Department of State Treasurer
Policy Manual for Local Governments
Section 20: Capital Assets
Revision Issued: August 2014
Department of State Treasurer – Policy Manual for Local Governments
Section 20: Capital Assets
Table of Contents
Executive Summary.................................................................................................................. 1
Part I – Introduction ................................................................................................................. 3
A Purpose and Applicability ............................................................................................. 3
B. Functions of the Capital Asset Accounting System...................................................... 3
Part II – Classification and Recording ..................................................................................... 5
A Classification ................................................................................................................. 5
1. Land ......................................................................................................................... 5
2. Improvements Other Than Buildings ..................................................................... 5
3. Infrastructure .......................................................................................................... 5
4. Buildings .................................................................................................................. 5
5. Equipment ............................................................................................................... 5
6. Vehicles .................................................................................................................... 6
7. Construction in Progress ......................................................................................... 6
8. Intangible Assets ..................................................................................................... 6
9. Works of Art and Historical Treasures ................................................................... 7
B. Recording Capital Assets .............................................................................................. 7
1. Capitalization Threshold – Definition .................................................................... 7
2. Capitalization Threshold – Considerations ............................................................ 7
a. Land ................................................................................................................... 8
b. Improvements Other Than Buildings ............................................................... 8
c. Buildings ............................................................................................................ 8
d. Infrastructure .................................................................................................... 8
e. Assets Acquired with Restricted Funds ............................................................ 8
f.
Small Items ........................................................................................................ 8
g. Equipment and Vehicles .................................................................................... 9
h. Construction in Progress ................................................................................... 9
i.
Donated Assets .................................................................................................. 9
j.
Intangible Assets ............................................................................................... 9
k. Internally Generated Intangible Assets............................................................ 9
3. Changing Capitalization Threshold ........................................................................ 9
4. Valuation of Capital Assets ................................................................................... 10
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Table of Contents
a. Cost .................................................................................................................. 10
b. Estimated Historical Cost ............................................................................... 11
c. Capitalization of Interest Cost ........................................................................ 11
d. Self-constructed Assets .................................................................................... 12
C. Internally Generated Computer Software .................................................................. 12
D. Water Rights ............................................................................................................... 13
E. Right-of-Way Easements............................................................................................. 14
F. Annual Initial Inventory of Assets ............................................................................. 14
Part III – Accounting for Capital Assets ................................................................................ 15
A. Introduction ................................................................................................................. 15
B. Acquisition of Capital Assets ...................................................................................... 15
1. Installment Purchases .......................................................................................... 15
2. Leases .................................................................................................................... 15
a. Operating Leases ............................................................................................. 16
b. Capital Leases.................................................................................................. 16
C. Acquisition with Federal Financial Assistance .......................................................... 17
D. Disposals of Captial Assets ......................................................................................... 19
1. Competitive Sale.................................................................................................... 20
a. Advertisement for Sealed Bids (G.S. 160A -268) ............................................ 20
b. Negotiated Offer, Advertisement, and Upset Bids ......................................... 20
c. Public Auction .................................................................................................. 21
2. Private Negotiation and Sale ................................................................................ 21
3. Exchange................................................................................................................ 22
E. Impairment of Capital Assets ..................................................................................... 22
Part IV – Internal Control and Financial Reporting ............................................................. 25
A. Introduction ................................................................................................................. 25
B. Internal Control Over Capital Assets ......................................................................... 25
C. Financial Reporting Considerations ........................................................................... 26
Part V – Depreciation and Amortization................................................................................ 29
A. Introduction ................................................................................................................. 29
1. Governmental Funds ............................................................................................. 29
2. Proprietary Funds ................................................................................................. 29
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Table of Contents
B. Depreciation and Amortization Considerations ......................................................... 30
1. Estimated Useful Life ........................................................................................... 31
2. Expected Salvage Value ........................................................................................ 31
C. Reporting Depreciation ............................................................................................... 31
D. Amortization of Intangible Assets .............................................................................. 31
E. Selection of a Depreciation Method ............................................................................ 32
F. Straight-line Depreciation .......................................................................................... 33
1. Computation .......................................................................................................... 33
2. Illustration ............................................................................................................. 33
G. Composite Depreciation .............................................................................................. 33
Part VI – Suggested Reading ................................................................................................. 35
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Section 20: Capital Assets
Executive Summary
GASB Statement No. 34 defines capital assets as “land, improvements to land, easements,
buildings, building improvements, vehicles, machinery, equipment, works of art and historical
treasures, infrastructure, and all other tangible or intangible assets that are used in
operations and that have initial useful lives extending beyond a single reporting period.”
Capital assets and related depreciation expense are presented on the government-wide
statements and are recorded in the accounts of proprietary funds, but are not recorded in the
accounts of the governmental funds.
Article V, Section 2(1) of the Constitution of the State of North Carolina requires funds
generated by taxation to be spent only for public purposes. Local governments and public
authorities are required by G.S. 159-26(b)(8) to maintain “a ledger in which to record the
details relating to the general capital assets of the unit or public authority.” The
establishment of the procedures and controls over capital assets are necessary to ensure that
this constitutional provision, as well as laws and regulations, relating to the expenditure of
public funds and the use of public property are being followed.
A capital assets control system is important because it provides for effective property
management and the safeguarding of a large public investment. The capital asset system
needs to provide information not only for accounting and financial reporting but also for
budgeting, for asset replacement and maintenance, and for insurance. It also can assist in
making management decisions and prevent misstatements in the financial statements. To
avoid recording assets for financial statement presentation with immaterial values, local
governments should set minimum unit values, known as capitalization thresholds, below
which an asset is not recorded in the capital assets records. The dollar amount set is a policy
decision of the governing board. Each capital asset should be assigned a control number and
all equipment tagged regardless of its cost. The existence, location and condition of all capital
assets should be verified by taking an annual inventory.
Capital assets should be accounted for at cost or estimated historical cost if actual cost is not
available. Estimated costs can be calculated by using price deflator tables to discount
replacement costs. Donated capital assets should be recorded at their estimated fair market
value when received.
Capital assets may be acquired with cash or through leases or other financing arrangements
such as bonds, notes, and installment purchases. Regardless of the method of acquisition,
when a local government obtains most of the benefits and risks of ownership of a property, the
property must be recorded as a capital asset. GASB Statement No. 62 codifies the definition of
a capital lease. A capital lease exists if at the inception of the lease it transfers ownership to
the governmental unit by the end of the lease term, or it contains a bargain purchase option,
or the lease term is 75% or more of the estimated economic life of the asset, or the present
value of the minimum lease payments is at least 90% of the fair value of the property. With
leases involving land, a lease must fulfill one of the first two above to be accounted for as a
capital lease. For capital leases, a unit should record a capital asset and the related obligation.
Unlike a capital lease, an operating lease does not transfer the benefits and risks of ownership
to the local governmental unit.
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Section 20: Capital Assets
Executive Summary
Under the North Carolina Constitution, a local government is generally required to dispose of
property at its fair market value. However, in certain cases a conveyance with the receiving
party (usually another government or nonprofit organization) to put the property to some
public use constitutes sufficient consideration for the conveyance. Subject to certain
limitations, a local government may dispose of real or personal property belonging to it by: 1)
competitive sale; 2) private negotiation and sale; or 3) exchange. Before a department in a
governmental unit disposes of any real or personal property, notice should be circulated to
other departments that the property is considered surplus. Office of Management and Budget
Circular A-102 sets out the requirements for the use and disposal of capital assets acquired
with federal financial assistance.
Depreciation expense should be recorded in the statement of activities, the accounts of
proprietary funds and some fiduciary funds. Capital assets, net of accumulated depreciation,
should be recorded on the statement of net position. Depreciation expense should not be
recorded in the governmental fund statements. The objective of depreciation is to charge each
accounting period for the estimated loss in economic value of the depreciable assets used
during the period. Theoretically, a depreciation method should be selected that achieves the
most realistic reflection of the loss in economic value of the asset. The most commonly used
depreciation method is straight-line depreciation which provides a uniform rate of
depreciation per period. Other depreciation methods available to units of local government
include accelerated depreciation methods and composite depreciation, but these are rarely
used.
The recording of an impairment of capital assets is required by GASB Statement No. 42 for all
long-lived assets when a decline in service utility of the capital asset is substantial and the
event or change in circumstances is not part of the normal life cycle of the capital asset.
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Section 20: Capital Assets
Part I – Introduction
A. Purpose and Applicability
Article V, Section 2(1) of the North Carolina State Constitution requires funds generated
by taxation to be spent only for public purposes. The establishment of the procedures and
controls over capital assets are necessary to ensure that this constitutional provision, as
well as laws and regulations, relating to the expenditure of public funds and the use of
public property are being followed.
GASB Statement No. 34 at paragraph 19 defines capital assets to include “land,
improvements to land, easements, buildings, building improvements, vehicles, machinery,
equipment, works of art and historical treasures, infrastructure, and all other tangible or
intangible assets that are used in operations and that have initial useful lives extending
beyond a single reporting period.” Items of insignificant value, while they may meet the
above criteria, are normally recorded as expenditures or expenses for financial reporting
purposes instead of as capital assets.
Local governments and public authorities are required by G.S. 159-26(b)(8) to maintain "a
ledger in which to record the details relating to the general capital assets of the unit or
public authority."
Generally accepted accounting principles (“GAAP”) as specified in Governmental
Accounting Standards Board (“GASB”) Statement 34 – “Basic Financial Statements — and
Management's Discussion and Analysis — for State and Local Governments” establish the
primary reporting requirements for capital assets. Adequate capital asset records are
necessary for the local government's auditor to render an unmodified opinion on the unit’s
financial statements. Governmental units having an unmodified opinion on their
statements are viewed favorably by bond rating agencies and normally pay lower interest
rates on their bonds. To meet GAAP and GASB 34 requirements, governmental units
should record the capital assets at cost when historical records are available and at an
estimated historical cost when no historical records exist. The LGC will not authorize the
issuance of long-term debt for any units having a capital assets opinion modification.
Capital assets information also is required for the unit’s Comprehensive Annual Financial
Report to qualify for the Government Finance Officers Association's Certificate of
Achievement for Excellence in Financial Reporting. For most local governments and public
authorities in North Carolina, meeting GASB 34 requirements involves extensive year-end
adjusting entries to convert governmental funds from modified accrual to full accrual basis
of accounting. Recording capital asset information throughout the year and using
appropriate capital asset software makes the year-end conversion process much easier and
may reduce audit cost.
B. Functions of the Capital Asset Accounting System
Establishing and maintaining complete and accurate accounting records for capital assets
is important for several reasons. First, the value of capital assets for most governmental
units and public authorities is significant. Therefore, adequate accounting procedures,
internal controls and asset records are essential for effective property management
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Section 20: Capital Assets
including insurance and risk management. The capital assets records should provide
adequate, detailed documentation of each asset capitalized including its description, serial
number, location, cost, date acquired, vendor, depreciation, and other information. This
information is necessary to determine the amount of property insurance required and to
adequately document a claim in the event of damage or loss from an insurable event. The
stewardship responsibility involved in safeguarding such a large public investment is of
the utmost importance to sound financial administration.
Adequate capital assets records can assist in making management decisions. Proper use of
these records may prevent unneeded assets from being acquired. When budgeting for and
preparing routine preventative maintenance and replacement schedules management may
use these records to determine whether maintenance costs are too high for particular
assets. Capital assets records also could be used to help clarify long-term capital budgeting
needs. Finally, accurate and complete capital assets records can prevent the possible
misstatement of a local government's financial statements. Otherwise, assets such as those
acquired under capital leases and joint ventures could be overlooked or improperly
reported.
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Section 20: Capital Assets
Part II – Classification and Recording
A. Classification
Capital assets owned by the governmental unit and public authority should be recorded in
the accounting records using the following general account classifications. Depreciable
capital assets should be recorded separately from nondepreciable capital assets. More
detailed, sub-classifications may be added as needed. The level of detail necessary at the
ledger level should be sufficient to provide management adequate financial information
but no more complex than necessary. Detail information for the individual assets should be
available from the capital asset subsystems.
1. Land
The land account includes the acquisition value of land and the rights to land owned by
the governmental unit. It includes all land held in fee simple and all rights to land that
have no termination date.
2. Improvements Other Than Buildings
Improvements other than buildings reflect the acquisition value of permanent
improvements (other than buildings) that add value to the land or improve the use of
the land. Examples of such improvements are fences, retaining walls, drainage
systems, sidewalks, parking lots, and driveways. Note that when used with capital
assets, the terms “improvement” and “betterment” have different meanings.
Improvements are capital assets permanently attached to land. Betterments are
additions to or changes in existing depreciable assets intended to increase their
efficiency or prolong their useful lives.
3. Infrastructure
Infrastructure assets are defined by GASB Statement No. 34, paragraph 19, as “longlived capital assets that normally are stationary in nature and normally can be
preserved for a significantly greater number of years than most capital assets.
Examples of infrastructure assets include roads, bridges, tunnels, drainage systems,
water and sewer systems, dams, and lighting systems. Buildings, except those that are
an ancillary part of a network of infrastructure assets, should not be considered
infrastructure assets….”
4. Buildings
A capital assets account that reflects the acquisition value of permanent structures
owned by the governmental unit and used to house persons and property. Permanently
installed fixtures to or within these structures are considered parts of the structures.
The costs of major improvements to structures are included in this account.
5. Equipment
A capital assets account that reflects the value of tangible property not permanently
affixed to real property and used in carrying out the operations of the governmental
unit. Examples of equipment are machinery, furniture, and vehicles. Most local units
include their computers in this category.
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Section 20: Capital Assets
Part II – Classification and Recording
6. Vehicles
A capital assets account that records the value of motor vehicles owned by the local
government.
7. Construction in Progress
A capital assets account used when a government reports amounts expended on an
uncompleted building or other capital asset construction project. These subclasses such
as buildings, improvements, and equipment might be used. When the project is
complete and placed in service, the cumulative costs are transferred to the appropriate
capital assets accounts. Depreciation expense is not recorded on the assets in this
category.
8. Intangible Assets
Intangible assets include assets such as easements, water rights, timber rights,
patents, trademarks, and computer software. Paragraph 19 of GASB Statement No. 34,
Basic Financial Statements-and Management’s Discussion and Analysis-for State and
Local Governments, states capital assets include intangible assets that are used in
operations and have initial useful lives that extend beyond a single reporting period.
Paragraph 21 of GASB Statement No. 34 explains that capital assets should be
depreciated or amortized over their estimated useful lives and those inexhaustible
capital assets such as land and land improvements should not be depreciated nor
amortized.
Paragraph 2 of GASB Statement No. 51 amends GASB Statement No. 34 and defines
an intangible asset as possessing all of the following characteristics:

Lack of physical substance.
An asset may be contained in or on an item with physical substance, for example, a
compact disc in the case of computer software. An asset also may be closely
associated with another item that has physical substance, for example, the
underlying land in the case of a right-of-way easement. These modes of containment
and associated items should not be considered when determining whether or not an
asset lacks physical substance.

Nonfinancial nature.
An asset with a nonfinancial nature is one that is not in a monetary form similar to
cash and investment securities, and it represents neither a claim or right to assets
in a monetary form similar to receivables, nor a prepayment for goods or services.

Initial useful life extending beyond a single reporting period.”
Intangible assets that meet at least one of the following exemptions are excluded from
the provisions of GASB Statement No. 51:



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Assets acquired or created primarily for the purpose of directly obtaining income or
profit,
Assets resulting from capital lease transactions reported by lessees, or
Goodwill created through the combination of a government and another entity.
(Paragraph 3, GASB Statement No. 51).
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Section 20: Capital Assets
Part II – Classification and Recording
Identifiable intangible assets that meet the above characteristics and are not exempt
should be classified as capital assets and recognized as such on the financial
statements. As capital assets, intangibles are subject to all existing guidance regarding
capital assets. It is important to remember that they are reported as expenditures in
the fund statements of governmental funds and not as assets.
Intangible assets are identifiable when either of the following conditions is met:


The asset is capable of being separated or divided from the government and sold,
transferred, licensed, rented, or exchanged, either individually or together with a
related contract, asset, or liability, or
The asset arises from contractual or other legal rights.
9. Works of Art and Historical Treasures
Works of art, historical treasures and similar collections should be capitalized at their
historical cost or estimated fair value at the date of donation. For a full discussion of
accounting for and reporting works of art and historical treasures, see GASB
Statement No. 34, paragraphs 27 – 29.
B. Recording Capital Assets
Governmental units may acquire capital assets by several methods. Possible acquisition
methods include purchase, capital lease, installment purchase, construction, eminent
domain, tax foreclosures, and gifts. Regardless of the method of acquisition, capital assets
should be properly recorded on the unit’s books and in subsidiary records that provide
detailed information on each asset.
1. Capitalization Threshold – Definition
To avoid recording many assets with low values that do not, in the aggregate, amount
to a material portion of the value of the capital assets, units should establish minimum
asset values or a capitalization threshold below which the item is not capitalized for
external financial reporting. However, adequate control must be maintained over all
assets, not just high value assets. Internal control, insurance and security concerns, as
well as legal compliance considerations, may require establishment of additional
procedures for certain items that do not otherwise meet the capitalization threshold.
Examples of such items include laptop computers and tablets, cell phones, assets
acquired with restricted funds, and firearms. The internal control procedures for the
capital assets not meeting the capitalization threshold should be designed to focus on
the particular control issues related to these assets.
The Government Finance Officers Association (“GFOA”) has issued Best Practice
papers titled "Establishing Capitalization Thresholds for Capital Assets" and
“Maintaining Control Over Items That Are Not Capitalized” that are available at their
website, www.gfoa.org.
2. Capitalization Threshold – Considerations
To determine the capitalization threshold, the unit must identify the dollar amount
that identifies an asset is of significant value for financial reporting. This is a policy
decision for the governing board of the local government or public authority. Assets
that equal or exceed the threshold value are capitalized; assets below that amount are
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Section 20: Capital Assets
Part II – Classification and Recording
recorded as expenditures or expenses. Local governments should establish a
capitalization threshold level that reflects their financial conditions and may find it
useful to establish different threshold values for different classes of capital assets.
Generally, smaller units of government will use a lower dollar amount as a threshold
for capitalizing assets than larger units.
Generally, groups of items not individually meeting the capitalization threshold would
not be capitalized. However, caution must be exercised in the application of the
guidance to avoid a significant class of capital assets being understated. In its
Comprehensive Implementation Guide (“CIG”), GASB recommends “an appropriate
balance between ensuring that all material capital assets, collectively, are capitalized
and minimizing the cost of record keeping for capital assets.”
Some suggested capitalization thresholds and considerations follow. These amounts are
optional and units of government may establish different thresholds.
a. Land
All land as well as easements and other permanent rights to land should be
capitalized without regard to their value.
b. Improvements Other Than Buildings
A capitalization of $5,000 or more may be appropriate for improvements other than
buildings.
c. Buildings
A capitalization of $5,000 or more may be appropriate for buildings, additions and
betterments. All buildings should be recorded at acquisition cost which usually is
well above the threshold. If a building is below the threshold, it should be expensed
in the year of acquisition. Additions and betterments costing more than the
capitalization threshold should be recorded as capital assets.
d. Infrastructure
A capitalization of $5,000 or more may be appropriate for infrastructure.
e. Assets Acquired with Restricted Funds
Assets costing less than the capitalization threshold for the class of property
acquired with grant funds, with funds from bonded debt issuances or installment
purchases, or with funds from other restricted sources should be capitalized in
compliance with the grant contract, bond indenture or other agreement. In all
instances, assets acquired with these funds should be specifically identified in the
asset records to assure that these assets are used in compliance with all restrictions
in the grant contract, bond indenture or other agreement. If necessary the assets
may be recorded at $1 or other nominal amount to maintain the asset accounting
record and assure proper internal control.
f.
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Small Items
Equipment costing less than $5,000 that the governmental unit desires to control
may be capitalized at $1.00 for each separate asset record. (Examples: calculators,
cell phones, computers and tablets, computer software, etc.)
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Part II – Classification and Recording
g. Equipment and Vehicles
Equipment and vehicles costing $5,000 or more should be recorded as capital assets.
Additions costing $2,500 or more to equipment and vehicles should be recorded as
capital assets. Equipment and vehicles costing less than the above should not be
recorded unless they meet the criteria for small items.
h. Construction in Progress
Construction in progress should be recorded at acquisition cost without regard to
significant value.
i.
Donated Assets
Since there is no cost for donated assets, the determination of whether to capitalize
donated assets would be based on their fair market value at the time of acquisition
plus additional charges related to the asset.
j.
Intangible Assets
All intangible assets as well as easements and other permanent rights to land
should be capitalized without regard to their value.
k. Internally Generated Intangible Assets
Intangible assets that are created or produced by the government or an entity
contracted by the government would be considered internally generated. Assets
acquired from a third party, but require more than minimal incremental efforts on
the part of the government to begin achieving their expected level of service
capacity, also are considered internally generated. Outlays that are incurred in the
generation of internally generated intangible assets should be expensed until
certain criteria are met.
GASB Statement No. 51 paragraph 8, states that all three of the following
requirements must occur before capitalization begins.



Determination of the specific objective of the project and the nature of the
service capacity that is expected to be provided by the intangible asset upon the
completion of the project,
Demonstration of the technical or technological feasibility for completing the
project so the intangible asset will provide its expected service capacity, and
Demonstration of the current intention, ability, and presence of effort to
complete or, in the case of multiyear project, continued development of the
intangible asset.
3. Changing Capitalization Threshold
When a government decides to increase its threshold for capitalization, the new
threshold is applied prospectively. Assets that have been capitalized under the
preceding lower capitalization threshold are not removed from the capital asset
records. GASB addressed the question of whether or not a restatement of beginning net
position is required for a change in the capitalization threshold in the CIG, 7.22.17 (As
amended for adoption of GASB 62). It concluded that no restatement of beginning
assets is required indicating “(u)se of a capitalization threshold is an application of
accounting policy, and any change in capitalization threshold should appropriately
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Section 20: Capital Assets
Part II – Classification and Recording
ensure that all significant capital assets, collectively, are capitalized while considering
the cost of record keeping for capital assets.”
4. Valuation of Capital Assets
Capital assets should be accounted for at cost or, if the cost is not practicably
determinable, at estimated historical cost. Donated capital assets should be recorded at
their estimated fair market value when received.
a. Cost
The cost of a capital asset includes the purchase price or construction cost and
ancillary charges necessary to acquire the asset or to place it in the intended
location and condition for use. Ancillary charges should be directly attributable to
acquisition of the specific asset and include costs such as transportation charges,
site preparation, professional fees including engineering and legal fees, and certain
interest costs during construction. For equipment, the costs of any testing also
should be capitalized. The costs of engineering studies on the feasibility of a project
are sometimes properly expensed rather than capitalized at the time they are
incurred if a decision on whether assets will be constructed has not been made. If
these studies eventually lead to the acquisition or construction of assets, the unit
should capitalize these costs if significant as part of a project. For example,
engineering costs for the expansion of a water and sewer system may be expensed if
there is no definite project. If the decision is made later to go through with the
project, these costs should be capitalized and the expensed amount reversed.
(1) Land
When land is purchased, the costs includes the purchase price; legal fees
including attorney’s fees, closing cost and recording fees; filling, grading and
excavation cost; and other costs directly related to the acquisition of the land
and its preparation for use. Rights of way and easements are recorded at
purchase cost plus legal costs. Removal cost for assets removed from the land
increase the cost of the land; the net proceeds from the salvaging of any assets
removed from the land reduce the cost, i.e. amounts received from the sale of the
components of an existing building on the land.
(2) Buildings, Improvements Other Than Buildings, and Construction in Progress
If purchased or constructed, the valuation includes such costs as the purchase
price, acquisition legal fees, permits, construction costs, and other professional
fees related to design or construction.
(3) Infrastructure
If purchased or constructed, the valuation includes such costs as the purchase
price, acquisition legal fees, and other professional fees related to design or
construction.
(4) Equipment
The basis of valuation of purchased equipment includes the net contract price;
transportation charges including insurance while in transit; the cost of assembly
and installation of special devices or foundations; testing and calibration costs;
and cost of other preparations required to ready the asset for its intended use.
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Section 20: Capital Assets
Part II – Classification and Recording
(5) Donated Assets
For assets acquired by a gift, the valuation recorded should be the fair market
value based on the appraised value at the time of acquisition plus ancillary
charges, if any.
b. Estimated Historical Cost
Appropriate capital asset accounting records are essential for the fair presentation
of financial statements prepared in accordance with GASB Statement 34. Prior
standards and practices placed less emphasis on the capital assets as a whole,
owned by the local government or public authority. Some units may find that their
capital asset records are lacking in detail and completeness. In such situations, the
original purchase documentation may not be available, or an inordinate
expenditure of resources may be required to establish original asset costs precisely.
Therefore, it may be necessary to estimate the original asset cost of such assets on
the basis of documentary evidence available, including price levels at the time of
acquisition, and to record these estimated costs in the appropriate capital asset
accounts. In some units, the cost may not be known; but information and records
may be available showing the year of acquisition. In this instance, historical
appraisal cost can be used.
Historical appraisal cost is defined for this purpose as the current appraised value
adjusted to the year of acquisition using the appropriate construction indices, such
as the Handy-Whitman Index (a subscription service available to utility companies)
or The Engineering News-Record (a weekly technical magazine whose publisher
issues a semiannual index upon request). If the exact date of acquisition and cost
are not known, but a general time period of the acquisition and cost are known, an
average year during the period and a reasonable estimated cost might be used.
Information on the approximate time of asset acquisition can be obtained from such
sources as building cornerstones and old newspaper clippings. The important
concept is to obtain a reasonable estimated cost for use in recording the assets on
the books and in establishing accountability. In order to have the auditor render an
unmodified opinion, the capital assets values need to be materially correct. If the
unit has documentation for assets that were recently acquired, this may represent
the bulk of the dollar value of the unit's total capital assets. The depreciated
carrying values for older assets should not be a large part of the total capital assets
value. Using estimated costs does create some margin of error in the capital assets
accounting records as compared to the proper recording at acquisition. However,
such errors should be immaterial and will diminish over time as assets are retired
and replaced, and estimated costs are replaced with actual costs.
c. Capitalization of Interest Cost
The cost of acquiring an asset in an enterprise fund includes the interest cost
incurred during the period of construction as a result of outlays for the assets.
GASB Statement No. 62 in paragraphs 5 – 22 discusses the capitalization of
interest costs. Interest should be capitalized for “qualifying assets”, primarily assets
constructed for the government’s own use and should not be capitalized for
inventories, assets acquired with gifts or grants restricted to the acquisition of the
assets and certain other assets. The portion of interest cost incurred during
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construction that could have been avoided if the outlays had not been made is the
amount that should be capitalized.
d. Self-constructed assets
At times a local government or public authority may construct an asset using its
own staff. In this circumstance, the unit must identify the cost of the selfconstructed asset. Since there is no external transaction to provide the exchange
price, this is more difficult than for a purchased asset and requires more detailed
recordkeeping. Generally, the direct costs of materials and labor are easily
captured.
The difficulty is determining the amount of indirect cost associated with the
construction. One approach is to include only those additional costs – excluding any
general or administrative expenses which are never capitalized – that are incurred
because of the decision to self-construct the asset, i.e. the incremental costs. Since
depreciation and supervisor’s salaries would be incurred if the asset was not selfconstructed, they are excluded when using this approach.
C. Internally Generated Computer Software
GASB Statement No. 51 recognizes computer software as internally generated if it is
purchased or licensed by the government and modified with more than minimal
incremental effort before putting into service. Websites also are considered in this group of
assets, however keep in mind that there is a high hurdle here to exceed before
capitalization is required. As with all other internally-generated intangible assets,
computer software should be expensed until the requirements to capitalize are met.
The requirements for capitalization of computer software are considered to be met when
the following occur:


The activities noted in the preliminary project stage are completed, and
Management implicitly or explicitly authorizes and commits to funding, at least
currently in the case of a multiyear project, the software project.
Internally generated computer software is grouped into three stages: preliminary project,
application development, and post-implementation. Only during the applicationdevelopment stage should outlays incurred be capitalized. Outlays associated with the
preliminary and post implementation stages should be expensed as incurred.
Preliminary-stage activities include: selecting a vendor, selecting a consultant to assist in
development or installation, final selection of alternatives for development, making
strategic decisions to allocated resources at a point in time, determining the performance
requirements for the project, and determining the existence of needed technology. Training
employees involved with the development of internally generated software, if the training
does not contribute to putting the software in use, should also be expensed as incurred and
not included in the application development stage.
Included in the application-development stage are activities such as coding, software
configuration, testing, installation to hardware, and data conversion. Tasks considered to
be data conversion include purging or cleansing of existing data and reconciliation from the
legacy system to the new system. Data conversion should only be included in the
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application development stage to the extent that it is necessary to make software
operational. The CIG references a human resource software system as an example of when
data conversion is needed for operational purposes. In a human resource system, payroll
transactions are dependent on the transfer of information such as direct deposit
information and tax deductions in order to pay employees.
If the data conversion is deemed unnecessary for operation or more informational than
essential, it should be included in the post-implementation stage. The same rule applies for
data conversion activities associated with computer software that is not internally
generated. Internal modification of existing software to make it able to interface with new
software should be capitalized if it increases the functionality, efficiency or extends its
useful life.
Post-implementation stage activities include software maintenance and application
training. Please note maintenance activities that do not improve efficiency, functionality or
extend useful life would be considered post-implementation and should be expensed as
incurred. The same rules apply for training activities when computer software is not
considered internally generated. Outlays from business process reengineering activities
that result during the development should not be considered a cost of development, but
should be expensed.
Commercially available computer software that is purchased or licensed by the
government and placed into operation without modification, or requiring minimal
incremental effort to modify is not considered ‘internally generated.’ However, it will still
meet the description of an intangible asset in GASB Statement No. 51. For example, a unit
of government that acquires computer software through a five year licensing agreement
requiring annual payments for the right to use should report the software as an intangible
asset and record a long-term liability for the required annual payments. The government
should not consider this software as internally generated. If the licensing agreement
includes several components each component should be evaluated for capitalization.
Similarly, an enterprise resource planning system with multiple modules, including
procurement, human resources, and financial reporting, should have each module
evaluated individually as to its stage in development. Maintenance agreements result in
external modifications of the software that increase its functionality or improve the
efficiency of the software should be capitalized as intangibles. Otherwise, maintenance
agreements should be expensed. Theoretically the unit should split its maintenance
agreement outlays into these two subsets. However, materiality should be considered in
this decision – the unit may as a matter of policy expense all maintenance agreements that
are not specified to increase functionality or improve efficiency (CIG Z.51.23).
D. Water Rights
Water rights are not excluded from the provisions of GASB Statement No. 51 even if
income or profit is generated through the sale of water. Question Z.51.5 in CIG states that
water rights used in operations are not themselves directly generating income or profit.
Income and profit are indirect results of ownership of the rights, therefore making water
rights used in operations of water system an intangible asset. Water rights acquired for
the purpose of trading those rights to obtain income are not intangible assets.
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E. Right-of-Way Easements
Right-of-way easements are generally considered to be recordable intangible assets. A
separate asset for the right-of-way easement should be reported at fair value at the time of
acquisition in accordance with GASB Statement 34, paragraph 18. Determining the fair
value is a challenge for right of way easements. The fair value of any asset is the amount
at which the asset could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. In the case of right-of-way easements for roads,
however, generally the only willing buyer is the government. The fair value can then be
estimated to be the outlay the government would have incurred to acquire the easement in
an exchange transaction. There also may be other reasonable methods for determining the
fair value of a donated right-of-way easement. However, it is not appropriate to arbitrarily
assign a nominal value to a donated easement.
F. Annual Inventory of Assets
The existence and condition of all capital assets should either be verified annually as a
part of the year-end closing process or on a cycle basis during the year. If this task is
challenging but manageable, then the capitalization threshold is probably appropriate for
the local unit. Assets should be identified by the identification tag affixed to the asset, the
asset description compared to the capital asset records, and its physical condition assessed.
Any unrecorded acquisitions, additions or improvements made since the prior annual
inventory should be identified and recorded. Capital asset records should be adjusted for
any assets relocated since the prior inventory.
Strict control must be maintained during the inventory-taking process to assure that
uninventoried items are not moved to areas previously inventoried, or vice versa.
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A. Introduction
Capital assets transactions arise primarily from acquisitions and disposals. These
transactions appear first in the expenditure ledger as purchases or in the revenue ledger
as revenues from the disposal of capital assets. The minutes of the governing board should
be inspected for any transactions not recorded in the expenditure or revenue accounts, e.g.,
donated assets, assets received from another government entity, or assets not otherwise
recorded.
After the end of each month, the capital asset transactions for the month should be
journalized and recorded. It is vital that capital asset subsidiary records also be
maintained and kept up-to-date. It is recommended that the subsidiary records be updated
on a monthly basis as well and reconciled to the general ledger. Subsidiary records should
also be updated for capital assets transferred between departments at the unit.
B. Acquisition of Capital Assets
Local governmental units may acquire capital assets with cash or through leases or other
financing arrangements such as bonds, notes, and installment purchases. The issuance of
debt and the use of obligations similar to debt are allowed for counties, cities and certain
other types of local governments but may require approval of the Local Government
Commission to issue the debt. Regardless of the format of payment, if the local
governmental unit acquires most of the benefits and risks of ownership of an asset, the
asset must be recorded as a capital asset of the appropriate fund or in the statement of net
position of the local governmental unit. Accordingly, the liability incurred to acquire the
property also must be recorded as a liability of the appropriate fund or in the statement of
net position of the local governmental unit.
1. Installment Purchases
Installment contracts that create a security interest in some or all of the property
purchased to secure payment of the purchase price to one advancing moneys or
supplying financing for the purchase transaction are known as “installment purchases”
and are authorized by G.S. 160A-20. Installment purchases that involve the
construction or repair of fixtures or improvements on real property or that meet the
standards set out in G.S. 159-148 require approval by the Local Government
Commission.
Capital assets purchased by incurring installment obligations must be capitalized. The
basis of valuation of a capital asset purchased with an installment sales agreement is
the lower of the market value of the capital asset or the net present value of the sales
agreement plus the closing costs and the other costs of the purchase. The net present
value of the installment sales agreement must be recorded as a long-term obligation in
the appropriate fund or in the statement of net position.
2. Leases
The standards of financial accounting and reporting for leases by lessees and lessors
are set forth in paragraphs 211 – 271 of GASB Statement No. 62. The paragraphs
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define a lease “an agreement conveying the right to use capital assets (land or other
depreciable assets) usually for a stated period of time.” This policy manual will only
discuss the accounting by lessees, the party receiving the use and possession of the
leased property.
Capital assets do not always have to be constructed or purchased outright in order to be
of benefit to a local government or public authority. Capital assets may be temporarily
utilized through a rental agreement, known as an operating lease. In other situations,
the utilization of leased capital assets may be such that the unit has in effect purchased
the asset by virtue of the length of its use of the asset, or the amount of payments it has
made to use the asset. This type of lease is known as a capital lease.
a. Operating Leases
A lease is an operating lease if it does not transfer the benefits and risks of
ownership to the local governmental unit. Operating lease payments are recognized
as expenses or expenditures to the local governmental unit when they become
payable. The capital assets leased through operating leases are not capitalized;
however, they should be inventoried and tagged for control purposes. Even if rental
payments are not made on a straight-line basis, the rental expense or expenditure
is recognized on a straight-line basis unless another systematic and rational basis is
more representative of the pattern in which the benefits flow from the leased
property.
b. Capital Leases
GASB Statement No. 62, paragraph 213, codifies the definition of a capital lease as
follows:
“If at its inception a lease meets one or more of the following four criteria, the
lease should be classified as a capital lease by the lessee. Otherwise, it should be
classified as an operating lease.
a. The lease transfers ownership of the property to the lessee by the end of the
lease term.
b. The lease contains a bargain purchase option.
c. The lease term is equal to 75 percent or more of the estimated economic life
of the leased property. However, if the beginning of the lease term falls
within the last 25 percent of the total estimated economic life of the leased
property, including earlier years of use, this criterion should not be used for
purposes of classifying the lease.
d. The present value at the beginning of the lease term of the minimum lease
payments, excluding that portion of the payments representing executory
costs such as insurance and maintenance to be paid by the lessor, including
any gain thereon, equals or exceeds 90 percent of the excess of the fair value
of the leased property to the lessor at the inception of the lease over any
related investment tax credit retained by and expected to be realized by the
lessor. However, if the beginning of the lease term falls within the last
25 percent of the total estimated economic life of the leased property,
including earlier years of use, this criterion should not be used for purposes
of classifying the lease. A lessor should compute the present value of the
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minimum lease payments using the interest rate implicit in the lease. A
lessee should compute the present value of the minimum lease payments
using its incremental borrowing rate, unless (1) it is practicable to obtain the
implicit rate computed by the lessor and (2) the implicit rate computed by
the lessor is less than the lessee’s incremental borrowing rate. If both of
those conditions are met, the lessee should use the implicit rate.”
The lessee records a capital lease as a capital asset and an obligation at an amount
equal to the present value of the minimum lease payments excluding that portion
representing certain costs. However, the present value as determined should not exceed
the fair value of the leased property.
The asset acquired under a capital lease should be amortized as follows:
a. When the lease transfers ownership of the property to the lessee by the end of the
lease term or contains a bargain purchase option, the asset should be amortized in a
manner consistent with the lessee’s normal depreciation policy for owned assets.
Because ownership is expected to pass to the lessee, the portion of the asset
recorded under the capital lease representing land would not be amortized.
b. Otherwise, the period of amortization should be the lease term.
Lease payments are allocated between a reduction of the obligation and interest
expense or expenditure at a constant periodic rate of interest on the obligation.
C. Acquisition with Federal Financial Assistance
The federal government issued a recompilation OMB Circular A-102 (August 29, 1997),
regarding uniform standards governing the utilization and disposal of property furnished
by the federal government or acquired in whole or in part with federal funds by nonfederal
political subdivisions. These requirements are set out in the common rule to OMB
Circular A-102.
Specific capital asset management information by federal department or agency may be
reviewed through the following websites:
www.whitehouse.gov/omb/circulars_a102 for the recompilation of Circular A-102 as
amended, and
www.whitehouse.gov/omb/grants/chart.html for Codification of the Government-wide
Grants Requirements by Department.
The capital asset management requirements may be summarized as follows. This
summary is qualified by reference to the circular and relevant common rule.
1. Capital assets acquired with federal funds are restricted to the following uses:
a. Real property - Unless otherwise provided by federal statutes, real property is to be
used for the originally authorized purpose as long as needed for that purpose. Local
governments are not to dispose of or encumber its title or other interests.
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b. Equipment – Used as follows:
(1) In the grant program for which the asset is acquired as long as there is a need
for the property to accomplish the purpose of the grant program, whether or not
the program continues to be supported by federal funds.
(2) If the property is no longer needed in this grant program, it may be used, in the
following order of priority, for other grants of the same federal agency, or grants
of other federal agencies.
2. When capital assets are no longer used as originally authorized, they may be disposed
of as follows:
a. The property may be used for the unit's official activities:
(1) With fair compensation to the federal agency based on the percentage of federal
participation in the original grant program times the current fair market value,
or
(2) Without reimbursement to the federal agency if the property cost is less than
$5,000.
b. The property may be disposed of under the common rule of OMB Circular A-102.
(1) When real property is no longer needed for the originally authorized purpose,
the unit should request disposal instructions from the federal awarding agency.
The common rule provides for retaining the property, selling it, or transferring
title. Whether the property is retained by the local unit or sold, the local unit
must compensate the federal agency for its percentage of participation in the
cost of the original purchase times the fair market value of the property. If title
to the property is transferred to the awarding agency, the local unit is
compensated.
(2) When original or replacement equipment (nonexpendable, tangible property)
acquired under a grant is no longer needed for the original project or program or
for other activities currently or previously supported by a federal agency,
disposal should be made as follows:
(a) Items of equipment with a current per-unit fair market value of less than
$5,000 may be retained, sold, or otherwise disposed of with no further
obligation to the federal awarding agency.
(b) Items of equipment with a current per-unit fair market more than $5,000
may be retained or sold and the federal awarding agency shall have a right
to be compensated for its share of the equipment.
(3) If there is a residual inventory of unused supplies exceeding $5,000 in total
aggregate fair market value upon termination or completion of the award, and if
the supplies are not needed for any other federally-sponsored programs or
projects, the local government shall compensate the federal awarding agency for
its share.
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3. In addition, the common rule specifies that the grantee's property records shall include
the following data:
a. Complete description of property, including serial numbers, location, use, and the
condition of the property.
b. Acquisition date and cost, the purpose for which acquired, name in which title is
held, and the source and amount of federal participation in the cost.
c. Complete information on the disposition of the property including date of disposal
and sales price of the property.
d. A physical inventory at least every two years verifying the existence and current
use of the property.
e. A control system to prevent the loss, damage, or theft of the property.
4. Additional procedures must ensure that maintenance is adequate, usage is permissible
as originally authorized or as otherwise authorized under law, and unauthorized
dispositions are not made.
Units must review and understand the detailed grant requirements and common rule
applicable to the specific grant. Any unusual problems encountered or clarifications needed
should be discussed with the federal granting agency or if the grant is a pass-through
grant, through the applicable State agency.
Units should review the tools related to procurement with federal grants available on the
School of Government’s Local Government Purchasing and Contracting website,
www.ncpurchasing.unc.edu. The documents “14 Key Steps to Federal Grant Compliance”
and the “Local Government Guide to Procurement with Federal Grant Funding” are
recommended.
D. Disposals of Capital Assets
Under the North Carolina Constitution, it is generally required that a local government
must dispose of property for no less than its fair market value. The disposal of a piece of
equipment that still has significant value to a local unit should be closely reviewed to
ensure that such actions are accomplishing a public purpose. A gift of property or a sale at
well below market value constitutes the granting of an "exclusive privilege or emolument"
to the person receiving the property, which is prohibited by Article 1, Section 32, of the
Constitution. Most of the procedures by which a local government is permitted to sell or
otherwise dispose of property are competitive, and the North Carolina Supreme Court has
indicated that the price resulting from an open and competitive procedure will normally be
considered appropriate unless strong evidence indicates that it is so significantly below
market value as to show an abuse of discretion.
It is not always constitutionally necessary that a local government receive any monetary
consideration when it conveys property. A conveyance requiring the receiving party to put
the capital asset to continued public use constitutes sufficient consideration for the
conveyance. The receiver in this case is usually, but not always, another government or a
nonprofit organization.
The following statutory references are authority for municipalities. For counties,
G.S. 153A-176 refers to G.S. 160A, Article 12 giving counties the same authority to dispose
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of property as municipalities. G.S. 115C-518(a) also incorporates G.S. 160A, Article 12 as
the primary disposal methods for local boards of education. Local boards of education have
additional flexibility in granting easements to local utility companies, but are
constitutionally prohibited from donating property.
Before a department in a governmental unit disposes of any real or personal property,
notice should be circulated to other departments that the property is considered surplus.
A quick reference guide to the procedures for disposal of surplus property and templates
for resolutions and notices required for the various property disposal methods discussed
above are available on the School of Government's Local Government Purchasing and
Contracting website, www.ncpurchasing.unc.edu.
Article 12 of G.S. Chapter 160A governs the disposal of real and personal property. Unless
otherwise authorized by statute, local governments must dispose of real and personal
property by competitive sale. G.S. 160A-266(a) sets out three competitive methods of sale,
each of which is appropriate in any circumstance: sealed bid; negotiated offer and upset
bid; and public auction. Two other categories of disposal methods are also authorized under
this statute: private negotiation and sale (meaning a non-competitive sale directly to an
individual buyer), and exchange (exchanging property for other property). In all instances,
the procedural requirements of the property disposal statutes must be followed exactly or
the transaction risks invalidation by a court.
The procedural requirements for these various methods of disposal are outlined below.
1. Competitive Sale
a. Advertisement for Sealed Bids (G.S. 160A -268)
(1) The same rules apply as for advertising purchase contracts in the formal
bidding range (G.S. 143-129; see Purchasing Policy, Section 30, in this Policies
Manual). If the property being advertised is personal property, publication of
the advertisement must occur seven (7) full days prior to the bid opening. If the
property being advertised is real property, the advertisement must occur 30
days prior to the bid opening.
(2) An advertisement for sealed bids must be published in a newspaper that has
general circulation in the local government's jurisdiction.
(3) The advertisement should generally describe the property, tell where it can be
examined and when and where the bids will be opened, and reserve the board's
right to reject any and all bids.
(4) Bids must be opened in public and be recorded in the board's minutes.
(5) The award is made to the highest bidder.
b. Negotiated Offer, Advertisement, and Upset Bids
(1) The governing body may solicit or receive an offer to purchase property.
(2) The offeror must make a deposit of 5% of the amount offered to be considered by
the governing board.
(3) The offer Upon accepting the offer and receipt of the 5% deposit, the local
government must publish notice of the offer. The advertisement must include a
description of the property, the amount and terms of the offer, and a notice that
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within 10 days any person may raise the bid by not less than ten percent (10%)
of the first one thousand dollars ($1,000) and five percent (5%) of the remainder.
(4) If a qualifying upset bid is received, steps b. and c. must be repeated until no
further qualifying upset bids are received.
(5) The governing board may then award the contract to the last qualifying upset
bidder.
c. Public Auction
(1) The governing body must pass a resolution authorizing the sale; describing the
property to be sold; and specifying the date, time, place, and terms of sale.
(2) Notice of the sale of real property must be published once at least 30 days before
the auction. For personal property only, the notice must be published at least
10 days before the auction.
(3) High bids received at auction for real property must be reported to the
governing body and accepted or rejected within 30 days. High bids received at
auction for personal property may be accepted by an appropriate official or
employee authorized by the governing board to dispose of the property at
auction.
(4) If the bids are rejected, the property may be readvertised for sale.
(5) The resolution adopted by the governing board authorizing the auction may
require the highest bidder to make a bid deposit in an amount specified in the
resolution.
2. Private Negotiation and Sale
a. Small item disposal:
G.S. 160A-266(b) and (c) authorize local governments to dispose of personal
property (one item or a group of similar items) valued at less than $30,000 (“small
items”) by private negotiation and sale. The governing body must pass a resolution
authorizing the sale and then a notice summarizing the contents of the resolution
must be published once after passage. The sale cannot be consummated until ten
days after publication of the resolution. The governing board may adopt a policy
delegating its authority to conduct private negotiation and sale of small items to an
individual official or employee. The regulations may, but need not, require
published notice.
b. Significant properties:
G.S. 160A-266(b) authorizes the private negotiation and sale of real or personal
properties with certain architectural, archaeological, artistic, cultural or historical
significance to a nonprofit corporation or trust whose purposes include the
preservation or conservation of real or personal property.
c. Conveyance to another unit of government:
G.S. 160A-274 authorizes governmental units to convey any interest in real or
personal property to another governmental unit with or without consideration
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under any terms and conditions “deemed wise” by the conveying unit. The
conveyance must be approved by the governing board disposing of the property.
d. Conveyance to volunteer fire departments and rescue squads:
G.S. 160A-277 provides that a local government may lease, sell, or convey, with or
without monetary consideration, land or interest in land to a volunteer fire
department or to a volunteer rescue squad for the purpose of constructing or
expanding volunteer fire department or rescue squad facilities.
e. Conveyance to private entity for public purpose:
G.S. 160A-279(a) provides that "whenever a city or county is authorized to
appropriate funds to any public or private entity which carries out a public purpose,
the city or county may, in lieu of or in addition to the appropriation of funds, convey
by private sale to such an entity any real or personal property which it owns...." The
consideration for this type of private sale is the continued public use of the property
after it has been conveyed.
f.
Donation of personal property:
G.S. 160A-280 authorizes a city or county (but no other unit of local government) to
donate personal property (but not real property) to another governmental unit
within the United States, a nonprofit organization, or a sister city. It is important to
note that school boards are constitutionally prohibited from conveying real or
personal property without monetary consideration.
g. Other private sales
Other private sales are authorized in very specific instances, including for economic
development (G.S. 158-7.1(d)); community development (G.S. 160A-457-this method
is available only for cities); affordable housing (G.S. 153A-378 for counties and
G.S. 160A-456(b)); and sale of a city-owned enterprise (G.S. 160A-321).
3. Exchange
Privately negotiated exchanges of property are also permitted in any circumstance so
long as equal value changes hands and Under G.S. 160A-271, a local government may
exchange real or personal property for other real or personal property if it receives full
and fair consideration for the property exchanged. The governing board must authorize
the exchange at a regular meeting. Notice of intent to make the exchange must be
published at least ten days before the exchange occurs. The notice must describe the
properties involves; give the value of each, as well as the value of other consideration
changing hands; and cite the date of the regular meeting at which the board proposes
to approve the exchange.
E. Impairment of Capital Assets
GASB Statement No. 42 defines impairment as “a significant, unexpected decline in the
service utility of a capital asset.” A two-step process which includes identifying potential
impairments and testing for impairment is necessary to determine if an asset is impaired.
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A capital asset should be tested for impairment when any one of the following triggering
events happens:
 Decline in market value of the capital asset;
 Change in the way the capital asset is used or physical change in asset;
 Adverse changes in legal factors or business climate;
 Accumulated cost in excess of amounts originally expected to construct or acquire asset;


Current expectation that, more likely than not, a long lived asset will be sold or
disposed of significantly before the end of its previously estimated useful life;
Current period losses with history of operating or cash flow losses associated with
asset.
The finance officer should be alert for the existence of any of the indicators of impairment
or triggering events that indicate that an asset should be subject to the impairment test.
The impairment test determines if both of the following two factors are present:
 The magnitude of the decline in service utility is significant; and
 The decline in service utility is unexpected.
If it is determined that a significant, unexpected decline in serve utility of an asset has
occurred, the impairment – amount by which cost is to be written down – must be
measured. The methods to measure the impairment include the restoration cost approach,
the service units approach and the deflated depreciation replacement cost approach. The
approach select depends on the reason for the impairment and whether or not the asset
will continue in use. Unless evidence indicates that the impairment is temporary, the
impairment loss should be reported in the statement of activities and, if appropriate, in the
statement of revenues, expenses and changes net fund assets. If circumstances causing the
impairment have changed, the impairment loss should not be reversed in subsequent
years.
The financial reporting and disclosures required for an impairment of capital assets are
illustrated in the sample financial statements for the City of Dogwood.
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Section 20: Capital Assets
Part III – Accounting for Capital Assets
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Page 24 of 36 Pages.
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Section 20: Capital Assets
Part IV – Internal Control and Financial Reporting
A. Introduction
All assets must be physically identified and tagged, their location recorded and the
responsibility for their custody assigned.
A control number should be assigned to each asset. It is suggested that the control number
system be designed in such a manner that, at a minimum, the control numbers relate to
the chart of account numbers for the asset class. Furthermore, control numbers should
include identifiers that indicate the location, department or other significant information
about the asset. This will facilitate controlling assets by asset classification as well as
location and manager assigned responsibility for custody of the asset. Additionally, it
should be noted that GASB Statement No. 34 requires that “(d)epreciation expense for
capital assets that can specifically be identified with a function should be included in its
direct expenses.” It will also facilitate the physical inventory of the capital assets. Control
numbers should be carefully designed to meet all these purposes. For internal control,
capital assets such as buildings, improvements other than to buildings, and land are
assigned appropriate capital assets control numbers in the accounting records but are not
physically tagged.
Asset control for financial reporting purposes should not be confused with safeguarding the
assets. A local government unit may purchase many different items in order to meet the
needs of the citizenry. In some local units, the cost of pistols, shotguns and other weapons
used by the law enforcement officers may be below the capitalization threshold. While they
may not be capitalized and depreciated on the financial records, law enforcement officials
must ensure that all weapons are accounted for and strictly controlled. Similarly, the
public grounds department should routinely inventory all the lawn mowers and weed
trimmers. By their portable nature, this equipment may easily be misappropriated.
B. Internal Control Over Capital Assets
It is essential that all capital assets be adequately controlled to prevent misuse.
Critical internal control procedures for capital asset management include the following:



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Adequate accounting records should be maintained that identify and classify all capital
assets. OMB Circular A-102 and the common rule specify the data that the grantee's
property records shall include for capital assets acquired with federal funds.
Adequate guidelines should be established and followed to distinguish between
expensed items and capital additions; items acquired with federal or state funds as well
as other special revenue purchased items; and betterments or improvements to assets.
Physical inventories of capital assets should be taken on an annual basis by
independent parties. Inventory counts should be taken "from scratch" – not using the
previous year's count lists. Count sheets should be initialed by the person(s) taking the
inventory. The count should be reconciled to the accounting records, with written
evidence of the reconciliation maintained. In small units, the inventory should be taken
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Section 20: Capital Assets
Part IV – Internal Control and Financial Reporting






by a board member if there is only one accounting or finance staff member. If there are
two accounting or finance staff members, the finance officer may take the inventory.
All capital assets should be tagged or identified in the accounting records by a control
number, as applicable. Tags should be prenumbered, with all numbers accounted for,
and should identify the assets as belonging to the unit. Tags should be affixed in a
permanent manner.
All property, buildings, titled equipment and vehicles, and other items should be held
in the name of the unit. All deeds on real property should be properly recorded and
stored in a secure place.
All capital assets purchased, transferred, sold, scrapped, or destroyed should be
recorded as such in a timely manner in the accounting system. This facilitates proper
valuing of assets and helps to prevent loss or misuse.
All sales of surplus property should be conducted in accordance with G.S.
Chapter 160A, Article 12 (municipalities) or G.S. 153A-176 (counties).
Capital assets records are often used to help determine adequate insurance coverage on
all real and personal property. An independent review of insurance coverage should be
conducted at least every three years.
Adequate procedures should be in place to assure compliance with the uniform
standards governing the utilization and disposal of property furnished by the federal
government or acquired in whole or in part with federal funds by nonfederal political
subdivisions set out in the common rule to OMB Circular A-102.
See the Policy Manual for Local Governments, Section 80 – Internal Controls for an
additional discussion of policies and procedures related to internal control.
C. Financial Reporting Considerations
For audited financial statement purposes, additions to capital assets and the related
financial liabilities must be disclosed in accordance with generally accepted accounting
principles. Capital assets that are being or have been depreciated are reported net of
accumulated depreciation in the statement of net position with related accumulated
depreciation reported on the face of the statement or disclosed in the notes. Greater detail
may be provided in reporting capital assets, such as by major class of asset, e.g.
infrastructure, buildings and improvements, vehicles, machinery and equipment, etc.
Governments should disclose information about their works of art and historical collections
as required by GASB Statement 34, paragraph 118. The standards of financial accounting
and reporting for leases by lessees are set forth in paragraphs 211 – 271 of GASB
Statement No. 62.
GASB Statement 34, paragraph 117 contains the following disclosure requirements for
capital assets and depreciation:
1. Beginning and end of year balances, with accumulated depreciation separately
presented from historical cost,
2. Capital acquisitions,
3. Sales or other dispositions, and
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Section 20: Capital Assets
Part IV – Internal Control and Financial Reporting
4. Current-period depreciation expense, with disclosure of the amounts charged to each of
the functions in the statement of activities.
Detail information should be included in the notes to the financial statements about
capital assets of the primary government reported in the statement of net position. The
disclosure should be divided into major classes of capital assets as well as between those
associated with governmental activities and those associated with business-type activities.
Furthermore, nondepreciable capital assets, such as land or infrastructure assets reported
using the modified approach, should be disclosed separately from those that are being
depreciated. Additionally, the notes should include disclosure regarding the policy for
capitalizing assets and for estimating the useful lives of those assets. The unit's accounting
policy on capitalization of interest costs incurred during construction should be disclosed
and applied consistently. In a period in which some interest is capitalized, the disclosure
should include both the amount of interest incurred during the period as well as the
amount of interest cost that has been capitalized. Units electing the modified approach for
reporting eligible infrastructure assets should describe their approach. Currently, the LGC
staff is recommending against the use of the modified approach.
According to paragraph 5 of GASB Statement No. 51, all intangible assets subject to this
Statement should be classified as capital assets and disclosed as such. Intangible assets
should be grouped with those of a similar nature and usage (i.e., right-of-way easements,
water rights, and software.)
The component of net position – net investment in capital assets – includes capital assets,
net of accumulated depreciation and reduced by the outstanding balances of any bonds,
mortgages, notes, or other borrowings that are attributable to the acquisition, construction,
or improvement of those assets. Interfund borrowings are not considered to be capitalrelated for purposes of this calculation. An Excel© worksheet is provided to assist in the
calculation of net investment in capital assets and is available at www.nctreasurer.com.
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Part IV – Internal Control and Financial Reporting
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Page 28 of 36 Pages.
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Department of State Treasurer – Policy Manual for Local Governments
Section 20: Capital Assets
Part V – Depreciation and Amortization
A. Introduction
Depreciation is the allocation of the cost of capital assets over their estimated useful lives
in a rational and systematic way. The allocation of the cost over the estimated useful lives
of intangible assets is known as amortization. Unless otherwise indicated, the term
depreciation expense will be used to include both depreciation and amortization.
Capital assets that are inexhaustible, such as land and land improvements, or are
infrastructure assets reported using the modified approach should not be depreciated.
Depreciation should begin when a capital asset is placed in service. Because costs reported
as construction in progress represent assets that have not been placed in service, they are
not depreciable until the underlying assets are placed in service. Infrastructure assets that
are not required to be depreciated must meet two conditions: they are managed under a
system having certain characteristics and are being preserved approximately at an
established level of condition.
1. Governmental Funds
Depreciation is an accrual basis of accounting concept and therefore is not an
expenditure, a modified accrual basis of accounting concept. Depreciation is not
recorded in the governmental funds. For governmental funds, inflows and outflows of
current financial resources is the measurement focus. However, depreciation expense is
recorded on the government-wide statement of activities for governmental units.
Depreciation of general capital assets should be recorded in the accounts of the
government-wide statement of activities. Governmental funds (the General Fund,
Special Revenue Funds, Capital Projects Funds, and Debt Service Funds) measure
inflows and outflows of financial resources. Since depreciation expense is neither an
inflow nor an outflow of governmental fund financial resources, it is not recorded in the
accounts of such funds. While depreciation is not recorded in the accounts of
governmental funds, it should be calculated for cost finding purposes such as analyzing
costs associated with vehicle operation, garbage collection, and data processing
services. Besides these routine activities, calculating depreciation can be of benefit for
determining reimbursable costs under grant provisions and for establishing fee
schedules. It also can assist the governmental unit in "make or buy" or "do or contract
for" decisions.
Finally, accumulated depreciation related to general capital assets must be recorded in
the statement of net position. When recorded, the entry for depreciation expense
increases the Accumulated Depreciation account(s) and decrease the Investment in
General Capital assets account(s).
2. Proprietary Funds
Depreciation and amortization expense is recorded in the proprietary funds as it is an
important element in the income determination process. Accordingly, depreciation of
capital assets in a proprietary fund is recorded in the accounts of that fund. Proprietary
funds include enterprise funds and internal service funds. Depreciation also is
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Section 20: Capital Assets
Part V – Depreciation and Amortization
recognized in those trust funds where expenses and net income, or capital maintenance
are measured, although this is rare.
Proprietary funds are used to account for a governmental unit's operations and
activities that should be self-supporting similar to private sector activities. The
generally accepted accounting principles applicable to proprietary funds are the same
as those applicable to comparable private sector enterprises. Inflows and outflows of
economic resources is the measurement focus applicable to the statement of activities.
The accrual basis of accounting is used.
Two fund types are classified as proprietary funds:
 Enterprise funds which are used to account for operations or activities that are
financed and operated like a private business enterprise for which the governing
body intends that costs (including depreciation) of providing goods or services to the
public on a continuing basis be financed or recovered primarily through user
charges, or for which the governing body has decided that periodic determination of
revenues earned, expenses incurred, and net income is appropriate for capital
maintenance, public policy, management control, accountability, or other purposes.
Water treatment and distribution, wastewater collection and processing, and
electric operations are examples of activities accounted for in enterprise funds.

Internal service funds are used to account for the financing of goods or services
provided by one department or agency to other departments or agencies of the
governmental unit, or to other governmental units, on a cost-reimbursement basis.
Examples of activities frequently accounted for as Internal Service Funds are data
processing centers, motor pools, and central office supply activities.
Proprietary fund capital assets are capitalized in the fund accounts because the capital
assets are used in the production of goods or services provided and sold. Depreciation of
these capital assets must be recorded to determine total expenses, net income, and
changes in fund equity.
B. Depreciation and Amortization Considerations
GASB Statement 34 at paragraph 22 provides 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. It
may be calculated for (a) a class of assets, (b) a network of assets, (c) a subsystem of a
network, or (d) individual assets. (Composite methods may be used to calculate
depreciation expense ….)”
Depreciation is an element of expense resulting from the use of long-lived assets. It is
conventionally measured by allocating the expected net cost of using the asset (original
cost less estimated salvage value) over its estimated useful life in a systematic and rational
manner. The objective of depreciation is to charge each accounting period for the estimated
loss in economic value of the depreciable assets used during the period.
Depreciation expense is a function of the cost of the asset, its expected salvage value, the
estimate of the economic useful life, and the depreciation method selected. The
depreciation method determines the rate at which the economic value of the asset will be
consumed during its expected life.
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Section 20: Capital Assets
Part V – Depreciation and Amortization
1. Estimated Useful Life
In estimating the economic useful life of an asset, consideration has to be given to:

The physical environment in which the asset is to be used, (hot, cold, caustic, dry,
moist, pressure vacuum, etc.); the physical characteristics of use (continuous,
intermittent, fixed or portable, stable or alternating); and the operating conditions
of weight, force, and friction to be encountered.

Physical resilience or ability to sustain full utility and value with minor repetitive
maintenance, as opposed to material progressive deterioration with use,
irrespective of continuing maintenance.

Obsolescence potential –which is defined as susceptibility to economic loss of value
because of technological, fashion, or other changes that reduce an asset's relative
economic suitability for its intended purposes.
For additional information, see the GFOA Best Practice, “Establishing the Estimated
Useful Lives of Capital Assets”
2. Expected Salvage Value
The salvage or residual value is the estimated value each asset will have after it is no
longer used by the government in its operations. An asset's salvage value is an estimate
of the proceeds from disposal of the asset less the cost of disposal. The same factors that
influence the determination of the life of a capital asset affect its salvage value.
C. Reporting Depreciation
GASB Statement No. 34 provides that for capital assets that can specifically be identified
with a function, the depreciation expense should be included in its direct expenses. If the
capital assets are used for more than one function, the depreciation expense should be
allocated to the direct expenses of the various functions on a rational basis. Depreciation
expense for capital assets such as a city hall or a state office building that essentially
serves all functions is not required to be included in the direct expenses of the various
functions. The depreciation expense for a facility that serves essentially all functions may
be included as a separate line in the statement of activities or as part of the "general
government". However, if unallocated depreciation expense is presented as a line item on
the statement of activities, it must be disclosed that this line item excludes direct
depreciation expense included in the various programs. However, for general
infrastructure assets, depreciation should not be allocated to the various functions but is
reported in the statement of activities as a direct expense of the function associated with
capital outlays for and maintenance of infrastructure assets, or reported as a separate line
item.
D. Amortization of Intangible Assets
Paragraph 16 of Statement No. 51 provides that “the useful life of an intangible asset that
arises from contractual or other legal rights should not exceed the period to which the
service capacity of the asset is limited by contractual or legal provisions.” In determining
the useful life, renewal periods may be considered when there is evidence that the
government will seek and be able to achieve renewal.
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Section 20: Capital Assets
Part V – Depreciation and Amortization
Paragraph 17 of Statement No. 51 also states “an intangible asset should be considered to
have an indefinite life if there are no legal, contractual, regulatory, technological or other
factors that limit the useful life of an asset” (i.e., a permanent right-of-way easement).
Intangible assets determined to have an indefinite life should not be amortized. However,
if changes occur such that an asset no longer has an indefinite useful life, the asset should
be evaluated for impairment. After any adjustment for impairment is recorded, the
remaining value should be amortized over the remaining useful life of the asset. Changes
in duration of use, change in term or status of contract, evidence of obsolescence,
enactment or approval of laws or regulations or other changes in environmental factors,
and development stoppage are indicators of impairment in addition to physical damage.
Refer to paragraph 9 of GASB Statement No. 42 for more information in regards to
accounting for impairments.
E. Selection of a Depreciation Method
Theoretically, a depreciation method should be selected that achieves the most realistic
reflection of the loss in economic value of the assets being used or, for cost accounting
purposes, that allocates a reasonable portion of the cost of an asset to the revenue
produced (per unit of production or per unit of time).
Depreciation methods available to local governmental units include the following:
1. Straight-Line Depreciation Method – This method produces a uniform rate per year
over the useful life in years for the asset. This is the most common method of
depreciation used by units of government. It is discussed and illustrated in the next
section.
2. Units of Production Method – A uniform rate of depreciation per unit of output is
determined and applied over the useful life of the asset. Unit of production might be
miles driven, hours flown, etc. It is similar to the straight-line method except that the
life is expressed in units of production and the periodic depreciation charge is the rate
per unit times the number of units consumed.
3. Accelerated Depreciation Methods – These methods generate decreasing charges for
depreciation expense over the useful life of the asset, i.e. the asset is depreciated at an
accelerated rate in the early years of its life. The declining balance and the sum-of-theyears digits’ are accelerated depreciation methods. These methods may be appropriate
where rapid obsolescence is expected.
4. Other Depreciation Methodologies – Group or composite depreciation methods were
designed to usually simplify the clerical process of calculating depreciation expense by
depreciating assets collectively, not individually. These methods create a collection of
assets that are treated as a single asset for the calculation of depreciation. Group
depreciation creates a collection of similar assets; composite depreciation creates a
collection of dissimilar assets. The need for internal control over capital assets
combined with advances in computer software has reduced the cost reduction potential
of the methods.
Accelerated, group and composite depreciation methods are not discussed in the manual.
Information describing and illustrating the methods can be found in accounting text books.
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Section 20: Capital Assets
Part V – Depreciation and Amortization
F. Straight-line Depreciation
1. Computation
This method is simple to apply and will provide satisfactory results where the useful
life and salvage value of an asset can be estimated with a reasonable degree of
accuracy. Because of its simplicity, it is the most widely used method by local
governments. Using the straight-line method of depreciation, the cost or other basis of
the asset, less the estimated salvage value, is divided by the number of years of useful
life to arrive at an annual depreciation charge.
The formula for the calculation of straight-line depreciation is as follows:
Annual
Asset Cost – Estimated Salvage alue
seful Life (in years)
epreciation
2. Illustration
A depreciable asset is acquired and placed is service on December 5, 20x0 costing
$85,400. The asset has an expected life of 8 years and an estimated salvage value of
$1,400.
The annual depreciation expense would be calculated as follows:
Annual
epreciation
$8 ,400 – $1,400
8 years
$10, 00 per year
The depreciation expense for this asset for the fiscal year ended June 30, 20x1 would be
$6,125 for the 7 months from December through June at $875 per month the asset was
in service. For the fiscal year ended June 30, 20x2 the depreciation expense would be
$10,500.
The depreciation expense over the life of the asset is as follows:
Years Ended
June 30
Depreciation
Expense
20x1
20x2
20x3
20x4
20x5
20x6
20x7
20x8
20x9
$ 6,125
10,500
10,500
10,500
10,500
10,500
10,500
10,500
4,375
Accumulated
Depreciation
Book Value
$ 6,125
16,625
27,125
37,625
48,125
58,625
69,125
79,625
84,000
$ 79,275
68,775
58,275
47,775
37,275
26,775
16,275
5,775
1,400
G. Composite Depreciation
Composite depreciation can be utilized with heterogeneous assets, which may have similar
characteristics or purposes. The assets are combined in one asset account and depreciated
accordingly. No gain or loss is normally recognized except in extraordinary circumstances.
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Section 20: Capital Assets
Part V – Depreciation and Amortization
For example, assume the following assets are placed in service:
Asset
A
Cost
$30,000
Salvage
Value
$6,000
Useful Life
10 years
Annual
Depreciation
$2,400
B
20,000
3,600
4 years
4,100
C
10,000
---
4 years
2,500
Total
$60,000
$9,600
$9,000
Using straight-line depreciation, the composite depreciation rate is computed as follows:
Depreciation Rate =
Total Annual epreciation
Total Cost
=
Depreciation is then charged at 15% of the cost of assets in service at that time until book
value equals the estimated salvage value of $9,600. Additional assets may be included by
adding their cost to the asset amount and determining a new composite depreciation rate.
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Section 20: Capital Assets
Part VI – Suggested Reading
UNC School of Government Publications
Kara A. Millonzi, Introduction to Local Government Finance in North Carolina, Second
Edition, 2014.
David M. Lawrence, Local Government Property Transactions in North Carolina, Second
Edition, 2000
Jack Vogt, Justin Marlowe, William C. Rivenbark, Capital Budgeting and Finance, A
Guide for Local Governments, Second Edition, 2009.
David M. Lawrence, Financing Capital Projects in North Carolina, Second Edition, 1994.
Frayda Bluestein, A Legal Guide to Purchasing and Contracting for North Carolina Local
Governments, 2004 Edition with 2007 Supplement.
Various blog posts, Coates' Canons: NC Local Government Law Blog.
OMB Circular A-102, Grants and Cooperative Agreements With State and Local
Governments. Revised August 29, 1997.
Codification of Governmentwide Grants Requirements by Department.
GFOA, Best Practices, www.gfoa.org
“Capital Planning Policies” (September 2013)
“Capital Asset Assessment, Maintenance and Replacement Policy” (2010)
“Asset Maintenance and Replacement” (March 2010)
“Role of the Finance
irector in Capital Asset Management” (October 2011)
“Establishing Appropriate Capitalization Thresholds for Capital Assets” (2006)
“Ensuring Control over Noncapitalized Items” (200 )
“Establishing the Estimated Useful Lives of Capital Assets” (2010)
Governmental and Nonprofit Accounting (Tenth Edition), Freeman, Shoulders, Allison,
Patton, Smith, Prentice Hall, 2012.
Governmental Accounting, Auditing, and Financial Reporting, GFOA, Stephen J. Gauthier.
Accounting for Capital Assets: A Guide for State and Local Governments, GFOA, Stephen J.
Gauthier, 2008.
Audit & Accounting Guide: State and Local Government, AICPA, March 1, 2013, Chapter 7.
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Section 20: Capital Assets
Part VI – Suggested Reading
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