The Governmental Accounting Standards Board (GASB) has issued Implementation Guide No. 2021-1, Implementation Guidance Update—2021.
The implementation guide contains new questions and answers that address the application of GASB standards on derivative instruments, fiduciary activities, leases, and nonexchange transactions. The guide also amends certain questions and answers issued in previous implementation guides.
This article focuses on the amendments to the capitalization policy question and answer that was previously issued in Implementation Guide 2015-1.
Capitalization Policy Guidance
Question 7.9.8, as follows, was originally included in Implementation Guide 2015-1 to address the capitalization requirements for capital assets that are significant in the aggregate:
Should a government’s capitalization policy be applied only to individual assets or can it be applied to a group of assets acquired together? Consider a government that has established a capitalization threshold of $5,000 for equipment. If the government purchases 100 computers costing $1,500 each, should the computers be capitalized?
In response to the above question, Implementation guide 2015-1 stated that it may be appropriate for a government to establish a capitalization policy that would require capitalization of certain types of assets with individual acquisition costs that are less than the threshold for an individual asset. This answer also noted that computers, classroom furniture, and library books are common assets that may not meet the capitalization policy on an individual basis but might be considered material collectively.
While the question itself remains unchanged—now Question 5.1 in Implementation Guide 2021-1—the answer has been amended to state that a government should capitalize assets whose individual acquisition costs are less than the threshold for an individual asset if those assets in the aggregate are significant.
Similar to the original answer, computers, classroom furniture, and library books are noted as common examples of asset types that may not meet a capitalization policy on an individual basis, yet could be significant collectively. However, the amended answer clarifies that if the $150,000 aggregate amount—100 computers costing $1,500 each—is significant, the government should capitalize the computers.
Under the original answer, governments didn’t typically interpret the wording to mean that the capitalization of individual items less than the threshold would be required, even if significant in the aggregate. The wording used in the updated answer, however, is more definite and implies that governments are now required to capitalize individual assets that are below the threshold when significant in the aggregate.
This change could greatly impact the application of a government’s capitalization policy and may require governments to capitalize many individual items with small dollar values. Governments should begin assessing the potential impact by taking inventory of asset types that would be considered significant in the aggregate but have previously been expensed because they are individually less than the threshold.
Before heading down the path of capitalizing all small capital expenditures, consider that this new provision largely hinges on interpreting the term significant. While the GASB uses significant throughout its previously issued pronouncements, that term is left undefined in that text. This provides financial statement preparers leeway in interpreting what groups of capital assets are significant.
While computers are important items to inventory for a number of reasons, governments may find the total financial statement value of computers is not noteworthy. A government spending $150,000 in total for all of its computers, as discussed in the example above, may have capital assets totaling $85 million. With this example, a financial statement preparer, when considering the users of the financial statements, likely views those computers as insignificant for financial statement reporting purposes. Also consider that similar to previously issued GASB Statements, Implementation Guide 2021-1 states that these provisions don’t need to be applied to immaterial items.
The amended guidance within Question 5.1 in Implementation Guide 2021-1 is effective for reporting periods beginning after June 15, 2023.
The amendments should be applied retroactively by restating the financial statements for all prior periods presented. If restatement for prior periods isn’t practicable, the cumulative effect of applying the amended guidance should be reported as a restatement of beginning net position for the earliest period restated.
Early application is encouraged.
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For more information about how the amended implementation guidance could affect your organization, contact your Moss Adams professional.