Infrastructure Reporting—Why
Should We All Care?
Lisa R. Parker, CPA, CGMA
Senior Project Manager
Governmental Accounting Standards Board
The views expressed in this presentation are those of Ms. Parker.
Official positions of the GASB on accounting matters are determined
only after extensive due process and deliberation.
Why Deteriorating Infrastructure?
 Deferred maintenance by the governments who are
responsible for these assets
 Governments fail to invest the money needed to maintain
and preserve their assets after the initial construction
investment
- Replacement cost due to neglected maintenance is much
more expensive than keeping up with maintenance
2
Why is Maintenance Neglected?
 Often a lack of commitment to fund maintenance efforts at
the level necessary for upkeep and preservation
 Reasons for the lack of funding include:
- Short-term perspectives




Annual cycle when budgeting
Election terms and cycles
Lack of a long-term strategic outlook
Failure to acknowledge future costs of reconstruction – annual
maintenance is less costly
3
Why is Maintenance Neglected?
 Reasons for the lack of funding also include:
- Competing priorities
 Operating versus capital
- Preference for capital funding
 Takes it out of the operating budget
 Capital budget is separate and projects are funded long-term with debt
and grants
- Misunderstanding of infrastructure condition
 Large range over which condition deteriorates without noticeably affecting
performance
 May become obsolete before it deteriorates
4
Why the Interest In the Condition of
Infrastructure?
 Reality that reconstruction through capital funding as opposed
to ongoing maintenance and preservation spending through
the operating budget was an unworkable way to handle
infrastructure assets
- Condition levels are poor and infrastructure needs to be fixed
- Available federal money for capital has been reduced
- Most cost effective way to fix is through ongoing maintenance
 Asset Management Systems were gaining popularity as an
infrastructure maintenance best practice
- System of inventory and tracking of the condition level of
infrastructure assets in order to combine management, financial,
economic, engineering and other practices applied over the full
life cycle of physical assets to provide the required level of service
for present and future customers in the most cost-effective way
5
Asset Management Systems
 Governments using these systems can have the advantage
of effectively counteracting the impediments to ongoing
maintenance funding
- Will keep track of condition levels
- Will provide the information necessary to prioritize funding
decisions
- Will validate budget requests for maintenance and
replacement
- Can be a policy of the government to protect against the
problem of turnover in elected officials
6
Brief History of Reporting Requirements
 Prior to 1999—capital assets, including
infrastructure, were left off the balance sheet
- Roadblock to informing decision-making and holding
governments accountable
- Level to which infrastructure was being maintained
was unclear
 1999 GASB issued Statement No. 34, Basic
Financial Statements—and Management’s
Discussion and Analysis—for State and Local
Governments
- Requires governments to report their capital assets,
including infrastructure
Goals of Statement 34
 To establish government-wide reporting on an accrual basis
- Would include the inclusion of capital assets, including
infrastructure assets
- Although they are not likely to be liquidated to produce inflows
 Generally the most valuable assets on a government’s Statement of Net
Position
 Play a vital role in the provision of services
- Their cost is also a significant component of the full cost of
services–the reporting of which is an objective of financial
reporting–Statement of Activities
- Infrastructure needs to be maintained and preserved
 Represents a significant potential claim on resources
 Without capital assets, including infrastructure – inaccurate
depiction of a government’s financial standing
8
Capital Asset Reporting Required
 Capitalization and measurement of the cost of
using capital assets helps users:
Determine whether current-year revenues covered the
cost of current-year services
Assess the service efforts and costs of programs
Assess the govt’s financial position and condition
Determine whether the govt’s financial position improved
or deteriorated
Assess the service potential of physical resources having
useful lives extending beyond the current period
Definition of Capital Assets
 Tangible or intangible assets used in operations
 Have initial useful life extending beyond a single reporting
period
 Include:
- land
- vehicles
- improvements to land
- machinery
- easements
- equipment
- buildings
- infrastructure
- building improvements
- works of art and historical treasures
Definition of Infrastructure Assets
Definition of Infrastructure
- Long-lived capital assets
- Normally stationary in nature
- Normally can be preserved for a significantly greater number
of years than most capital assets
- Examples: roads, bridges, tunnels, drainage systems, water
and sewer systems, dams, and lighting systems
Definition of Infrastructure Assets Cont’d
Definition of Infrastructure
- Land under roads is not infrastructure
- Buildings are not infrastructure
 Except those that are an ancillary part of a network of infrastructure
assets
 When ownership is unclear . . .
The government primarily responsible for managing
infrastructure should report it.
Valuing Capital Assets
 Report at historical cost
 Cost includes:
- Ancillary charges necessary to place asset into its intended
location and condition for use
 Donated items reported at estimated fair value at time of
acquisition, plus ancillary charges
Depreciation--General Requirements
 Report capital assets net of accumulated depreciation
 Not all are depreciable
- Inexhaustible capital assets
 land, improvements to land, construction in progress, etc.
- Infrastructure assets reported using modified approach
Calculating Depreciation
 Systematic and rational allocation of net cost over
estimated useful life
 May use any established depreciation method
Calculating Depreciation Cont’d
Net Cost
- Historic cost of the asset less salvage value
Estimated Useful Life
- Governments should periodically reevaluate estimated useful
lives in relation to actual conditions and usage
- Any change in useful life is applied prospectively (change in
accounting estimate)
Calculating Depreciation Cont’d
Asset Grouping Options
- Depreciation expense may be calculated for:
 Individual assets
 A class of assets (e.g., vehicles, buildings, or computers)
 A network of assets--all assets providing a particular type of
service, such as a dam, its spillway, and locks
 A subsystem of a network--all assets that make up a similar portion
or segment of a network, such as interstate highways, state
highways, or rural roads
Calculating Depreciation Cont’d
Asset Grouping Options
- Composite and group depreciation may be used
 Composite depreciation rate may be based on:
– weighted average or simple average life of the assets in the group
– assessment of the life of the group as a whole
– any established depreciation method allowed
 Composite depreciation assumes all assets are retired at the end
of their useful lives
– cost of replaced assets is removed from both the capital asset account
and the accumulated depreciation account (no gains or losses
reported)
Modified Approach--Definition
 If infrastructure is maintained, using an asset
management system, at or above a set condition level
- Then not required to depreciate infrastructure
- Costs that extend the life of infrastructure (preservation
costs) are immediately expensed rather than capitalized
and depreciated
Modified Approach—Definition Cont’d
Expense
Capitalize
Modified Approach
Traditional Depreciation
Maintenance and
Preservation costs
Maintenance
Additions and
improvements
Preservation costs,
additions, and
improvements
Preservation costs are expenditures that extend the useful life of an asset without
increasing its capacity or efficiency
Modified Approach--Requirement to Use
 Infrastructure assets that are part of a network or
subsystem of a network are eligible
infrastructure assets
 Eligible infrastructure assets are not required to
be depreciated as long as government:
- Manages them using an asset management system,
and
- Documents that they are being preserved
approximately at or above a condition level established
by the government
Modified Approach--Requirement to Use Cont’d
Asset Management System
- An acceptable asset management system must:
 Report an up-to-date inventory
 Perform replicable condition assessments and summarize results
using a measurement scale
 Estimate each year the annual amount to maintain and preserve the
infrastructure at the condition level established and disclosed by the
government
Modified Approach--Requirement to Use Cont’d
Documentation of Preservation
- Governments should document that:
 Complete condition assessments are performed in a consistent
manner at least every 3 years
 The results of the 3 most recent complete condition assessments
show preservation approximately at or above the established condition
level
Modified Approach--Requirement to Use Cont’d
Establishing Condition Levels
- Statement 34 does NOT establish a minimum condition
level
- The government should establish the target condition level
in a formal, documented manner through:
 Appropriate administrative or executive policy
 Legislative action
Disallowance of Use of Modified Approach
 Failure to meet requirements
 Failure determined network-by-network or subsystemby-subsystem
 Depreciation begins in year subsequent to the year
requirements are not met
 Change is accounted for prospectively as a change in
accounting estimate
RSI for Modified Approach
 For infrastructure reported using the modified
approach, disclose:
1. The assessed condition
- performed at least every 3 years
- for at least the 3 most recent complete condition assessments
- indicating the dates of the assessments
2. The estimated annual amount to maintain and preserve at the
condition level, compared to the amounts actually expended/expensed
for each of the past 5 reporting periods
3. Basis for the condition measurement and the measurement scale
4. The condition level at which the government intends to preserve its
infrastructure assets
5. Factors that significantly affect trends in the information reported
Transition for Infrastructure Reporting
 Transition provisions apply to only major general
infrastructure assets (BTAs should already be reporting
infrastructure)
Transition Accommodations





Staggered transition dates for old infrastructure
Limited time look-back period
Look-back limited to major assets
Reporting nonmajor assets not required
Historical cost may be estimated
Staggered Transition Dates
Staggered Transition Dates
 Total revenue--governmental and enterprise fund revenues
combined
 Extraordinary items and other financing sources are
excluded
 Revenue calculation should be made in the first fiscal year
ending after June 15, 1999
Look-back Period is Limited in Time
 Estimated historical cost is required for:
- Assets acquired
- Significant reconstructions/improvements
In fiscal years ending after June 30, 1980
Look-back Limited to Major Assets
 Major determined at the network or subsystem level and
should be based on these criteria:
a Cost of subsystem is expected to be at least 5% of the total cost of all
general capital assets reported in the first fiscal year ending after June
15, 1999, OR
b Cost of network is expected to be at least 10% of the total cost of all
general capital assets reported in the first fiscal year ending after June
15, 1999
Nonmajor Networks Reporting Optional
 Encouraged, but NOT required
Estimated Historical Cost Allowed
 If determining historical cost is not practical
because of inadequate records, estimated
historical cost may be used
 Acceptable estimating methods
a Review of engineering and bond documents
b Expenditures reported in capital project funds or capital outlays in
governmental funds
c Estimated replacement cost, deflated
d Any approach that complies with the intent of Statement 34
Use of the Modified Approach
 In 2011 GASB requested proposals to research the extent
to which, and how, governments use the modified
approach:
- How have county and local governments implemented the
infrastructure accounting and financial reporting requirements
of Statement 34?
- Which county and local governments are using the modified
approach to infrastructure reporting and for what types of
infrastructure assets?
- Why did governments choose to use the modified approach?
How do they view the usefulness of the modified approach?
What difficulties, if any, have they encountered?
- Who uses the infrastructure information that governments are
required to report and for what purposes? How useful is this
information for making decisions and assessing government
accountability?
35
Use of the Modified Approach
 Research approach
- CAFRs of 620 large and medium city and county governments
were examined
 36 (8 cities, 27 counties, and 1 metro government) were
using the modified approach
- Interviews of finance and public works department
representatives were conducted with 5 of these governments
- Literature review
- Research on the asset management systems used by these
governments
 A separate research report has revealed that almost half of
the states use the modified approach.
36
Governments that Use the Modified Approach
 Since Statement 34 was issued, several assumptions have
been made about governments that would be most likely to
use the modified approach:
- In general, governments will be more likely to use the depreciation
approach – overwhelmingly true
- Larger governments will be more likely to use the modified approach –
looks to be true with 81% being large and 19% medium, using GASB
definitions
- Counties will be more likely than cities to use the modified approach –
true with 75% of modified approach governments being counties
- Governments will be more likely to use the modified approach for roads
than other types of infrastructure assets – overwhelmingly true with 97%
of modified approach governments accounting for roads with the
method (53% for bridges)
- Governments whose assets have high condition levels will be more
likely to use the modified approach – seems to be true but can’t prove
37
Why the Use of the Depreciation Approach?




Perception of being simpler
Preferred by financial officials
Avoids the requirements of the modified approach
May portray the government more favorably if infrastructure
conditions are not up to par
38
Benefits to the Modified Approach
 Asset Management System
 Provides a more accurate valuation of a government’s
infrastructure assets than does depreciation
- Depreciation presents that an asset will lose value until the
point that it is value-less or obsolete
- Not just a mathematical exercise because it reflects how
infrastructure assets are managed
- Matches the philosophy of maintaining and preserving current
roads rather than having to continue the need to build new
ones
- Takes into account the costs associated with maintenance and
preservation better than the depreciation method
 Depreciation does not take into account maintenance costs of inflationary
increases that will impact replacement needs
39
Benefits to the Modified Approach Cont’d
 Results in increased cooperation between government’s
departments
- Cooperation between public works, engineering, and finance
 Results in better financial practices, which may lead to an
increased bond rating
40
Challenges to the Modified Approach
 Too difficult and costly to implement
 Uncertain revenue streams will impact a government’s
ability to maintain target condition levels, and will then need
to revert to depreciation
- GASB 34 – if condition levels drop below the established target
without a plan to improve, they must depreciate their
infrastructure or lower the specified condition level
- A change to depreciation accounting late in the useful life
could result in elevated levels of annual depreciation expense
for an extended period as they would be depreciated over the
estimated remaining service life
 Infrastructure maintenance will be given too much leverage
in budget deliberations due to the necessity of maintaining
the target condition level
41
What’s Next for GASB
 Pre-agenda research reexamining Statement 34 and its
requirements
- Is the statement meeting its objectives?
42