Capitalization Policies: Updated Guidance for Capitalizing Group Assets

Capital assets are often a significant portion of a government’s statement of net position. Note disclosures of capital assets are also complex for some governments, despite minimal changes of requirements in decades.

Further clarity has been given to help governments when the capitalization policy applies only to individual assets versus if it should be applied to a group purchase of assets. Although the change seems small, there is a potential for substantial impact to governmental entities.

Here’s how Question 5.1 in Implementation Guide 2021-1 can help provide clarity around the expectation.

Implementation Guidance

Authoritative pronouncements do not address the question of when to capitalize a group purchase of assets. GASB first published a response in Question 7.9.8 in Implementation Guide 2015-1 stating that it may be appropriate for a government to consider capitalization of a group purchase that would be significant collectively, even if the individual items are below the capitalization threshold for the government. However, this answer was considered too vague for application and there has been an inconsistent approach in practice for governments.

To address this, Question 5.1 in Implementation Guide 2021-1 was published.  The guidance states a government should capitalize a group purchase of assets that would be significant collectively, even if the individual items are below the capitalization threshold for the government. ‘Should' generally is interpreted as meaning ‘must.’

This language changes the intent for governments to imply that it is now required for significant purchases. For example, if your government makes a purchase of 100 computers costing $2,000 each, your government will have to assess if the total purchase of $200,000 is significant.

Unfortunately, the word ‘significant’ is undefined in GAAP. It is unclear of the word means more than material or less.  Often, a policy may mirror the definition of “equipment” contained in Title 2, Code of Federal Regulations, Part 200.1, (the Uniform Guidance), which currently stands at $5,000 for an individual piece of equipment.

For a large government, the purchase of 100 computers may not qualify as significant to the financial statement user and may not be required to be capitalized. Other examples given in the implementation guide for common assets that may be significant collectively were classroom furniture and library books. Determining what should be capitalized should be documented in policy.

Application of Capitalization Policies

Although the change in guidance seems small, this has the potential to have a substantial impact on governmental entities. Group purchases of assets are common, especially for large governments. Entities interpreting the original 2015 guidance as optional now must implement policies and procedures to monitor these types of purchases.

This amended guidance is expected to be applied retroactively by restating all prior period financial statements that would be impacted, if practical. If not practical to do so, the government is required to restate beginning net position for the earliest period reported.

This means that governments should start taking inventory of any group asset purchases that have historically been made to assess if the assets are significant in total but were previously expensed due to the individual assets being below the government’s capitalization threshold. Those assets should still be in use and not fully depreciated.

Further clarification on capital asset reporting is being proposed by the GASB with an exposure draft of a proposed statement expected for release in October. Minor changes may be made to the note disclosure presentation of right-to-use assets and capital assets held for sale. If approved as drafted, Disclosure and Classification of Certain Capital Assets may be effective for fiscal years beginning after June 15, 2025.