Best Practices for Managing Capital Assets in Local Government

By 2003, local governments began reporting capital assets on their financial statements after implementing the Government Accounting Standards Board (GASB) Statement 34. This requirement was intended to help users of financial statements understand the extent to which the government has invested in capital assets. However, it also introduced additional responsibilities for local governments in managing and reporting these assets.  

What is a Capital Asset?  

Capital assets are long-lived items whose useful lives extend beyond a single reporting period, typically one year. These assets include land, easements, buildings, machinery, equipment, and infrastructure such as water and sewer systems. Capital assets are recorded at their historical cost and depreciate over their useful lives, except for land, which does not depreciate.  

Best Practices for Capital Asset Management  

1. Establishing a Comprehensive Asset Inventory  

Maintaining a comprehensive asset inventory is crucial for effective capital asset management. This inventory should include detailed records of all capital assets, including acquisition dates, costs, estimated useful lives, and current conditions. Clear and specific descriptions are essential when documenting to ensure they can be easily identified and correlated with financial records in the future. For instance, avoid vague labels like “2024 Building Improvements”.  

Local boards must record capital outlay expenditures in account 970 (or 971 through 989 if additional detail is needed). By using this account, you comply with the state chart of accounts and more easily identify capital assets to be added to your inventory.  

Additionally, the inventory should be regularly updated as assets are disposed of or replaced.  

2. Conducting Regular Condition Assessments  

Regular maintenance is key to extending the useful life of capital assets and minimizing the total cost of ownership. Local governments should hire professionals to conduct condition assessments of their capital assets. Proactive maintenance, guided by these assessments, can prevent costly emergency repairs and ensure the longevity of assets.   

3. Implementing a Capital Improvement Plan  

After investing in capital assets, you are responsible for maintaining and eventually replacing them. One way to accomplish this is by developing a Capital Improvement Plan (CIP). By creating and using a CIP, local governments can allocate funds efficiently, ensuring that capital assets are maintained and improved in a planned rather than reactive manner.  

4. Financial Planning and Reserve Funds  

Following the assessment of capital assets and developing a CIP, financial planning for asset replacement becomes essential. Establishing reserve funds dedicated to capital asset maintenance and replacement helps ensure that resources are available when significant expenditures are required. Governing boards can commit a portion of their unrestricted fund balances to future capital projects, creating financial stability.  

Reviewing and Updating the Capital Asset Threshold  

When GASB 34 was implemented in 2003, many local governments set a minimum capital asset threshold of $5,000. This threshold determines which assets must be tracked and depreciated on financial statements. However, it may be time to consider raising this threshold to a more appropriate level due to inflation.  

Local governments should work with their auditors to review and update their capital asset policies. Depending on specific circumstances, increasing the threshold to $7,500 or $10,000 may be appropriate. A higher threshold can streamline asset management by reducing the number of tracked assets, ultimately saving time and resources.  

If you have questions about capital asset management, reach out to the government experts at Maner Costerisan for more support, send us a message at maner@manercpa.com, or give us a call at 517.323.7500.