Classifying Capital Assets

To be classified as a capital asset, a specific item must be used in operations, have an initial useful life extending beyond a single reporting period, 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 for an individual item and a minimum useful life of at least two years. The GFOA also recommends that the capitalization threshold generally be applied to individual items rather than to a group of items, unless applying the threshold to individual items would eliminate a significant portion of total capital assets. The 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. Land should be capitalized regardless of its 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, professional fees, and other costs directly attributable to place the building into its intended condition for use. 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. Examples include 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 cost of equipment includes the purchase price and other costs necessary to place the equipment in its intended condition for use, such as freight, installation, dealer add-ons, and modifications. Discounts and other applicable credits should reduce the cost.
• Infrastructure includes roads, bridges, tunnels, drainage systems and water and sewer systems. Infrastructure assets may be accounted for as networks and subsystems of networks. For example, a city's street system may be considered a network, while bridges may be accounted for as a subsystem.
• Construction in Progress represents costs incurred for a capital asset that is not yet substantially complete and ready for its intended use. Costs may include labor, materials, equipment, and other costs directly related to the construction of the asset. Upon completion of the work, the total cost is transferred to the appropriate capital asset clarification. 
• Intangibles include assets such as easements, water rights, computer software, patents, trademarks, timber rights, and other identifiable nonfinancial assets that lack physical substance. GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets, requires intangible assets that meet the applicable recognition criteria to be classified as capital assets. For governments that were classified as Phase 1 or Phase 2 for purposes of implementing GASB Statement No. 34, retroactive reporting was required for intangible assets acquired in fiscal years ending after June 30, 1980, except for intangible assets with indefinite useful lives and internally generated intangible assets. If determining historical cost was not practical because sufficient records were unavailable, estimated historical cost could be used. For Phase 3 governments, retroactive reporting was encouraged but not required. Certain contracts for the right to use information technology software and related IT assets are accounted for under GASB Statement No. 96, Subscription-Based Information Technology Arrangements, rather than GASB Statement No. 51. Perpetual software licenses continue to be subject to GASB Statement No. 51.