Infrastructure
Why include infrastructure? To be consistent with the government-wide perspective of reporting and the reasoning for reporting capital assets, governmental entities must also include infrastructure assets (e.g. roads, bridges, sewers, etc.) in the capital asset categories. The GASB believes that capitalization and depreciation of infrastructure assets is important to assist users in satisfying the objectives stated in paragraphs 77a, 77c, 78c, and 79a of Concept Statement 1.

The Statement outlines the methods governmental entities may use to develop and report general government infrastructure assets retroactively. The emphasis is intended on reasonably estimating the costs of existing major components of infrastructure assets when historical data are not readily available.

Only major infrastructure assets need to be reported. Roads, bridges, tunnels, storm sewers, dams, sea walls, and levees would generally be considered major categories. Several criteria are provided in the Statement to help determine what is "major":

• The asset cost is at least 5% of total general capital asset cost in the first fiscal year ending after June 15, 1999, or
• The asset is part of a network where the network cost is at least 10% of total general capital asset cost in the first fiscal year ending after June 15, 1999.

Establishing appropriate capitalization thresholds for infrastructure assets is to be determined by the governmental entity using reasonable and consistent rationale. GASB concedes that different thresholds may be appropriate for different types of capital assets. For example, the capitalization threshold for infrastructure assets would probably be higher than the threshold used for vehicles or office equipment.

Several approaches to grouping infrastructure assets for inventorying and recording are outlined in the Statement. Simply grouping by infrastructure systems is an allowable approach. Alternatively, dividing those systems into components or even down to the element level are also acceptable approaches. Each system may also include all attendant features. For example, the Street & Highway System could also include all the lane dividers, guard rails, underground piping, and lighting.

Upon inventorying the infrastructure assets, the governmental entity may estimate its total cost and calculate depreciation of that estimated total cost based on the weighted-average age and estimated useful life of the assets included.

To estimate cost, a commonly used cost backtrending method is suggested. The age and estimated useful life of infrastructure assets should be based on when the asset was acquired or underwent its most recent major renovation. When that is not feasible, the age and useful life may be estimated based on the condition of the asset and/or data for comparable assets. Governments may and should consider:

• guidelines obtained from professional or industry organizations such as appraisal or engineering firms;
• data for comparable assets of other governments;
• available internal information; and
• the asset's present condition and how long it is expected to meet service demands.

Depreciation
Why report depreciation expense? A fundamental principle of accounting holds that a proper matching of "revenues" and "expenses" more accurately reflects the economic change that has occurred between two points in time.

Since capital assets are resources employed to help generate the revenue or services of an entity, the cost of "using up" the capital asset resources should be reported in the same period. That cost of using up a capital asset is more commonly referred to as depreciation.

Statement 34 requires depreciation expense to be reported in the Statement of Activities using a conventional method of allocating the depreciable cost (i.e. historical or estimated historical cost less estimated salvage value) over the estimated useful lives of the assets in a systematic and rational manner. The depreciation expense may be calculated for composite groups of similar assets.

The depreciation expense for capital assets that can be specifically identified with a functional category should be included in direct expenses of that function. Depreciation expense for infrastructure assets should not be allocated to the direct expenses of the various functions. Rather, it should either be included in the direct expenses of the function(s) that normally would include capital outlay for infrastructure assets or be reported separately.

An alternative "modified approach" can be used as a substitute to depreciating infrastructure assets. To use the modified approach, the government must manage the eligible infrastructure assets using an asset management system that complies with the characteristics required in Statement 34 and the government must document that the eligible infrastructure assets are being preserved approximately at (or above) a condition level established and disclosed by the government. Conceptually, the dollars spent to preserve the condition of those assets will substitute for the depreciation expense that would have been reported.

Next week, we will examine required implementation dates - and the rationale for the "3-phase" implementation.