Capital confusion: 12 misunderstandings about Accounting for Capital Assets.

• Author: Gauthier, Stephen J.

Many accounting and financial reporting issues affect some governments, but not others. Virtually all state and local governments, however, must confront the ongoing challenge of accounting for capital assets. To help governments meet this challenge, the Government Finance Officers Association (GFOA) recently released a new book, Accounting for Capital Assets: A Guide for State and Local Governments, that comprehensively addresses accounting and financial reporting for capital assets (the contents are listed in Exhibit 1).This article will focus on 12 common misunderstandings that the new publication should help eliminate.

Misunderstanding No. 1

If it's a parcel of land with a building on top, it must be a capital asset.

If asked to provide the quintessential example of a capital asset, most probably would reply "land" or "buildings" Yet not every parcel of land or building necessarily qualifies as a capital asset. Some assets are acquired for use in operations (e.g., fire truck),while others are acquired with the intent of resale (e.g., foreclosure properties). By definition, only the former qualify as capital assets. (1) That is, the crucial factor in determining whether a given item should be classified as a capital asset is not the form of the asset, but its intended use. Thus, a parcel of land acquired to serve as the site of a new school would properly be classified as a capital asset, but not an identical parcel of land acquired for eventual resale to a private-sector business as part of a redevelopment program.

The distinction between capital and noncapital is more than a question of terminology Governmental funds (e.g., general fund) do not report capital assets; they do, however, report items acquired for the purpose of resale, including items that resemble capital assets. Also, capital assets are unaffected by changes in fair value, whereas items held for resale cannot be reported at more than their net realizable value.

Misunderstanding No. 2

Capital assets and "fixed assets" are really one and the same thing.

In the private sector, capital assets are commonly described as property, plant, and equipment. For many years, the equivalent term in the public sector was fixed assets. In both cases, the language suggests an asset that is both tangible and immovable. Neither quality, however, is an essential characteristic of a capital asset. Rather, the essential features of a capital asset are that it will be used in operations and that it has a useful life extending beyond a single reporting period. Thus, intangible items such a legal rights (e.g., easements) and internally developed computer software typically qualify as capital assets. Unfortunately, because intangible assets do not "look like" other capital assets, financial statement preparers often overlook them when calculating the portion of net assets classified as invested in capital assets, net of related debt.

Misunderstanding No. 3

A capital asset should always be reported as an asset of the government that maintains it.

In the public sector, it is not uncommon for a higher level of government (e.g., county) to acquire or construct a capital asset for a lower level of government (e.g., township), with the latter assuming responsibility for maintenance. Under generally accepted accounting principles (GAAP), the same item cannot be reported as a capital asset of two different governments...