The Government Accounting Standards Board (GASB) recently issued an implementation guide to help governments adopt new accounting standards and further clarify existing standards. Implementation guides are authoritative Category B guidance, which means government entities should incorporate the guidance into their financial reporting, as applicable.
The amends previous guidance regarding asset capitalization. Specifically question 5.1:
Should a government’s capitalization policy be applied only to individual assets or can it be applied to a group of assets acquired together? Consider a government that has established a capitalization threshold of $5,000 for equipment. If the government purchases 100 computers costing $1,500 each, should the computers be capitalized?
Note that computers, furniture and library books are further cited as potential asset examples that might not meet a capitalization policy on an individual basis but could be significant collectively.
The above question was originally included in 2015 implementation guide and has not changed. The answer, however, has been altered significantly. As a result, we are advising governments to begin changing their capital asset policies now to allow aggregated assets over their capitalization threshold to be capitalized as allowed under the previous guidance.
Original GASB capital asset guidance
Implementation guide 2015-1 states that it may be appropriate for a government to establish a capitalization policy that would require capitalization of certain types of assets whose individual acquisition costs are less than the threshold for an individual asset.
This language made it sound like governments had the option to capitalize like-assets as an aggregate, but did not require capitalization.
Amended 2021 guidance
The amended guidance now indicates that a government should capitalize assets whose individual costs are less than the threshold for an individual asset if those assets in aggregate are significant.
This new wording removes the optional language and indicates governments must now capitalize individual assets that would otherwise fall below the threshold when the total purchase would be significant on the whole.
Effective date and retroactive requirements
The amended guidance on capitalization is effective for reporting periods beginning after June 15, 2023. However, the guidance states that amendments are to be applied retroactively by restating all prior periods presented, if practical.
Wipfli has fielded a number of government client questions and concerns regarding the new guidance. Here we address three key considerations:
- How far back will we need to take this retroactively?
Governments may opt to review their procurement records to determine if material purchases were made with depreciation lives that would extend past the effective date. Further, technology equipment and furniture tend to have short depreciation lives. For computers, it may only be necessary to look back three years depending on your capitalization policy useful life guidance. For furniture, you may only need to go back as far as the last major renovation.
However, if you change capitalization practices now, many of those items may already be fully depreciated by the time the new guidance is actually required.
- When should be begin implementation?
Governments should begin adjusting their capitalization practices now, even without formally implementing the new guidance. The sooner governments implement the change, the better they will be able to reduce or eliminate the need for prior year adjustments.
- How do we define the parameters for significant aggregated assets?
The guidance does not define the timeframe over which a government would need to aggregate purchases. For example, if a government purchases computers on July 1 and July 30, should those purchases be aggregated? Should purchases be aggregated over an entire fiscal year?
While the implementation guidance does not provide an answer, the Government Finance Officers Association (GFOA) has provided a non-authoritative recommendation. In doing so, the GFOA looks to GASB guidance on combining lease agreements which suggests assets are “substantively part of a single overall transaction when entered into at or near the same time and with a single objective.”
By way of illustration, the GFOA suggests that a large order of library books meant to outfit or expand a library facility should be aggregated for the purpose of capitalization, but on-going acquisitions for the purpose of replacing volumes and keeping the collection up-to-date should not.
Likewise, a government may conclude that purchasing furniture as part of a whole classroom renovation should be aggregated but acquiring replacement pieces for disparate rooms might not.
How Wipfli can help
Wipfli can help you interpret and implement GASB guidance. To learn more about how amended GASB implementation guidance could affect your government organization, contact us or reach out to your Wipfli relationship manager.
Visit our government services page for more on Wipfli’s dedicated government team and practice areas.
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