Chapter 5: Financial Reporting — Financial Statement Elements

The major elements of financial statements—assets, deferred outflows and inflows of resources, liabilities, fund balance/net position, revenues, expenditures, and expenses—are discussed below, as are the proper accounting treatments and disclosure requirements. However, the narrative does not exhaustively discuss all of the reporting requirements that school districts may face; therefore, district personnel should refer to the actual GASB statements or other definitive sources for detailed disclosure requirements and reporting formats.

Assets

Assets are defined as a probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events. The following typically represent the major asset categories:

• cash and investments;
• receivables;
• prepaid items;
• inventory; and
• capital assets.

Cash and Investments
Cash and investments often represent a large portion of the assets on a government's balance sheet. Because of the importance of these assets, proper management based on sound investment policies and strategies is vital, and the investment of excess funds is often governed by statute. Thus, many state governments have adopted legal frameworks that restrict the investment activities of local governments, including school districts. These restrictions often place limitations on the types of investments allowed, regulate procedures used to manage investments, and require governing bodies to institute certain review procedures.

The following discussion about cash and investments does not illustrate all the possible investment scenarios that a local government might use. However, the following five general rules may protect a school district from problems related to investment decisions:

• For public funds, the investment objectives have traditionally been safety of principal first, then liquidity, followed by yield.
• All investments should be made with consideration of the district's cash requirements and cash flows.
• The district must understand the investment instrument, the investment mechanics, and the associated risk of the investment. Specifically, the district must understand investment risks associated with credit ratings of instruments, interest rates, and foreign currency transactions. Knowing the factors and variables that affect the market value of each investment will help the district to determine investment policies and strategies and to understand the external financial reporting requirements associated with investment management.
• School district personnel should know with whom they are dealing before purchasing an investment. This means researching any financial institutions or brokers/dealers that the district uses.
• Proper protection of investments includes acquiring legal ownership or custody of securities and ensuring that deposits have been properly insured and collateralized.

Certain words in common usage have more limited definitions when they are used for accounting and financial reporting. Within the context of governmental accounting, the following definitions describe the specific content of accounts used by governmental entities:

• Cash is considered to be the most liquid (i.e., readily available) asset owned by an entity.
• Cash equivalents are short-term, highly liquid investments (readily convertible to known amounts of cash) that are so near to maturity that they present an insignificant risk of changes in value resulting from changes in interest rates. Generally, only investments with original maturities of 3 months or less qualify under this definition. Items commonly considered cash equivalents are U.S. Treasury bills, commercial paper, short-term deposits in financial institutions, and money market funds. However, not all investments that qualify as cash equivalents are required to be treated as cash equivalents. Therefore, an entity should establish a policy concerning the classification of qualified investments as cash equivalents that may be no more liberal than the authoritative definition, except in the pooling of cash and investments (as discussed in the paragraph that follows this list). The policy must be disclosed in the notes to the financial statements.
• Investments are defined as securities and similar assets acquired primarily to earn income or profit. A security is a transferable financial instrument that evidences ownership or creditor status. Securities that are often held by or pledged to school districts include U.S. Treasury bills, notes, and bonds; federal agency and instrumentality obligations; direct obligations of a state or its agencies; commercial paper; negotiable and nonnegotiable certificates of deposit; fully collateralized repurchase agreements; and prime domestic bankers' acceptances.

The pooling of cash and investments provides several advantages, including better physical custody and control, enhanced investment opportunities, and ease of operations. It may also simplify custody, collection, and disbursement. In certain instances, the pooling of cash and investments may be prohibited in contractual clauses, such as bond indentures, or through legal restrictions. If the school district pools cash for investment purposes, the resulting pooled cash and investments may qualify as a cash equivalent for participating funds, even though individually some of the pooled investments would not meet that definition.

Top

Financial Statement Presentation and Disclosure.The complexity and range of investment potential and the large amounts of cash and other assets present in most governmental units highlight the need to carefully capture and present these data in usable form. Cash and investment balances are segregated into individual funds and, depending on contractual requirements, may be classified as restricted assets. If a fund overdraws its share of a pooled cash account, the overdraft should be reported as a liability of that fund. Fund overdrafts of this type should be reported as interfund payables and receivables.

The required disclosures for cash and investments normally include, in addition to the disclosures required by GASB Statements 3 and 40 (see the following paragraph), the valuation basis of investments (i.e., investments should be stated at a fair value that approximates their market value). Changes in fair value are included as a component of investment income.

The detailed disclosure requirements for cash and investments have been established in GASB Statement 3, Deposits With Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements (issued in April 1986); GASB Statement 28, Accounting and Financial Reporting for Securities Lending Transactions (issued in May 1995); GASB Statement 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools (issued in March 1997); and GASB Statement 40, Deposit and Investment Risk Disclosure—An Amendment of GASB Statement No. 3 (issued in March 2003).

Although it would probably be uncommon for governmental entities that use this guide to have endowments that include land or real estate, it may occur in certain circumstances. Endowments that include land and other real estate for investment purposes previously reported such investment assets at cost. However, GASB Statement 52, Land and Other Real Estate Held as Investments by Endowments, now requires such holdings to be reported at fair value as of the reporting date.

In June 2008, GASB issued GASB Statement 53, Accounting and Financial Reporting for Derivative Instruments. The GASB literature describes derivative instruments as being "…often complex financial arrangements used by governments to manage specific risks or to make investments." In other words, derivative instruments may be used as an investment; as a hedge against financial risks associated with assets, liabilities, or expected transactions (e.g., volatility of cash flows or fair values); or as a way to effectively lower the costs of borrowing (e.g., interest rate swaps). For those few governmental entities that are affected by this guidance, the accounting and financial reporting requirements are extensive. It is beyond the scope of this publication to detail the accounting and financial reporting implications of such arrangements.

For GASB Statement 53, as well as all others, the entity's external auditor should be consulted regarding implementation, accounting, and financial reporting requirements for all types of cash and investments.

Receivables
Receivables are generally recognized when a service is performed and/or goods are delivered. Receivables usually arise as a result of revenue transactions. The following are the main sources of revenues for school districts that would result in outstanding receivables:

• property taxes;
• state and federal grants;
• intergovernmental revenues (due from other governmental entities); and
• interest income.

The method of accounting for revenues in governmental entities depends on the type of fund in which the revenue is recorded.

Because governmental funds use the modified accrual basis of accounting, governmental fund revenues should be recognized in the accounting period in which they become susceptible to accrual—that is, when they become both measurable and available to finance expenditures of the fiscal period. "Available" refers to the collectibility of the receivable within the current period or soon enough thereafter to be used to pay for liabilities of the current period. A general criterion for availability is 60 days, although a longer or shorter period may be used, except for property taxes (where the maximum period may not be more than 60 days). The availability period will be disclosed in the notes to the financial statements. Each entity should adopt a revenue accrual policy that implements the susceptibility-to-accrual criterion and applies it consistently. This policy should also be disclosed in the notes to the financial statements.

Proprietary funds use the accrual basis of accounting to determine when revenues and related receivables should be recorded. Revenues are recognized when they are earned—that is, when the earnings process is complete and an exchange has taken place.

GASB Statement 33, Accounting and Financial Reporting for Nonexchange Transactions, and Statement 36, Recipient Reporting for Certain Shared Nonexchange Revenues—An Amendment of GASB Statement 33, may have an impact on a governmental entity's reporting of revenues related to certain nonexchange transactions. Entities should consult these statements and their external auditors to determine the impact.

Top

Property Taxes Receivable. Property taxes are generally assessed to finance expenditures of a specific fiscal year. On the assessment date or levy date, the property taxes become a lien against the assessed property. Property taxes should be recorded in the governmental funds by using the modified accrual basis of accounting (i.e., when they are both measurable and available). The amount of the property taxes receivable is based on the assessed value of the property, the current property tax rate, and an estimate of the uncollectible portion. When taxes are levied, the revenue and related receivable should be recognized, net of the estimated uncollectible portion. A receivable is usually recognized at the time an enforceable legal claim arises. The revenue is usually recognized in the first period in which the use of the revenues is permitted or required.

If taxes that are levied to finance a subsequent fiscal period are collected in the current period, the amount collected should be recorded as a deferred inflow of resources. In the next fiscal year, a journal entry will be recorded to recognize the revenue amount that was collected in advance.

When property taxes are delinquent but are expected to be collected, they should be reported in the fund financial statements as a deferred inflow of resources if it is estimated that the taxes will not be available to pay current obligations of the governmental fund. This situation indicates that the delinquent property taxes are not expected to be collected within 60 days of the close of the fiscal year, although a shorter availability period may be used. This "60-day rule" is established by GAAP and cannot be exceeded, even if the district's collection period occurs shortly thereafter.

Due From State. This receivable represents amounts from state resources that exceed the amounts received during the fiscal year for which the school district has met all eligibility requirements. A district should also use the measurable and available criteria that are consistent with the modified accrual basis of accounting in the governmental funds to record revenues due from the state. Revenue due from the state for which all eligibility requirements were met during the fiscal year, and which is expected to be received within the availability period (e.g., 60 days) from the financial statement date, should be recorded as a receivable using this account.

Due From Federal Agencies. This account represents amounts for which all eligibility requirements have been met by a district under a federal financial assistance program and that are expected to be available to finance current liabilities. Such revenues are usually accounted for in the general fund or special revenue funds using the measurable and available criteria, as appropriate for a modified accrual-based fund. If this is an expenditure-driven grant, revenues may be recognized only to the extent that expenditures have been incurred.

Due From Other Governments or Agencies. In some instances, districts become eligible for revenue from other governments or agencies through grant programs or by providing services. The receivable earned from such revenue should be recorded only if it also meets the measurable and available criteria. Thus, when the revenue has been earned under the grant program, or when the services have been provided, the district should recognize the revenues and receivables for the amount earned. In addition, if the amount of an outstanding receivable at the end of a fiscal year is not expected to be collected within the availability period (e.g., 60 days) from the financial statement date, the district should record a deferred inflow of resources for the outstanding amount.

Top

Accrued Interest Receivable. Accrued interest represents the amount of interest at the end of an accounting period on all cash accounts and investments held at that date. Accrued interest should be computed for all investments and cash accounts held by the government that generate interest earnings regardless of the expected payment date.

Inventory
Governmental accounting generally requires that amounts spent to purchase goods be recorded as an expenditure at the time of the purchase. An exception to this general rule is made for inventory. If the amount of inventory on hand at year-end is significant, the value of such inventory should be recorded as an asset. This is considered the "purchase method," under which the portion of the fund balance relating to inventory is classified as nonspendable. Inventory may also be recorded as an expenditure when it is consumed, rather than when it is purchased. Under the "consumption method," purchase transactions are first recorded in the inventory account. As inventory is actually used, an entry to recognize the expenditure is posted to the appropriate accounts. This method is required for the proprietary funds.

It is not uncommon for school districts to have a relatively high level of inventory at the end of the fiscal year, because this often coincides with the start of a new school year. In addition to the balance sheet presentation, note disclosure regarding the method of accounting for inventory should be made. Districts often distribute inventoried supplies to schools prior to fiscal year-end to accommodate the beginning of the new academic school year. Such inventories may either be included in inventory at year-end or recorded as an expenditure in the year of distribution.

For the entity-wide statements, the consumption method must be used. If the purchase method is used in the governmental funds and it produces a different result from the consumption method, the difference should be included in the reconciliations of governmental funds to governmental activities; see Guide to Implementation of GASB Statement 34 and Related Pronouncements: Questions and Answers, Q. 23 (GASB 2001) or Comprehensive Implementation Guide—2012—2013: Questions and Answers, Q. 7.8.6 (GASB 2012b).

Inventories in school districts generally represent goods that are insignificant individually, but are significant as a whole. These items may be described as follows:

• Consumable goods that have a relatively short shelf life. Common examples are office supplies, paper, computer supplies, building and maintenance supplies, and science lab supplies.
• Items that are expected to be used within a short time, including cafeteria foods such as commodities received from the U.S. Department of Agriculture (USDA).
• Tangible personal property that is durable but does not meet the entity's criteria for capitalization as an asset. Examples are textbooks, calculators, and physical education equipment.

The accounting for inventory can be broken down into the following two general areas:

• monitoring and valuation of inventory; and
• accounting for transactions related to inventory.

For internal control purposes, these two functions should be performed by individuals (or departments, if the district is of sufficient size) that are organizationally independent. The results of the two processes should then be reconciled by personnel external to these functions. This segregation of duties will improve the internal controls over inventory and may mitigate the risks of theft or defalcation.

Top

Accounting for and Control of Inventory. Governmental entities have several options for physical counts of inventory. Independent auditors are required by generally accepted auditing procedures to conduct physical observations of inventories at least annually when such inventories are material to the district's operations. The physical observations should be conducted as of the balance sheet date or as of a single date that is within a reasonable time before or after the balance sheet date. The independent auditor is usually present at the time of the inventory to assess the effectiveness of the inventory-taking procedures and to determine the reliance that can be placed on the entity's representations relating to the physical condition and quantities of the inventory. The most common physical inventory count methods are

• cycle counts;
• full counts taken at fiscal year-end; and
• full counts taken at times other than fiscal year-end.

Accounting for Commodities. School districts that receive federal commodities during the year should recognize the fair value as revenue in the period when all eligibility requirements are met—typically, when the commodities are received; see Guide to Implementation of GASB Statement 34 and Related Pronouncements: Questions and Answers, Q. 152 (GASB 2001) or Comprehensive Implementation Guide—2012—2013: Questions and Answers, Q. 2.20.4 (GASB 2012b). Because the federal agricultural commodity program involves purpose restrictions on the use of the resources, the value of inventory remaining on hand at fiscal year-end should be reflected as nonspendable fund balance/restriction of net position (Statement 33, Paragraph 14, as amended by Statement 63). However, there may be instances in which resources are transmitted before the eligibility requirements are met. These resources would be reflected by the recipient as a liability.

Pension Assets
GASB recently issued Statement 68, which provides accounting and financial reporting guidance for employers that offer pension plans. This guidance significantly changes the manner in which an employer reports potential pension liabilities. In short, the net pension liability is the portion of the actuarial present value of projected benefit payments net of the pension plan's net resources. The net pension liability is reported by the reporting government if it sponsors a single employer plan. If the employer is a participant in a cost-sharing plan, then the employer would report its proportionate share of the overall net pension liability. As such, it would be exceedingly rare for plans to have a negative net pension liability that would be reported as an asset.

The new pension guidance does not, however, modify the current method of reporting other postemployment benefit (OPEB) plans, which include health care, life insurance, disability, long-term care, and other benefits. Thus, for OPEB, an asset would be recognized by an employer for contributions to the plan that are greater than the OPEB expense and amortized against the OPEB costs of the employer when due. Potential changes to OPEB reporting will be the subject of a future GASB project.

Capital Assets
Governmental entities are responsible for accounting for, controlling, and reporting both current and capital assets. Capital assets have certain properties that distinguish them from other types of assets. Capital assets are

• tangible or intangible;
• long-lived (have a life longer than 1 year);
• of a significant value at the time of purchase or acquisition; and
• reasonably identified and controlled through a physical inventory system.

Capital assets may include the following:

• land and land improvements;
• easements;
• buildings and building improvements;
• vehicles;
• machinery and equipment;
• technological assets such as computers and network equipment;
• initial library collections;
• works of art and historical treasures (discussed separately below);
• infrastructure (discussed separately below); and
• intangible assets (discussed separately below)..

Governmental accounting places an emphasis on the control and accountability of capital assets. This emphasis requires that data be maintained on the

• quantity and types of assets;
• location of assets; and
• life expectancy of assets.

Capital asset records are necessary to demonstrate accountability for the custody and maintenance of individual items and to assist in projecting future requirements. All transactions for the acquisition of capital assets should be controlled through a well-defined authorization procedure. If the budget does not authorize the purchase of specific items, approval power, subject to specific monetary limits, should be assigned to the chief administrator or to a person designated by the chief administrator. The entity should adopt policies to govern this situation even if it has not been an issue in the past.

Top

Basis of Capital Assets. Capital assets are included in the financial records at cost. In some situations, the purchase or acquisition documents may not be available for capital assets already on hand. If reliable historical records are not available, an estimate or appraisal of the original cost based on other information, such as price index levels at the time of acquisition, may be used. The intent of such valuation is to record a fair value at the date of acquisition and not expend excessive resources in ascertaining exact costs.

Capital assets may be acquired by any of several methods:

• purchase;
• lease-purchase;
• internal generation (e.g., internally designed software);
• construction;
• tax foreclosure; and
• gifts and contributions.

All capital assets acquired in some manner other than as a gift are recorded at the cost necessary to place the asset in service. Capital assets arising from gifts or donations are recorded at their estimated fair value at the time of receipt.

Capital Asset Reporting. GASB Statement 34 established reporting requirements for general government capital assets, as follows:

• Depreciable capital assets should be reported in the statement of net position (a government wide statement) at historical cost, net of accumulated depreciation.
• The historical cost should include the ancillary charges necessary to place the asset into its intended location and condition for use, including freight and transportation charges, site preparation costs, and professional fees that directly relate to the acquisition of the asset.
• Depreciable capital assets may be reported on the face of the statement of net position as a single item or by major class. Detailed information should be reported in the notes to the financial statements.
• Significant nondepreciable capital assets that are inexhaustible (such as land), certain nondepreciable site improvements, and infrastructure assets reported using the modified approach should be reported separately from depreciable capital assets on the statement of net position. GASB has defined an inexhaustible capital asset as one whose economic benefit or service is used up so slowly that its estimated useful life is extraordinarily long. Construction in progress should be included with nondepreciable capital assets in the statement of net position.
• Accumulated depreciation may be reported on the face of the statement of net position, either parenthetically or as a separate line item reducing capital assets. However, regardless of the presentation in the statement of net position, the notes to the financial statements should disclose balances and changes in accumulated depreciation for the period by major asset class, as well as information regarding the depreciation methods used.

In addition to the GAAP reporting requirements referred to above, GASB issued Statement 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. Governmental entities, including school districts, are required to report the financial effects of capital impairments when the service utility of a capital asset has permanently declined significantly and unexpectedly. Though such events are generally rare, standardized guidance now exists to assist districts in accounting for and reporting significant capital asset impairments. In brief, Statement 42 establishes the following:

• a standardized definition of a capital asset impairment (i.e., "a significant, unexpected decline in the service utility of a capital asset" that is deemed to be permanent);
• definitive guidance that impaired capital assets no longer being used should be reported at the lower of carrying value or fair value;
• a variety of measurement options for impaired capital assets that are still being used and how such losses should be reported in the financial statements; and
• guidelines for reporting insurance recoveries.

Note disclosures associated with capital asset impairments are summarized later in this chapter.

One of the most common challenges that governmental entities of all types face involves tracking capital assets for government-wide reporting. Capital assets are not reported within governmental funds as assets, but as expenditures when purchased (consistent with the current financial resources measurement focus and the modified accrual basis of accounting). However, capital assets related to the governmental funds are reported at the government-wide level. This often poses a challenge in that capital assets for governmental funds have to be tracked as expenditures throughout the year, but then "converted" to asset reporting at the government-wide level at the end of the year.

One common approach to prepare for the preparation of the government-wide statements is to maintain internal records, apart from the general ledger, that track the acquisition of the capital assets. Many entities simply compile a list of capital asset purchases that will be capitalized at the government-wide level as they occur (similar to how entities maintained account groups before the issuance of GASB Statement 34). At the end of the year, there is then a total amount that will be reported as part of the assets of the governmental activities and offset by the net investment in capital assets equity account.

Top

Capitalization Thresholds, Estimated Useful Lives, and Depreciation Methods for Capital Assets. Given the requirements in GASB Statement 34 to depreciate general capital assets, governments must establish a range of policies regarding capitalization thresholds for capital assets, estimates for useful lives, and depreciation methods. Statement 34 does not prescribe policies in any of these areas; however, note disclosure is required. Management is granted the discretion to determine appropriate policies for control purposes in accordance with the laws and regulations under which the entity operates. Some states have established specific regulations surrounding capital assets; therefore, school districts should consult state sources in establishing new policies.

Capitalization Thresholds. Capitalization threshold refers to the dollar value threshold at which purchases of assets will be capitalized in the financial records of the governmental entity (i.e., within the proprietary funds, fiduciary funds, and government-wide financial statements) rather than recorded as an expense at the time of purchase (except in the governmental funds, where they remain as an expenditure). Many assets having useful lives greater than 1 year do not have values that are material to the entity's financial statements. Additionally, the costs of tagging, tracking, and accounting large numbers of immaterial items may be considered excessive by the entity. As a result, many local governments establish capitalization thresholds that exclude reporting these items as capital assets and instead rely on systems other than the financial management system for tracking and control purposes (e.g., computer inventories, building equipment lists, maintenance systems).

In determining an appropriate capitalization threshold, entities should consider the following factors:

• total value of all capital assets;
• impact of the new/revised capitalization threshold on values reported in the statement of net assets;
• value of any related debt (financial statement presentations may be misleading if significant assets acquired through debt are excluded by the capitalization threshold);
• costs associated with tracking and reporting assets; and
• applicable state or federal requirements (typically for grant funds).

Several resources exist to guide governmental entities in making informed decisions related to asset capitalization thresholds, including industry guidelines for specific assets, state auditors' and comptrollers' guidelines for state agencies, and the implementation guide produced by the Association of School Business Officials (ASBO) International. These resources are typically available via state websites.

Finally, local governmental entities should review applicable state and federal requirements related to asset capitalization in determining appropriate policies. For example, the federal government uses a dollar threshold of $5,000 for federal grant management purposes. This threshold may have an impact on an entity's policies, particularly as it relates to capital assets that are acquired with federal grant funds. A threshold should only apply if the item has a useful life of 1 year or more. It is highly recommended, however, that a threshold for capitalization—or for the coding purposes outlined in the object codes within Chapter 6 or within appendix E—not be less than $500. The Government Finance Officers Association (GFOA) has recommended a capitalization threshold of not less than $5,000, but ultimately the threshold limit is up to the school district or state.

Estimated Useful Lives. The estimated useful life of an asset is the period (of months or years) that the asset will be used for the purpose for which it was purchased. In determining the estimated useful life of an asset, consideration must be given to the asset's present condition and intended use, maintenance policy, and how long the asset is expected to meet service and technology standards. School districts may use general guidelines obtained from professional or industry organizations, information on comparable assets of other school districts/governments, and internal historical data. The determination of appropriate estimated useful lives is a management decision that is affected by a number of factors:

• experience with asset management;
• plans for asset use;
• property management practices;
• asset maintenance practices; and
• applicable federal or state regulations.

Many sources of information are available to assist in establishing appropriate policies in this area, including the following:

• GASB Statement 34 implementation guides issued by state education agencies and other key state agencies, including state auditors and comptrollers. Many of these agencies have websites that contain information about the useful lives of various asset classes in the state.
• Statement 34 implementation guide for schools issued by ASBO International. This guide discusses capitalization policies and depreciation methods at length.

A periodic reassessment of the estimated useful lives of capital assets may be appropriate. Any change in the useful life of a capital asset should be applied prospectively in accordance with Accounting Principles Board Opinion 20 (now codified into the GASB literature as GASB Statement 62).

Web searches can render informative policies and recommendations from many governmental entities regarding the valuation of assets, the assignment of useful lives, and other similar information. For example, searches can be used to locate specific accounting or GAAP reporting manuals for each state. Note, however, that web addresses tend to change over time as websites are updated or removed.

Top

Depreciation Methods. GASB Codification Section 1400.113 states that "depreciation expense should be measured by allocating the net cost of depreciable assets (historical cost less estimated salvage value) over their estimated useful lives in a systematic and rational manner" (GASB 2010). Although GASB requires governmental entities to depreciate capital assets (other than nonexhaustible assets), the statement does not prescribe a method. As a result, depreciation methods are a management decision that should be based on the resources necessary to determine the various calculations and the capabilities of asset management systems. In addition to composite or group methods, any established depreciation method may be used (e.g., straight-line, sum-of-the-years' digits, or double-declining balance).

It should be noted, however, that the most common depreciation method used by governmental entities, including school districts, is the straight-line method. There are several reasons for this. First, it is a simple yet rational method that allocates depreciation based on the capital assets' useful life. Also, it is the primary method that incorporates the potential of salvage value in the calculation. Some would argue that GASB Codification Section 1400.113 implies a preference for the straight line method simply because it refers to the potential inclusion of a salvage value in the depreciation calculation. Thus, while not specifically required for governmental entities, it is the method most commonly used. An example calculation using the straight-line depreciation method is as follows (see exhibit 3):

Thus, accumulated depreciation, a contra-asset account, would increase by $5,000 each year. Accordingly, the annual depreciation expense would be $5,000. At the end of year 6, the accumulated depreciation associated with the capital asset would be $30,000 ($5,000 × 6 years) and the net book value of the capital asset would be $10,000 (see exhibit 4):

Depreciation may be calculated for individual assets or it may be determined for a

• class of assets;
• network of assets; or
• subsystem of a network.

The depreciation method can vary for different categories of assets.

To simplify the calculations involved, the composite method may be used to calculate depreciation expense. It is applied to a group of similar assets or dissimilar assets in the same class using the same depreciation rate, but not across classes of assets. The estimated life for the group may be based on the individual weighted average, the simple average of the useful lives of the assets in the group, or the weighted average or assessment of the life of the group as a whole. This method assumes no salvage value for assets; therefore, it simplifies the calculations and the recording of asset dispositions.

Finally, as is noted below, a relatively new class of capital assets that would qualify for amortization is intangible capital assets. Similar to the concept of depreciation for tangible capital assets, amortization for intangible assets is most commonly executed using the straight-line method. The useful life should equal the service capacity expectations of the capital asset, and it should not exceed the length of any contractual provisions. An intangible asset with an indefinite useful life should not be amortized

Works of Art and Historical Treasures. Works of art, historical treasures, and similar assets are a special class of capital assets that may require developing a specific capitalization and depreciation policy. These assets are defined as items held singly or in collections that meet all of the following conditions (GASB Statement 34, Paragraph 27):

• held for public exhibition, education, or research in furtherance of public service, rather than financial gain;
• protected, kept unencumbered, cared for, and preserved; and
• subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.

Historical buildings, monuments, and fountains are capital assets that may qualify as works of art, historical treasures, or similar assets if they meet the requirements above. School districts that have collections meeting these criteria may choose not to capitalize these collections of works of art or historical treasures.

Depreciation is not required for those capitalized collections or individual items that are considered to be inexhaustible. Inexhaustible collections of individual works of art or historical treasures are those with extraordinarily long useful lives. Because of their cultural, aesthetic, or historical value, the holder of the asset applies efforts to protect and preserve the asset in a manner greater than that for similar assets without such cultural, aesthetic, or historical value.

Top

Intangible Assets. GASB issued Statement 51, Accounting and Financial Reporting for Intangible Assets, to provide definitive accounting and financial reporting guidance related to a variety of intangible assets. Intangible assets include, but are not limited to

• easements;
• contractual rights;
• patents;.
• trademarks; and
• computer software

While the concept of an intangible asset, and the reporting of those intangible assets, has been evident for decades, the absence of specific authoritative guidance resulted in many inconsistencies among governmental entities related to actual accounting and financial reporting practices. While much of what is included in Statement 51 represents general practice that was already in wide use (e.g., classification of intangible assets as capital assets), it also provides guidance in a variety of areas (e.g., internally generated assets, amortization issues) that are relatively new to public sector practice and are certainly new to governmental GAAP authoritative literature.

Of the several types of intangible assets identified above, the most common one for most school districts would probably be computer software. Therefore, the accounting and financial reporting guidance within this publication focuses on computer software, including internally generated software.

In general, an intangible asset should be classified as a capital asset. To be reported on a statement of net position, an intangible asset should be identifiable (i.e., the asset is separable and can thus be bought, sold, or transferred or the asset arises from contractual or legal rights). An internally generated intangible asset is one that has been created or produced by the government (or contracted for production by the government).

In order for outlays for internally generated assets to be eligible for capitalization, the following three criteria must be met:

• objective and service capacity of the asset should be determined;
• feasibility of the project has been demonstrated; and
• clear intention has been established and demonstrated to continue and complete the project.

In addition, management must also have authorized and committed funding for the project before any outlays may be considered capitalizable. Thus, the capitalization period begins with the authorization of, and formal commitment, to the project and ends when the project is substantially completed. Any outlays in the pre- and post-capitalization phases would be expensed.

Again, one of the most common examples of internally generated capital assets would be internally generated software. The development of a website or similar web-based application might also qualify, but it should be noted that the three criteria mentioned above create a relatively high bar for projects of any type to qualify.

Technology-Related Assets Technology-related assets are a class of capital assets that may require special treatment and reporting by school districts based on local or state reporting and accountability requirements or policies. Although technology-related assets are not dissimilar from other capital assets (such as vehicles or furniture and fixtures), the resources dedicated to the installation and ongoing support and use of technology by school districts have resulted in an increased level of interest by policymakers and citizens. Thus, many school districts have instituted special accounting and reporting practices associated with expenditures for technology-related assets.

To facilitate the proper accounting and reporting of technology expenditures by school districts, "Chapter 6: Account Classification Descriptions" in this handbook establishes a number of expenditure and asset reporting codes. As is outlined in chapter 6, school districts should account for technology-related expenditures according to the following principles:

• Expenditures related to technology and media-related activities used in the classroom (function code 1000) should be segregated from those associated with activities that support instruction (function code 2300), which in turn should be segregated from those associated with administration at the school (function code 2400) or district (function code 2580) level.
• Expenditures associated with services purchased to support technology should be distinguished from other types of purchased and professional services. Expenditure object codes 351 and 352 have been established for this purpose.
• Expenditures associated with the rental of computer and other technology equipment should be distinguished from other types of rentals. Expenditure object code 443 has been established for this purpose.
• Communications expenditures should include all costs associated with voice, data, and video communications charges regardless of the media used (expenditure object code 530).
• Expenditures for software should be reported as a supply (object code 650). This includes fees for licenses to use software. Services, such as subscriptions to research materials over the Internet, should be reported as object code 530.
• Technology supplies should be segregated from other types of supplies. Expenditure object code 650 has been established for this purpose.
• Purchases of technology capital equipment should be tracked specifically for analysis purposes. Expenditure object codes 734 and 735 have been established for this purpose.

Using these codes to account for and report on technology-related costs will allow school districts to

• capture information on both instructional and administrative technology costs; and
• accumulate the total expenditures associated with technology for operating purposes (expenditure object codes 351, 352, 443, 530, and 650) and capital purchases (expenditure object codes 734 and 735).

Although chapter 6 addresses many of the key issues related to tracking and reporting on technology-related costs, school districts will still need to establish capitalization and depreciation policies for technology assets. School districts should capitalize only those technology assets that meet their local policies in this area. Noncapital technology purchases should be treated as supplies for reporting purposes (expenditure object code 650).

Top

E-Rate
E-Rate is not currently addressed within the new accounting codes for technology, as is noted in chapter 6 in this handbook. E-Rate is a discount, ranging from 20 to 90 percent, available to schools and libraries for telecommunications services, Internet access, and internal wiring to connect classrooms to the Internet (http://www.sl.universalservice.org). The program may also involve reimbursements from telecommunications vendors or the Federal Communications Commission (FCC) for costs incurred related to these services or access. School districts must apply to participate in the FCC program, which began in 1997 when the FCC adopted a Universal Service Order to implement the Telecommunications Act of 1996.

The level of the E-Rate discount is determined by the percentage of students eligible for free or reduced-price lunch under federal guidelines. Libraries use free or reduced-price lunch status and an urban/rural classification to determine their discount. Schools must develop a technology plan that is approved by an independent agency, such as a state department of education or a library agency. A school district or library must submit a self-certification of eligibility to the Schools and Library Division of the Universal Service Administrative Company, which administers the discount program. Schools and libraries pay only the nondiscounted portion of their costs. The vendor of the services and the school district enter into a contract. The school district is billed at the discounted rate or may be reimbursed by the vendor or by the FCC if the district pays the full rate. The vendor receives a payment from the school district that is based on the discounted rate and then receives a payment from the Universal Service Fund administrator for the remainder.

The method of recognition of E-Rate as a financial resource in the accounting records may differ depending on whether it is a reimbursement or a discount. As a result, inconsistencies exist in current practice regarding the accounting treatment afforded E-Rate. NCES suggests, as a matter of practice, that E-Rate be netted against the expenditure if it was received in the same fiscal year or coded as a Refund of Prior Year's Expenditures if it was received in a subsequent fiscal year (source code 1980).

Infrastructure Assets
Infrastructure assets are long-lived capital assets that are normally stationary and can be maintained for a significantly longer period of time than most other capital assets.

Infrastructure assets include the following:

• roads;
• bridges;
• drainage systems;
• water and sewer systems; and
• lighting systems.

Parking lots and related lighting systems may be defined by the entity as part of the associated building, rather than as infrastructure. Most school districts have either no infrastructure assets or an immaterial amount.

Reporting Requirements. Infrastructure assets have several reporting requirements as follows:

• In general, governmental entities are required to report all general infrastructure assets acquired during the year of GASB Statement 34 implementation and thereafter.
• Governmental entities are required to capitalize and report major general infrastructure assets that were acquired in fiscal years ending after June 30, 1980, or that received major renovations, restorations, or improvements during that period. Governments with revenues of less than $10 million (annually) are not required to report their infrastructure assets retroactively.
• Statement 34 defines major general infrastructure at subsystem or network level on the basis of the following criteria:
  • the cost or estimated cost of the subsystem is expected to be at least 5 percent of the total cost of all general capital assets reported in the first fiscal year ending after June 15, 1999; or
  • the cost or estimated cost of the network is expected to be at least 10 percent of the total cost of all general capital assets reported in the first fiscal year ending after June 15, 1999.
• The reporting of nonmajor networks is encouraged, but not required.

In determining when to implement the retroactive infrastructure asset reporting requirements, governmental entities should consider the value of any related debt that will be reflected in the Statement of Net Assets.

Top

Valuation of Infrastructure Assets. Infrastructure assets are reported at historical cost or estimated historical cost. If a determination of the historical cost is not viable because of incomplete records, an estimated historical cost may be determined in one of the following ways:

• Using standard costing, which relies on available records from the period of acquisition to estimate asset cost. These records may include historical documents, such as invoices for similar assets and vendor catalogs from the acquisition period.
• Calculating the current replacement cost of a similar asset and deflating this cost back by using price-level indexes to the year or average year of acquisition. Refer to http://www.fhwa.dot.gov/programadmin/publicat.htm for the Price Trends for Federal-Aid Highway Construction, published by the U.S. Department of Transportation, Federal Highway Administration, Office of Program Administration, Office of Infrastructure.

Depreciation of Infrastructure Assets. GASB Statement 34 allows two distinct approaches to reporting infrastructure assets in the statement of net position. The standard approach requires governmental entities to capitalize all major infrastructure assets and depreciate them over their useful lives. This approach does not differ from the accounting and reporting treatment of other types of capital assets. Alternatively, entities may elect to use a modified approach to infrastructure asset reporting under a specific set of conditions. The modified approach allows governmental entities to capitalize assets yet avoid the depreciation of their eligible infrastructure assets if they meet the following two criteria:

• The entity has a qualifying asset management system that
  • has an up-to-date inventory of infrastructure;
  • performs consistent and complete condition assessments every 3 years, the results of which are summarized using a measurement scale; and
  • can estimate, on an annual basis, the cost to maintain and preserve the infrastructure assets at the disclosed condition level; and
• the entity documents that the eligible infrastructure assets are being preserved approximately at or above a condition level established and disclosed by the government.

The modified approach is not limited to general infrastructure assets—infrastructure assets associated with governmental activities. Eligible infrastructure assets of enterprise funds that were previously depreciated may also be reported using the modified approach.

If entities choose the modified approach for reporting general infrastructure assets, they are required to present information on condition and on estimated versus actual maintenance as Required Supplementary Information (RSI).

Entities should consult their external auditors and the detailed disclosure requirements outlined in GASB Statement 34 to determine policy decisions concerning the modified approach of infrastructure asset reporting.

Deferred Outflows and Inflows of Resources

GASB Statement 63 uses the definitions of deferred outflows and inflows of resources found in GASB Concepts Statement No. 4, Elements of Financial Statements. A deferred outflow of resources is defined as "a consumption of net assets by the government that is applicable to a future reporting period" and a deferred inflow of resources is defined as "an acquisition of net assets by the government that is applicable to a future reporting period." While it is possible for these elements to be reported on a governmental fund balance sheet, it is more common for them to be reported on a statement of net position in proprietary or fiduciary fund statements and government-wide statements. Currently, there are only two situations where this reporting would come into play (i.e., changes in the fair value of qualified hedging derivatives and consideration received in a service concession arrangement), and neither would be common for governmental entities that use this guide.

However, GASB recently issued Statement 65, Items Previously Reported as Assets and Liabilities. This statement builds upon the foundation of reporting deferred outflows of resources and deferred inflows of resources found in GASB Statement 63. Certain items that were previously reported as assets or liabilities are now reclassified as deferred outflows of resources or deferred inflows of resources, respectively. In other cases, some items are now recognized as an outflow of resources (i.e., expenditure/expense) instead of as an asset or as an inflow of resources (i.e., revenue) rather than as a liability. The following are the reclassified items that that entities that use this guide would most commonly encounter.⁴

Refundings of Debt
GASB Statement 65 slightly modifies the reporting for current refundings and advance refundings that result in the defeasance of debt, as originally established in GASB Statement 23. The difference between the reacquisition price and the net carrying amount of the old debt should be reported as a deferred outflow of resources or a deferred inflow of resources instead of as an asset or liability, respectively. The amount should then be amortized over the remaining life of the old debt or the life of the new debt, whichever is shorter.

Imposed Nonexchange Revenue Transactions
The most common type of imposed nonexchange transaction is property taxation. A deferred inflow of resources should be reported when resources associated with the imposed nonexchange transaction are received either before the period it was intended to finance or the period in which the resources were required or first permitted to be used. Thus, most prepaid taxes will be reported as a deferred inflow of resources.

Government-Mandated Nonexchange Transactions and Voluntary Nonexchange Transactions
Providers (e.g., grantors) of these types of nonexchange transactions typically establish certain eligibility requirements. If these resources are transmitted before the eligibility requirements are met (not including time requirements), they should be reported as assets by the provider and as liabilities by the recipient. However, if the resources are transmitted by the provider and received by the recipient before the timing requirements are met—but after meeting all other eligibility requirements—then the provider should report the resources as a deferred outflow of resources and the recipient should report them as a deferred inflow of resources.

Debt Issuance Costs
One of the more significant changes to current reporting requirements as a result of GASB Statement 65 is the requirement to now report all debt issuance costs (with the exception of prepaid bond insurance) as a current period expense for proprietary funds and government-wide reporting (they are already reported as a current period expenditure for governmental funds and will remain so). Prepaid bond insurance would still be a type of prepaid cost that will be amortized.

Revenue Recognition in Governmental Funds
Revenues are recognized in governmental funds in the accounting period in which they become both measurable and available. For revenues or other resources that have not met the availability criterion, the government should report a deferred inflow of resources until they become available.

Use of the Term "Deferred"
GASB Statement 65 stipulates that the term "deferred" should now only be used with items reported as a deferred outflow of resources or a deferred inflow of resources. Therefore, entities should refrain from using terminology such as "deferred revenue."

Top

---

⁴ GASB Statement 65 should be consulted if more complex scenarios that involve the sale of future revenues, sales-leaseback transactions, elaborate lending activities, commitment fees, regulated operations, or mortgage banking activities are a reporting issue for the entity.