acquired or constructed, but typically include costs such as freight and transportation charges, site preparation expenditures, professional fees, and legal claims directly attributable to the asset acquisition or construction. An example of legal claims directly attributable to an asset acquisition is liability claims resulting from workers or others being injured during the construction of an asset, or damage
done to the property of others as a direct result of the construction activities.
Taken From : Governmental Accounting Made Easy