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Financial Accounting for Local and State School Systems: 2009 Edition
NCES 2009-325
June 2009

Chapter 5: Financial Reporting — Government-Wide Statements — Reporting of Expenses

Governmental entities are required to present their government-wide financial statements on the accrual basis of accounting. Thus, the statement of activities reflects the expenses of the entity for the reporting period. Entities are required to report all expenses by activities and programs (by function), except certain indirect expenses, as explained below. GASB has defined direct expenses as those that are specifically associated with a service, program, or department and thus are clearly identifiable to a particular function. Direct expenses include both operating and nonoperating expenses, including depreciation and amortization of assets.

Functions, such as general administration or data-processing services, may include indirect expenses of other functions. Governmental entities are not required to allocate indirect expenses to other functions, but may choose to do so. If indirect expenses are allocated, direct and indirect expenses should be presented in separate columns. A column totaling direct and indirect expenses may be presented, but is not required. Indirect expenses may be allocated to any of the primary government's functions. Although there are no standards for determining an allocation methodology, there should be a reasonable basis for expense allocations.

Depreciation expense should be included in the statement of activities as follows:

  • Capital assets that can be specifically identified with a function. Depreciation should be included in the direct expenses of that function.
  • "Shared" capital assets. Depreciation should be prorated as a direct expense of the appropriate functions on some reasonable allocation basis.
  • Capital assets that essentially serve all functions. Depreciation is not required to be included in the direct expenses of the various functions but may be reflected as a separate line captioned "unallocated depreciation" in the statement of activities or as part of the general government function. If an entity chooses to use a separate line in the statement of activities to report unallocated depreciation expense, it should clearly indicate in the footnotes to the financial statements that this line item does not include direct depreciation expenses of the other functions. Because school buildings often serve multiple functions, many school districts report the depreciation as "unallocated depreciation" for these assets.
  • General infrastructure assets. Depreciation should not be allocated to the various functions, but should be reported as a direct expense of the function that the reporting government normally associates with capital outlays or as a separate line in the statement of activities.
  • Interest expense. Interest on general long-term liabilities, including interest on capital leases or other vendor financing arrangements, should be considered an indirect expense. Interest on long-term debt should be included in direct expenses only when borrowing is essential to the creation or continuing existence of a program.

The difference between a "shared" capital asset and one that "essentially serves all functions" is the number of functions involved. As the number of functions increases, the ease, practicality, and usefulness of assigning depreciation to those functions decreases. Therefore, the depreciation of assets that serve many, or essentially all, functions is not required to be included in the direct expenses of those functions. A shared capital asset is generally used by only a few functions, and its use can be specifically identified to those functions.


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