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Classifying Capital Assets

Reference Number: MTAS-628
Reviewed Date: 12/06/2022

To be classified as a capital asset, a specific item must be used in operations, have an initial useful life longer than one year and have significant value.

What constitutes significant value varies depending on the size of the city and the class of capital asset. The Government Finance Officers Association (GFOA) recommends a minimum capitalization threshold of $5,000. The GFOA also recommends that the threshold for capitalization be applied to individual items in a group of items, rather than to the group as a whole. Your municipality should have procedures in place to maintain control over items that do not meet the capitalization threshold.

The municipal governing body should set the capitalization threshold for all classes of capital assets via resolution or ordinance.

The following classifications for capital assets are recommended for purposes of accounting and financial statement presentation:

  • Land includes investment in real estate other than structures, improvements and land acquired and used for street and road purposes. All land, as defined above, should be capitalized without regard to significant value. Include legal and surveying fees, damage payments and site preparation costs, including removal of old buildings, etc. Receipts from the sale of salvage should be credited against the land cost.
  • Buildings include costs incurred directly to put the building into its intended state of use, including construction or purchase price, architect fees, accident or injury costs, payments for damage and insurance during construction. The costs should be reduced for discounts, insurance recoveries and other credits.
  • Improvements other than buildings are costs incurred directly to place the improvement into its intended state of use. It includes storage tanks, parking areas, landscaping, connector driveways, traffic lights, parking meters, and other improvements.
  • Equipment includes moveable personal property such as furniture, machines, tools and vehicles. The price should include the total purchase cost before any trade-in allowance minus any discounts. It also should include other costs required to place the equipment in its intended state of operation, such as dealer add-ons or modifications.
  • Infrastructure includes roads, bridges, tunnels, drainage systems and water and sewer systems. During implementation of GASB 34, many cities were required to capitalize major infrastructure items acquired since 1980. Other cities picked up infrastructure assets prospectively. Infrastructure assets are classified into networks and subsystems of networks. For example, city streets may be classed as a network, while bridges would be a subsystem.
  • Construction Work in Progress represents a temporary accumulation of labor, materials, equipment and overhead costs (excluding administrative overhead) of a construction project. Upon completion of the work, the total cost is transferred to one or more of the above classes of capital assets.
  • Intangibles include costs incurred to acquire assets such as patents, trademarks, water rights, road and utility easements, timber rights and computer software. GASB Statement No. 51 had a phase-in similar to GASB 34. Phase 1 and 2 cities must go back to 1981 and pick up intangible assets that were internally generated and those that have a definite life due to contractual or legal limitations. Intangible assets with an indefinite useful life may be retroactively reported. Phase 3 cities do not have to retroactively report any intangible asset.