Accounting for property, plant, and equipment

Federal Financial Accounting Standards no. 6

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Federal Accounting Standards Advisory Board

(FASAB)

ACCOUNTING FOR PROPERTY, PLANT, AND EQUIPMENT

Statement of Federal Financial Accounting Standards No. 6

JUNE 1996

GPO # 041-001-00462-9 ($6.50)

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[NOTE 1: THE FOOTNOTES INCLUDED IN THIS DOCUMENT ARE

OFTEN CRITICAL TO UNDERSTANDING THE STANDARDS. DUE TO

THE LIMITATIONS ON TEXT PRESENTATION THE FOOTNOTES ARE

PRESENTED AS ENDNOTES. PLEASE BE SURE TO REFER TO

THESE ENDNOTES AS YOU REVIEW THE STANDARDS.]

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EXECUTIVE SUMMARY

a This statement contains accounting

 standards for Federally owned property,

 plant, and equipment (PP&E); deferred

 maintenance on PP&E; and cleanup costs. Each

 standard is summarized below.

PROPERTY, PLANT, AND EQUIPMENT

b The Federal Government's investment in PP&E

 exceeds $1 trillion [SEE NOTE 1] PP&E used

 for many different purposes. "PP&E" is

 defined as follows:

 Tangible assets that (1) have an

 estimated useful life of 2 or more

 years, (2) are not intended for

 sale in the ordinary course of

 business, and (3) are intended to

 be used or available for use by the

 entity.
c The diversity among Federal PP&E creates a

 need for meaningful categories of PP&E with

 different accounting standards for each

 category. The Board identifies four

 categories of PP&E. The categories are:

 - general PP&E are PP&E used to provide

 general government services or goods;

 - Federal mission PP&E are PP&E exhibiting

 specific characteristics set by the Board;

 - heritage assets are those assets

 possessing significant educational,

 cultural, or natural characteristics; and

 - stewardship land [SEE NOTE 2] (i.e.,

 land other than that included in general

 PP&E).

d Complete accounting standards for general

 PP&E are included in this document.

e Federal mission PP&E, heritage assets, and

 stewardship land are the subject of a project

 on "Supplementary Stewardship Reporting." An

 exposure draft (ED) on this topic was issued

 in August 1995. The Supplementary Stewardship

 Reporting ED proposes accounting standards

 for these assets after their acquisition. The

 accounting standards in this document address

 (1) classification of PP&E in the categories,

 (2) accounting for the acquisition cost of

 PP&E falling into one of these three

 categories, and (3) implementation of these

 standards where it affects the basic

 financial statements. Because Federal mission

 PP&E, heritage assets, and stewardship land

 would be subject to supplementary stewardship

 reporting, they are referred to collectively

 as stewardship PP&E. This term is used for

 convenience only since each category has its

 own definition.

 GENERAL PP&E

f The general PP&E category consists of items
 that:

 - could be used for alternative purposes

 (e.g., by other Federal programs, state or

 local governments, or non-governmental

 entities) but are used by the Federal

 entity to produce goods or services, or to

 support the mission of the entity; or

 - are used in business-type activities; [SEE

 NOTE 3] or

 - are used by entities in activities whose

 costs can be compared to other entities

 (e.g., Federal hospitals compared with

 other hospitals).

g General PP&E includes land acquired for or

 in connection with other general PP&E. [SEE

 NOTE 4]

h General PP&E shall be reported in the basic

 financial statements: the balance sheet, [SEE

 NOTE 5] and the statement of net cost. [SEE

 NOTE 6] The acquisition cost of general

 PP&E shall be recognized [SEE NOTE 7] as an

 asset. Subsequently, except for land which is

 a nondepreciable asset, that acquisition cost

 shall be charged to expense through

 depreciation. [SEE NOTE 8] The depreciation

 expense shall be accumulated in a contra

 asset account--accumulated depreciation.

i The standards provide that certain costs of

 internally-developed software [SEE NOTE 9]

 can be capitalized and amortized over a

 period not to exceed five years. The costs to

 be capitalized are limited to direct costs

 incurred after technological feasibility has

 been established.

j In addition, the standard addresses

 donations, transfers, and retirements of

 general PP&E as well as disclosure [SEE NOTE

 10] requirements.

 STEWARDSHIP PP&E
k The following paragraphs describe Federal

 mission PP&E, heritage assets, and

 stewardship land, the categories for which

 supplementary stewardship reporting is being

 proposed. These standards are limited to

 accounting requirements for the basic

 financial statements--they do not address the

 information to be reported through

 supplementary stewardship reporting. The

 accounting standards provide guidance on:

 - identifying stewardship PP&E, and

 - elements associated with stewardship PP&E

 that are to be recognized on the basic

 financial statements (e.g., information

 shown on the statement of net costs).

 Federal Mission PP&E

l Federal mission PP&E are specific types of

 PP&E identified by the Board (i.e., weapons

 systems and space exploration equipment) or

 exhibiting the characteristics established by

 the Board. [SEE NOTE 11] The Board

 specifically identified weapons systems and

 space exploration equipment as Federal

 mission PP&E because it does not believe

 applying depreciation accounting would

 contribute to measuring the cost of outputs

 produced, or to assessing operating

 performance, in any given accounting period.

 The Board believes that these assets are

 developed, used, and retired in a manner that

 does not lend itself to a "systematic and

 rational" assignment of costs to accounting

 periods (i.e., depreciation accounting) and,

 ultimately, to outputs.

m The Board did not find any other categories

 of PP&E that it believed should be explicitly

 included in the Federal mission category at

 this time. However, there are other types of

 PP&E, or PP&E may be developed in the future,

 that are similar to these two items, so the
 Board has articulated characteristics of

 Federal mission PP&E. PP&E other than weapons

 systems and space exploration equipment

 clearly exhibiting these characteristics

 should be categorized as Federal mission

 PP&E. For example, based on comments from

 respondents and information provided by the

 Department of Energy, nuclear weapons

 production facilities do exhibit these

 characteristics and should be categorized as

 Federal mission PP&E.

n There are two types of characteristics. The

 first relates to the use of the PP&E. The

 second relates to expectations about, and

 risks associated with, its useful life. To be

 categorized as Federal mission PP&E, an item

 should have at least one characteristic from

 each of the two types of characteristics

 discussed below.

o Characteristics related to the use of

 Federal mission PP&E are that the PP&E:

 - has no expected nongovernmental

 alternative uses; or

 - is held for use in the event of emergency,

 war, or natural disaster; or

 - is specifically designed for use in a

 program for which there is no other

 program or entity (Federal or non-Federal,

 governmental or nongovernmental) using

 similar PP&E with which to compare costs.

p Characteristics related to the useful life

 are that the PP&E:

 - has an indeterminate or unpredictable

 useful life [SEE NOTE 12] due to the

 manner in which it is used, improved,

 retired, modified, or maintained; or

 - is at a very high risk of being destroyed

 during use or of premature obsolescence.

q Annual expenditures to acquire, replace or

 improve Federal mission PP&E shall be shown
 as a cost in the period incurred. Separating

 these costs from other period expenses would

 facilitate analysis of the operating expense

 and prevent distortion due to large

 infrequent expenditures.

 Heritage Assets

r Heritage assets include PP&E that have

 historical or natural significance; cultural,

 educational, or artistic importance; or

 significant architectural characteristics.

 Expenditures to acquire, construct,

 reconstruct, or improve heritage assets shall

 be reported as a cost in the period incurred.

 Separating these costs from other period

 expenses would facilitate analysis of the

 operating expense and prevent distortion due

 to large infrequent expenditures.

 Multi-use Heritage Assets

s Not all heritage assets are used solely for

 heritage purposes--some serve two purposes by

 providing reminders of our heritage and by

 being used in day-to-day government

 operations unrelated to the assets

 themselves. For example, the government has

 constructed "monumental" style office space,

 such as the Old Executive Office Building and

 the Pentagon. Such assets contribute to the

 day-to-day operations of programs but the

 cost of these assets can not be easily

 assigned to heritage and operating purposes.

t The cost of renovating, improving, or

 reconstructing operating components of

 heritage assets used in government operations

 shall be included in general PP&E. Following

 initial construction, any renovation,

 improvement or reconstruction costs to

 facilitate government operations (e.g.,

 installation of communications wiring or

 redesign of office space) would be

 capitalized and depreciated over its expected
 useful life. The cost should not be

 depreciated over an unrealistically long

 life.

u Costs of renovating or reconstructing the

 heritage asset that can not be directly

 associated with operations shall be

 considered heritage asset costs. For example,

 installing a new roof should be considered a

 heritage asset cost.

 Stewardship Land

v The Federal Government has vast holdings of

 land and puts land to various uses. If land

 is acquired for or in connection with an item

 of general PP&E, it shall be categorized as

 general PP&E. Other land (e.g., land in the

 public domain and national park or national

 forest land) shall be excluded from general

 PP&E and referred to as 4stewardship land.

w The acquisition cost of stewardship land

 shall be reported as a cost in the period

 incurred. Separating the cost of land

 acquisitions from other period expenses would

 facilitate analysis of the operating expense

 and prevent distortion due to large

 infrequent purchases.

DEFERRED MAINTENANCE

x The deferred maintenance standard requires

 disclosures related to the condition and the

 estimated cost to remedy deferred maintenance

 of PP&E. These disclosures are made as a note

 to a line item on the statement of net costs-

 -no dollar amount shall be recognized on the

 statement.

y The standards recognize that there are many

 variables in estimating deferred maintenance

 amounts. The standards acknowledge that

 condition rating is a management function
 since different conditions might be

 considered acceptable by different entities

 as well as for different items of PP&E held

 by the same entity. In addition, management

 may use condition assessment surveys or life

 cycle cost plans to estimate the amount of

 deferred maintenance.

z The deferred maintenance standard applies

 to all PP&E whether reported on the balance

 sheet or through supplementary stewardship

 reporting.

CLEANUP COSTS

aa Cleanup costs are the costs associated with

 hazardous waste removal, containment, or

 disposal. In some instances, the Federal

 Government incurs liabilities [SEE NOTE

 13] for cleaning up hazardous waste at

 sites or facilities it operates or has

 operated. Generally, cleanup cannot be, or is

 not, done until permanent or temporary

 closure or shutdown of sites or facilities.

 The Board has completed recommended

 accounting standards for liabilities which

 address liabilities for environmental cleanup

 resulting from an accident, natural disaster,

 or other one-time occurrence. Those liability

 standards do not address inter-period cost

 allocation when cleanup relates to operations

 that span many periods.

ab Therefore, the Board chose to provide

 additional guidance relative to cleanup costs

 in this standard. The additional standards in

 this statement provide for the timing of

 recognition of the liability and related

 operating expense.

ac For cleanup costs associated with general

 PP&E, probable [SEE NOTE 14] and

 measurable cleanup costs shall be allocated

 to operating periods benefiting from

 operations of the general PP&E. This
 allocation shall be based on a systematic and

 rational method. For example, the estimated

 cost could be allocated to operating periods

 based on the expected physical capacity of

 the PP&E and the amount of capacity used each

 period. In addition, disclosure of the total

 estimated cost is required.

ad For cleanup costs associated with

 stewardship PP&E, probable and measurable

 liabilities shall be recognized when the

 stewardship PP&E is placed in service.

 Simultaneous to recognizing the liability,

 the related expense for cleanup cost shall be

 recognized.

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TABLE OF CONTENTS

SECTION PARAGRAPH

EXECUTIVE SUMMARY a..ad

CHAPTER 1: INTRODUCTION

 PURPOSE 1..7

 SCOPE 8

 REPORTING OBJECTIVES 9..12

 CAPITALIZATION THRESHOLDS 13

 APPLICABILITY 14

 MATERIALITY 15

 EFFECTIVE DATE 16

CHAPTER 2: ACCOUNTING STANDARD - PROPERTY, PLANT,

AND EQUIPMENT

DEFINITIONS 17..20

CATEGORIES, RECOGNITION AND MEASUREMENT, AND

DISCLOSURE REQUIREMENTS: 21..22

General PP&E 23..45

Federal Mission PP&E 46..56

Heritage Assets 57..65

Stewardship Land 66..76

CHAPTER 3: ACCOUNTING STANDARD - DEFERRED

MAINTENANCE
DEFINITION 77..78

RECOGNITION 79

DISCLOSURE REQUIREMENTS 80..84

CHAPTER 4: ACCOUNTING STANDARD - CLEANUP COSTS

DEFINITION 85..87

SCOPE 88..93

RECOGNITION AND MEASUREMENT 94..103

IMPLEMENTATION GUIDANCE 104..106

DISCLOSURE REQUIREMENTS 107..111

APPENDIX A: BASIS FOR CONCLUSIONS 112..113

PROPERTY, PLANT, AND EQUIPMENT 114..170

DEFERRED MAINTENANCE 171..181

CLEANUP COSTS 182..199

APPENDIX B: ILLUSTRATIONS OF CATEGORIES

200..201

FEDERAL MISSION PROPERTY, PLANT, AND EQUIPMENT

202..213

HERITAGE ASSETS 214..225

LAND 226..232

APPENDIX C: DEFERRED MAINTENANCE ILLUSTRATION

 

233

APPENDIX D: CLEANUP COSTS ILLUSTRATION

 234..240

APPENDIX E: GLOSSARY

ENDNOTES 1 THROUGH 92

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INTRODUCTION

PURPOSE

1 The purpose of this statement is to provide

 accounting standards for Federally owned
 property, plant, and equipment (PP&E);

 deferred maintenance; and cleanup costs. This

 introduction provides information on:

 - the scope of the standards,

 - consideration of reporting objectives,

 - applicability of the standards,

 - capitalization threshold,

 - materiality, and

 - effective date.

2 Chapters 2, 3, and 4 present the accounting

 standards for PP&E, deferred maintenance, and

 cleanup costs respectively.

3 Appendix A presents the Basis for

 Conclusions. This appendix provides the

 Board's rationale for the decisions made and

 responds to the major issues raised in

 comment letters.

4 Appendix B presents illustrations to aid in

 categorizing PP&E.

5 Appendix C provides an example of a

 deferred maintenance disclosure.

6 Appendix D illustrates cleanup cost

 accounting.

7 Appendix E is a glossary of terms used in

 this statement.

SCOPE

8 This statement identifies and defines

 categories of PP&E and addresses recognition

 and measurement of, and disclosure

 requirements associated with property, plant,

 and equipment (as well as land), including

 accounting for deferred maintenance and

 cleanup costs. This statement does not

 address natural resources. However, the Board

 is undertaking a project to address

 accounting for natural resources.
REPORTING OBJECTIVES

9 In drafting accounting standards for PP&E,

 the Board relied on its Statement of Federal

 Financial Accounting Concepts Number 1,

 Objectives of Federal Financial Reporting.

 Ultimately, all accounting standards taken as

 a whole will help meet the four reporting

 objectives expressed in the Objectives

 statement: budgetary integrity, operating

 performance, stewardship, and systems and

 control. The focus of these standards is on

 the two reporting objectives most relevant to

 PP&E--operating performance and stewardship.

 These objectives and how they could be met

 through PP&E accounting are discussed under

 the headings (1) operating performance, and

 (2) stewardship.

 OPERATING PERFORMANCE

10 The Board believes that it can contribute

 to meeting the operating performance

 objective [SEE NOTE 15] by measuring the

 cost associated with using property, plant,

 and equipment and including that cost in

 entity operating results. The Board first

 sought to identify PP&E costs that would be

 appropriate to include in operating expense.

 Then, from consideration of cost information

 required, the Board determined what balance

 sheet information would have to be reported.

11 To meet the operating performance

 objective, the Board seeks to provide

 accounting standards that will result in:

 - relevant and reliable cost information for

 decision-making by internal users (e.g.,

 program managers, budget examiners and

 officials),

 - comprehensive, comparable cost information

 for decision-making and program evaluation
 by Congress and the public, and

 - information to help assess the efficiency

 and effectiveness of asset management

 (e.g., condition of assets including

 deferred maintenance).

 STEWARDSHIP

12 The Board believes that Federal financial

 reporting can fulfill the stewardship

 objective [SEE NOTE 16] if the Board

 provides standards that will result in

 reporting information on:

 - asset condition;

 - changes in the amount and service

 potential of property, plant, and

 equipment;

 - cost of property, plant, and equipment

 where applicable; and

 - spending for acquisition of property,

 plant, and equipment versus non-capital

 spending.

CAPITALIZATION THRESHOLDS

13 The Board believes that capitalization

 thresholds should be established by Federal

 entities rather than centrally by the Board.

 Because Federal entities are diverse in size

 and in uses of PP&E, entities must consider

 their own financial and operational

 conditions in establishing an appropriate

 capitalization threshold or thresholds. Once

 established, this threshold(s) should be

 consistently followed and disclosed in the

 financial reports.

APPLICABILITY

14 For guidance on the general applicability

 of this standard and all other Federal

 financial accounting standards please refer
 to Statement of Federal Financial Accounting

 Concepts No. 2, Entity and Display.

MATERIALITY

15 The provisions of this statement need not

 be applied to immaterial items.

EFFECTIVE DATE

16 The Board recommends that the accounting

 standards presented in this proposed

 statement become effective for periods

 beginning after September 30, 1997. Earlier

 implementation is encouraged. In addition,

 under early implementation individual

 provisions of the accounting standards may be

 implemented before other provisions. For

 example, provisions for stewardship PP&E may

 be implemented before provisions for general

 PP&E.

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CHAPTER 2 -- ACCOUNTING STANDARD

PROPERTY, PLANT, AND EQUIPMENT

DEFINITIONS

17 Property, plant, and equipment consists of

 tangible assets, including land, that meet

 the following criteria:

 - they have estimated useful lives [SEE NOTE

 17] of 2 years or more;

 - they are not intended for sale in the

 ordinary course of operations; and

 - they have been acquired or constructed

 with the intention of being used, or being

 available for use by the entity.

18 Property, plant, and equipment also

 includes:

 - assets acquired through capital leases
 (See paragraph 20), including leasehold

 improvements;

 - property owned by the reporting entity in

 the hands of others (e.g., state and local

 governments, colleges and universities, or

 Federal contractors); and

 - land rights. [SEE NOTE 18]

19 Property, plant, and equipment excludes

 items (1) held in anticipation of physical

 consumption such as operating materials and

 supplies [SEE NOTE 19] and (2) the

 Federal entity has a reversionary interest

 in. [SEE NOTE 20]

20 Capital leases are leases that transfer

 substantially all the benefits and risks of

 ownership to the lessee. If, at its

 inception, a lease meets one or more of the

 following four criteria, [SEE NOTE 21]

 the lease should be classified as a capital

 lease by the lessee. Otherwise, it should be

 classified as an operating lease. [SEE NOTE

 22]

 - The lease transfers ownership of the

 property to the lessee by the end of the

 lease term.

 - The lease contains an option to purchase

 the leased property at a bargain price.

 - The lease term is equal to or greater than

 75 percent of the estimated economic life

 [SEE NOTE 23] of the leased property.

 - The present value of rental and other

 minimum lease payments, excluding that

 portion of the payments representing

 executory cost, equals or exceeds 90

 percent of the fair value [SEE NOTE

 24] of the leased property.

 The last two criteria are not applicable when

 the beginning of the lease term falls within

 the last 25 percent of the total estimated

 economic life of the leased property.
STANDARDS AND CATEGORIES

21 The following paragraphs provide

 recognition and measurement principles, and

 disclosure requirements for each category of

 PP&E. The categories identified are:

 - general PP&E (including land acquired for

 or in connection with other general PP&E),

 - Federal mission PP&E,

 - heritage assets, and

 - stewardship land (i.e., land not included

 in general PP&E).

22 In determining which category PP&E should

 be placed in, it will be necessary to

 identify the "base unit" [SEE NOTE 25] of

 PP&E against which the category definitions

 will be applied. For example, units as large

 as entire facilities or as small as computers

 could be categorized. In determining the

 level at which categorization takes place, an

 entity should consider the cost of

 maintaining different accounting methods for

 property and the usefulness of the

 information, the diversity in the PP&E to be

 categorized (e.g., useful lives, value,

 alternative uses), the programs being served

 by the PP&E, and future disposition of the

 PP&E (e.g., transferred to other entities or

 scrapped). [SEE NOTE 26]

 GENERAL PROPERTY, PLANT, AND EQUIPMENT

23 General property, plant, and equipment is

 any property, plant, and equipment used in

 providing goods or services. General PP&E

 typically has one or more of the following

 characteristics:

 - it could be used for alternative purposes

 (e.g., by other Federal programs, state or

 local governments, or non-governmental

 entities) but is used to produce goods or
 services, or to support the mission of the

 entity, or

 - it is used in business-type activities,

 [SEE NOTE 27] or

 - it is used by entities in activities whose

 costs can be compared [SEE NOTE 28] to

 those of other entities performing similar

 activities (e.g., Federal hospital

 services in comparison to other

 hospitals).

24 For entities operating as business-type

 activities, all PP&E shall be categorized as

 general PP&E whether or not it meets the

 definition of any other PP&E categories.

25 Land and land rights acquired for or in

 connection with other general PP&E [SEE NOTE

 29] shall be included in general PP&E. In

 some instance, general PP&E may be built on

 existing Federal lands. In this case, the

 land cost would often not be identifiable. In

 these instances, general PP&E shall include

 only land and land rights with an

 identifiable cost that was specifically

 acquired for or in connection with

 construction of general PP&E.

 Asset Recognition

26 All general PP&E shall be recorded at cost.

 Cost shall include all costs incurred to

 bring the PP&E to a form and location

 suitable for its intended use. For example,

 the cost of acquiring property, plant, and

 equipment may include:

 - amounts paid to vendors;

 - transportation charges to the point of

 initial use;

 - handling and storage costs;

 - labor and other direct or indirect

 production costs (for assets produced or

 constructed);

 - engineering, architectural, and other
 outside services for designs, plans,

 specifications, and surveys;

 - acquisition and preparation costs of

 buildings and other facilities;

 - an appropriate share of the cost of the

 equipment and facilities used in

 construction work;

 - fixed equipment and related installation

 costs required for activities in a

 building or facility;

 - direct costs of inspection, supervision,

 and administration of construction

 contracts and construction work;

 - legal and recording fees and damage

 claims;

 - fair value of facilities and equipment

 donated to the government; and

 - material amounts of interest costs paid.

 [SEE NOTE 30]

27 Internally-developed [SEE NOTE 31]

 software may be included in general PP&E (or

 other asset accounts [SEE NOTE 32]) if

 its cost is intended primarily to be

 recovered through charges to users. [SEE NOTE

 33] Other internally-developed software

 costs shall be expensed when incurred.

28 If an entity elects to capitalize

 internally-developed software costs under the

 circumstances described in the preceding

 paragraph, costs that may be capitalized are

 limited to:

 - those clearly identifiable with major new

 software projects and distinguishable from

 recurring maintenance-type activities;

 - costs incurred after technological

 feasibility [SEE NOTE 34] has been

 established; and

 - direct costs of developing the software,

 initial training material, and

 documentation manuals incurred after

 technological feasibility has been

 established (e.g., salaries of

 programmers, systems analysts, project
 management, and administrative personnel

 directly involved in the planning,

 designing, coding, or testing; associated

 employee benefits, outside consultants

 fees, and supplies).

 The amortization or depreciation of these

 costs shall not exceed five years.

29 The cost of general PP&E acquired under a

 capital lease shall be equal to the amount

 recognized as a liability for the capital

 lease at its inception (i.e., the net present

 value of the lease payments calculated as

 specified in the liability standard [SEE NOTE

 35] unless the net present value exceeds

 the fair value of the asset).

30 The cost of general PP&E acquired through

 donation, devise, [SEE NOTE 36] or

 judicial process excluding forfeiture (See

 paragraph 33) shall be estimated fair value

 at the time acquired by the government.

31 The cost of general PP&E transferred from

 other Federal entities shall be the cost

 recorded by the transferring entity for the

 PP&E net of accumulated depreciation or

 amortization. If the receiving entity cannot

 reasonably ascertain those amounts, the cost

 of the PP&E shall be its fair value at the

 time transferred.

32 The cost of general PP&E acquired through

 exchange [SEE NOTE 37] shall be the fair

 value of the PP&E surrendered at the time of

 exchange. [SEE NOTE 38] If the fair value

 of the PP&E acquired is more readily

 determinable than that of the PP&E

 surrendered, the cost shall be the fair value

 of PP&E acquired. If neither fair value is

 determinable the cost of the PP&E acquired

 shall be the cost recorded for the PP&E

 surrendered net of any accumulated

 depreciation or amortization. Any difference

 between the net recorded amount of the PP&E
 surrendered and the cost of the PP&E acquired

 shall be recognized as a gain or loss. In the

 event that cash consideration is included in

 the exchange, the cost of general PP&E

 acquired shall be increased by the amount of

 cash consideration surrendered or decreased

 by the amount of cash consideration received.

33 The cost of general PP&E acquired through

 forfeiture shall be determined in accordance

 with Statement of Federal Financial

 Accounting Standards No. 3, Accounting for

 Inventory and Related Property (SFFAS 3).

 [SEE NOTE 39] Amounts recorded for

 forfeited assets based on SFFAS 3 shall be

 recognized as the cost of general PP&E when

 placed into official use.

34 PP&E shall be recognized when title passes

 to the acquiring entity or when the PP&E is

 delivered to the entity or to an agent of the

 entity. [SEE NOTE 40] In the case of

 constructed PP&E, the PP&E shall be recorded

 as construction work in process until it is

 placed in service, at which time the balance

 shall be transferred to general PP&E.

 Expense Recognition

35 Depreciation expense is calculated through

 the systematic and rational allocation of the

 cost of general PP&E, less its estimated

 salvage/residual value, over the estimated

 useful life of the general PP&E. Depreciation

 expense shall be recognized on all general

 PP&E [SEE NOTE 41], except land and land

 rights of unlimited duration. [SEE NOTE

 42]

 - Estimates of useful life of general PP&E

 must consider factors such as physical

 wear and tear and technological change

 (e.g., obsolescence).

 - Various methods can be used to compute

 periodic depreciation expense so long as
 the method is systematic, rational, and

 best reflects the use of the PP&E.

 - Any changes in estimated useful life or

 salvage/residual value shall be treated

 prospectively. The change shall be

 accounted for in the period of the change

 and future periods. No adjustments shall

 be made to previously recorded

 depreciation or amortization.

36 Depreciation expense shall be accumulated

 in a contra asset [SEE NOTE 43] account--

 accumulated depreciation. Amortization

 expense shall be accumulated in a contra

 asset account--accumulated amortization.

37 Costs which either extend the useful life

 of existing general PP&E, or enlarge or

 improve its capacity shall be capitalized and

 depreciated/amortized over the remaining

 useful life of the associated general PP&E.

38 In the period of disposal, retirement, or

 removal from service, general PP&E shall be

 removed from the asset accounts along with

 associated accumulated

 depreciation/amortization. Any difference

 between the book value of the PP&E and

 amounts realized [SEE NOTE 44] shall be

 recognized as a gain or a loss in the period

 that the general PP&E is disposed of,

 retired, or removed from service.

39 General PP&E shall be removed from general

 PP&E accounts along with associated

 accumulated depreciation/amortization, if

 prior to disposal, retirement or removal from

 service, it no longer provides service in the

 operations of the entity. This could be

 either because it has suffered damage,

 becomes obsolete in advance of expectations,

 or is identified as excess. It shall be

 recorded in an appropriate asset account at

 its expected net realizable value. Any

 difference in the book value of the PP&E and
 its expected net realizable value shall be

 recognized as a gain or a loss in the period

 of adjustment. The expected net realizable

 value shall be adjusted at the end of each

 accounting period and any further adjustments

 in value recognized as a gain or a loss.

 However, no additional

 depreciation/amortization shall be taken once

 such assets are removed from general PP&E in

 anticipation of disposal, retirement, or

 removal from service.

 Implementation Guidance

40 For existing general PP&E, if historical

 cost information necessary to comply with the

 above recognition and measurement provisions

 has not been maintained, estimates are

 required. Estimates shall be based on:

 - cost of similar assets at the time of

 acquisition, or

 - current cost of similar assets discounted

 for inflation since the time of

 acquisition (i.e., deflating current costs

 to costs at the time of acquisition by

 general price index).

41 Accumulated depreciation/amortization shall

 be recorded based on the estimated cost and

 the number of years the PP&E has been in use

 relative to its estimated useful life.

 Alternatively, the PP&E may be recorded at

 its estimated net remaining cost [SEE NOTE

 45] and depreciation/amortization charged

 over the remaining life based on that net

 remaining cost.

42 For general PP&E that would be

 substantially depreciated/amortized had it

 been recorded upon acquisition based on these

 standards, materiality and cost-benefit

 should be weighed heavily in determining

 estimates. Consideration should be given to:
 - recording only improvements made during

 the period beyond the initial expected

 useful life of general PP&E, and

 - making an aggregate entry for whole

 classes of PP&E (e.g., entire facilities

 rather than a building by building

 estimate).

43 In recording existing general PP&E, the

 difference in amounts added to asset and

 contra asset accounts shall be credited (or

 charged) to Net Position of the entity. The

 amount of the adjustment shall be shown as a

 "prior period adjustment" in the statement of

 changes in net position. For published

 financial statements presenting prior year

 information, no prior year amounts shall be

 restated.

44 In the period that these standards are

 implemented, disclosure of the adjustments,

 by major class [SEE NOTE 46] of PP&E,

 made to general PP&E and accumulated

 depreciation/amortization is required.

 Disclosure Requirements

45 The following are minimum general PP&E

 disclosure requirements:

 - the cost, associated accumulated

 depreciation, and book value by major

 class;

 - the estimated useful lives for each major

 class;

 - the method(s) of depreciation for each

 major class;

 - capitalization threshold(s) including any

 changes in threshold(s) during the period;

 and

 - restrictions on the use or convertability

 of general PP&E.

 FEDERAL MISSION PROPERTY,
 PLANT, AND EQUIPMENT

46 Federal mission PP&E includes certain items

 used to meet a Federal Government mission in

 which the specific PP&E used is an integral

 part of the output of the mission. [SEE NOTE

 47] PP&E should be considered Federal

 mission PP&E if it possesses at least one of

 each of the two types of characteristics

 presented below. One type of characteristic

 relates to the use of Federal mission PP&E

 and the other relates to its useful life.

47 Characteristics related to the use of the

 Federal mission PP&E are that it:

 - has no expected nongovernmental

 alternative uses; or

 - is held for use in the event of emergency,

 war or natural disaster; or

 - is specifically designed for use in a

 program for which there is no other

 program or entity (Federal or non-Federal)

 using similar PP&E with which to compare

 costs.

48 Characteristics related to the useful life

 are that it:

 - has an indeterminate or unpredictable

 useful life [SEE NOTE 48] due to the

 unusual manner in which it is used,

 improved, retired, modified, or

 maintained; or

 - is at a very high risk of being destroyed

 during use or premature obsolescence.

WP Federal mission PP&E specifically includes

 (1) weapons systems PP&E (e.g.,

 fighter/attack aircraft, submarines, and

 tracked combat vehicles) and (2) space

 exploration equipment (e.g., space hardware

 and launch, tracking, and recovery

 facilities) which will be defined in

 paragraphs 50 and 52. Federal mission PP&E

 excludes land.
50 "Weapons systems" are a combination of one

 or more weapons [SEE NOTE 49] with all

 related equipment, materials, services,

 personnel and means of delivery and

 deployment required for self-sufficiency.

 [SEE NOTE 50] This standard addresses

 only the PP&E component of weapons systems.

 PP&E included in weapons systems are

 distinguished from general property, plant,

 and equipment held by defense agencies and

 defense support agencies in that they are

 intended to be used directly by the armed

 forces to carry out combat missions, when

 necessary, and to train in peacetime.

51 Weapons systems include only those assets

 owned by defense agencies and defense-support

 agencies that would otherwise meet the PP&E

 definition. Items meeting other than the PP&E

 asset category definitions (such as items of

 inventory or operating materials and

 supplies) are excluded from Federal mission

 PP&E.

52 "Space exploration equipment" includes

 items that are:

 - intended to operate above the atmosphere

 for space exploration purposes, and

 - any specially designed equipment to aid,

 service, or operate other equipment

 engaged in the exploration of space.

 Recognition and Measurement

53 The periodic cost of acquiring,

 constructing, improving, reconstructing, or

 renovating Federal mission PP&E shall be

 recognized as a cost on the statement of net

 cost when incurred. The cost shall be

 disclosed [SEE NOTE 51] as "cost of

 Federal mission PP&E." The cost shall include

 all costs incurred to bring the PP&E to its

 current condition and location (See paragraph
 26 for examples of the costs to be

 considered).

54 Additional reporting requirements for

 stewardship reporting will be developed in a

 separate standard.

 Implementation Guidance

55 Federal mission PP&E previously recognized

 as assets and contra-assets for balance sheet

 reporting shall be removed. The amounts

 removed shall be charged to Net Position of

 the entity. The amount of the adjustment

 shall be shown as a "prior period adjustment"

 in the statement of changes in net position.

 The amounts removed from the balance sheet

 shall be disclosed in a footnote.

56 For published financial statements

 presenting prior year information, no prior

 year amounts shall be restated.

 HERITAGE ASSETS

57 Heritage assets are property, plant, and

 equipment that are unique for one or more of

 the following reasons:

 - historical or natural significance;

 - cultural, educational or artistic (e.g.,

 aesthetic) importance; or

 - significant architectural characteristics.

58 Heritage assets are generally expected to

 be preserved indefinitely. One example of

 evidence that a particular asset is heritage

 in nature is that it is listed on the

 National Register of Historic Places.

59 Heritage assets may in some cases be used

 in general government operations (e.g.,

 office buildings such as the main Treasury

 building). These assets are referred to as
 multi-use heritage assets. The costs to

 maintain these assets serve two purposes--

 they preserve the heritage features and

 permit continued use of the asset for

 government operations. Costs of renovation,

 improvement, restoration, or reconstruction

 that can be directly related to government

 operations (e.g., modification or improvement

 of office space, upgrading of electrical or

 communications equipment/wiring) shall be

 treated as general PP&E and depreciated over

 the period of time they are expected to

 provide service or produce benefits.

60 Cost to renovate, restore, or reconstruct

 the heritage asset itself shall be excluded

 from general PP&E (i.e., not capitalized).

 Recognition and Measurement

61 The cost of improving, reconstructing, or

 renovating heritage assets (excluding any

 costs designated as general PP&E) shall be

 recognized as a cost in the period incurred.

 Also, in the event that heritage assets are

 acquired or constructed, the cost shall be

 recognized as a cost of the period incurred.

 These costs shall be disclosed [SEE NOTE

 52] as "Cost of Heritage Assets." The

 cost shall include all costs incurred to

 bring the PP&E to its current condition and

 location (See paragraph 26 for examples of

 the costs to be considered).

 - The cost of heritage assets transferred

 from other Federal entities shall be the

 book value of the asset recorded on the

 transferring entity's books. If the

 receiving entity does not know the book

 value, the fair value shall be disclosed

 in notes to the statement of net cost. If

 fair value is not estimable, information

 related to the type and quantity of assets

 transferred shall be disclosed.

 - No amounts for heritage assets acquired
 through donation, or devise [SEE NOTE

 53] shall be recognized in the cost of

 heritage assets. [SEE NOTE 54] The

 assets' fair value, if known and material,

 shall be disclosed in notes to the

 statement of net cost in the year

 received. If fair value is not known or

 reasonably estimable, information related

 to the type and quantity of assets

 received shall be disclosed.

62 Additional reporting requirements will be

 developed for stewardship report items in a

 separate standard.

 Implementation Guidance

63 Heritage assets previously recognized as

 assets for balance sheet reporting shall be

 removed. The amounts removed shall be charged

 to Net Position of the entity. The amount of

 the adjustment shall be shown as a "prior

 period adjustment" in the statement of

 changes in net position. The amounts removed

 from the balance sheet shall be disclosed in

 a footnote.

64 If records are not available to determine

 which costs are associated with heritage

 assets and which are general PP&E, the entity

 may estimate the cost of heritage assets by

 classes of PP&E (e.g., entire facilities

 rather than a building by building estimate).

65 For published financial statements

 presenting prior year information, no prior

 year amounts shall be restated.

 STEWARDSHIP LAND

66 Land is defined as the solid part of the

 surface of the earth.

67 Excluded from the definition of land are
 materials beneath the surface (i.e.,

 depletable resources such as mineral deposits

 and petroleum), the space above the surface

 (i.e., renewable resources such as timber),

 and the outer-continental shelf resources.

 The materials excluded from the definition of

 land will be addressed in a separate

 accounting and reporting standard related to

 them.

68 Land and land rights owned by the Federal

 Government and not acquired for or in

 connection with other general PP&E [SEE NOTE

 55] will be referred to as stewardship

 land and will not be reported on the balance

 sheet. Examples of land not associated with

 other items of general PP&E include land used

 as forests and parks and land used for

 wildlife and grazing. General PP&E may be

 built on existing Federal lands. In this

 case, the cost of the land would often not be

 identifiable. In these instances, general

 PP&E shall include only land or land rights

 with an identifiable cost that was

 specifically acquired for or in connection

 with construction of general PP&E.

 Recognition and Measurement

69 The acquisition cost of stewardship land

 shall be recognized as a cost in the period

 incurred. The cost shall be disclosed [SEE

 NOTE 56] as "cost of stewardship land."

 The cost shall include all costs incurred to

 bring the PP&E to its current condition and

 location (See paragraph 26 for examples of

 the costs to be considered).

70 In some cases, land may be acquired along

 with existing structures. The following

 treatments may apply:

 - if the structure is significant in and of

 itself, the entity shall use its judgment

 as to whether the acquisition cost shall
 be treated as the cost of stewardship

 land, heritage asset, or both;

 - if the structure is to be used in

 operations (e.g., as general PP&E) but (1)

 the value of the structure is

 insignificant as compared to the value of

 the land, (2) it has little or no inherent

 value, and/or (3) it is merely a byproduct

 of the acquisition of the land, the cost

 shall be treated as an acquisition of

 stewardship land in its entirety; or

 - only significant structures which have a

 significant operating use (e.g., a

 recently constructed hotel or employee

 housing block) shall be treated as general

 PP&E by identifying the cost attributable

 general PP&E and segregating it from the

 cost of the stewardship land acquired.

71 However, no amounts for stewardship land

 acquired through donation or devise [SEE NOTE

 57] shall be recognized as a cost on the

 statement of net cost. Its fair value, if

 known and material, shall be disclosed in

 notes to the statement of net cost. If fair

 value is not estimable, information related

 to the type and quantity of assets received

 shall be disclosed in the year received.

72 Land may be transferred between Federal

 entities. In some cases, land included in

 general PP&E may be transferred to an entity

 for use as stewardship land. In this

 instance, the cost of stewardship land

 transferred from another Federal entity shall

 be the book value of the land recorded on the

 transferring entity's books. If the receiving

 entity does not know the book value, the

 transfer shall be disclosed in notes if

 material. In other cases, stewardship land

 may be transferred between Federal entities.

 Transfers of stewardship land shall be

 disclosed in the notes if material.

73 Any costs to prepare stewardship land for

 its intended use (e. g., razing a building)
 shall be expensed as a part of the cost of

 stewardship land.

74 Additional reporting requirements will be

 developed for stewardship report items in a

 separate standard.

 Implementation Guidance

75 Land previously recognized as assets for

 balance sheet reporting shall be removed. The

 amounts removed shall be charged to Net

 Position of the entity. The amount of the

 adjustment shall be shown as a "prior period

 adjustment" in the statement of changes in

 net position. The amounts removed from the

 balance sheet shall be disclosed in a

 footnote.

76 For published financial statements

 presenting prior year information, no prior

 year amounts shall be restated.

The provisions of this

statement need not be

applied to immaterial

items.*************************************************

*

CHAPTER 3 -- ACCOUNTING STANDARDS:

DEFERRED MAINTENANCE

DEFINITION

77 "Deferred maintenance" is maintenance that

 was not performed when it should have been or

 was scheduled to be and which, therefore, is

 put off or delayed for a future period.

78 For purposes of this standard, maintenance

 is described as the act of keeping fixed

 assets in acceptable condition. It includes

 preventive maintenance, normal repairs,

 replacement of parts and structural

 components, and other activities needed to

 preserve the asset so that it continues to

 provide acceptable services and achieves its
 expected life. [SEE NOTE 58] Maintenance

 excludes activities aimed at expanding the

 capacity of an asset or otherwise upgrading

 it to serve needs different from, or

 significantly greater than, those originally

 intended.

RECOGNITION

79 A line item for "deferred maintenance

 amounts" [SEE NOTE 59] shall be presented

 on the statement of net cost with a note

 reference in lieu of a dollar amount. [SEE

 NOTE 60] No amounts shall be recognized

 for deferred maintenance.

DISCLOSURE REQUIREMENTS

 MEASUREMENT

80 Amounts disclosed for deferred maintenance

 may be measured using:

 - condition assessment surveys, or

 - life-cycle cost forecasts. [SEE NOTE

 61]

81 Condition assessment surveys are periodic

 inspections of PP&E to determine their

 current condition and estimated cost to

 correct any deficiencies. It is desirable

 that condition assessment surveys be based on

 generally accepted methods and standards

 consistently applied. [SEE NOTE 62]

82 Life-cycle costing is an acquisition or

 procurement technique which considers

 operating, maintenance, and other costs in

 addition to the acquisition cost of assets.

 Since it results in a forecast of maintenance

 expense, these forecasts may serve as a basis

 against which to compare actual maintenance

 expense and estimate deferred maintenance.
 DISCLOSURES

83 At a minimum, the following information

 shall be presented for all PP&E (each of the

 four categories established in the PP&E

 standard should be included).

 - Identification of each major class [SEE

 NOTE 63] of asset for which

 maintenance has been deferred.

 - Method of measuring deferred maintenance

 for each major class of PP&E.

 - If the condition assessment survey method

 of measuring deferred maintenance is used,

 the following should be presented for each

 major class of PP&E:

 * description of requirements or

 standards for acceptable operating

 condition,

 * any changes in the condition

 requirements or standards, and

 * asset condition [SEE NOTE 64] and

 a range estimate of the dollar amount

 of maintenance needed to return it to

 its acceptable operating condition.

 - If the total life-cycle cost method is

 used the following should be presented for

 each major class of PP&E:

 * the original date of the maintenance

 forecast and an explanation for any

 changes to the forecast,

 * prior year balance of the cumulative

 deferred maintenance amount,

 * the dollar amount of maintenance that

 was defined by the professionals who

 designed, built or manage the PP&E as

 required maintenance for the reporting

 period,

 * the dollar amount of maintenance

 actually performed during the period,

 * the difference between the forecast

 and actual maintenance,

 * any adjustments to the scheduled
 amounts deemed necessary by the

 managers of the PP&E, [SEE NOTE

 65] and

 * the ending cumulative balance for the

 reporting period for each major class

 of asset experiencing deferred

 maintenance.

 OPTIONAL DISCLOSURES

84 Stratification between critical and

 noncritical amounts of maintenance needed to

 return each major class of asset to its

 acceptable operating condition. If management

 elects to disclose critical and noncritical

 amounts, the disclosure shall include

 management's definition of these categories.

The provisions of this

statement need not be

applied to immaterial items.

*********************************************

CHAPTER 4 -- ACCOUNTING STANDARDS:

CLEANUP COSTS

DEFINITION

85 Cleanup costs are the costs of removing,

 containing, and/or disposing of (1) hazardous

 waste (See paragraph 86) from property, or

 (2) material and/or property that consists of

 hazardous waste at permanent or temporary

 closure or shutdown of associated PP&E.

86 Hazardous waste is a solid, liquid, or

 gaseous waste, or combination of these

 wastes, which because of its quantity,

 concentration, or physical, chemical, or

 infectious characteristics may cause or

 significantly contribute to an increase in

 mortality or an increase in serious

 irreversible, or incapacitating reversible,
 illness or pose a substantial present or

 potential hazard to human health or the

 environment when improperly treated, stored,

 transported, disposed of, or otherwise

 managed.

87 Cleanup may include, but is not limited to,

 decontamination, decommissioning, site

 restoration, site monitoring, closure, and

 postclosure costs.

SCOPE

88 This standard applies only to cleanup costs

 from Federal operations known to result in

 hazardous waste which the Federal Government

 is required by Federal, state and/or local

 statutes and/or regulations that have been

 approved as of the balance sheet date,

 regardless of the effective date, to cleanup

 (i.e., remove, contain or dispose of). [SEE

 NOTE 66] These cleanup costs meet the

 definition of liability provided in Statement

 of Recommended Accounting Standards no. 5,

 Accounting for Liabilities of the Federal

 Government (SRAS no. 5).

89 However, due to the nature of the liability

 and the timing associated with cleanup costs,

 additional guidance is provided in this

 standard on the recognition of cleanup costs

 over the life of the related PP&E. Guidance

 is required since cleanup can not occur until

 the end of the useful life of the PP&E or at

 regular intervals during that life.

90 This standard is intended to supplement the

 accounting requirements for liabilities in

 SRAS no. 5. SRAS no. 5 defines liabilities as

 a "probable future outflow or other sacrifice

 of resources as a result of past transactions

 or events." Further, SRAS no. 5 requires

 recognition of liabilities that are probable

 and measurable. Measurable means that an item

 has a relevant attribute that can be
 quantified in monetary units with sufficient

 reliability to be reasonably estimable.

91 The recognition and measurement standards

 provided in this standard are subject to the

 criteria for recognition of liabilities

 included in SRAS no. 5. That is, liabilities

 shall be recognized when three conditions are

 met:

 - a past transaction or event has occurred,

 - a future outflow or other sacrifice of

 resources is probable, [SEE NOTE 67]

 and

 - the future outflow or sacrifice of

 resources is measurable. [SEE NOTE 68]

92 SRAS no. 5 also provides for disclosure of

 liabilities that do not meet all of the above

 criteria; these standards apply to cleanup

 costs as well.

93 Other cleanup costs, such as those

 resulting from accidents or where cleanup is

 an ongoing part of operations, are to be

 accounted for in accordance with liability

 standards and are not subject to the

 recognition guidance provided in this

 standard. This guidance does not apply to

 these other types of cleanup since the

 cleanup effort is not deferred until

 operation of associated PP&E ceases either

 permanently or temporarily. [SEE NOTE 69]

RECOGNITION AND MEASUREMENT

 ESTIMATION METHODS

94 Cleanup costs, as defined above, shall be

 estimated when the associated PP&E is placed

 in service . The estimate shall be referred

 to as the "estimated total cleanup cost."

 There are two approaches to recognizing this

 total--one applies to general PP&E and

 another to stewardship PP&E.
95 The estimate shall contemplate:

 - the cleanup plan, including

 * level of restoration to be performed,

 * current legal or regulatory

 requirements, [SEE NOTE 70] and

 * current technology; and

 - current cost which is the amount that

 would be paid if all equipment,

 facilities, and services included in the

 estimate were acquired during the current

 period.

96 Estimates shall be revised periodically to

 account for material changes due to inflation

 or deflation and changes in regulations,

 plans and/or technology. New cost estimates

 should be provided if there is evidence that

 material changes have occurred; otherwise

 estimates may be revised through indexing.

 CLEANUP COST FOR GENERAL PP&E

97 A portion of estimated total cleanup costs

 shall be recognized as expense during each

 period that general PP&E is in operation.

 This shall be accomplished in a systematic

 and rational manner based on use of the

 physical capacity of the associated PP&E

 (e.g., expected usable landfill area)

 whenever possible. If physical capacity is

 not applicable or estimable, the estimated

 useful life of the associated PP&E may serve

 as the basis for systematic and rational

 recognition of expense and accumulation of

 the liability.

98 Recognition of the expense and accumulation

 of the liability shall begin on the date that

 the PP&E is placed into service, continue in

 each period that operation continues, and be

 completed when the PP&E ceases operation.

99 As reestimates (See paragraph 96) are made,
 the cumulative effect of changes in total

 estimated cleanup costs related to current

 and past operations shall be recognized as

 expense and the liability adjusted in the

 period of the change in estimate.

100 As cleanup costs are paid, payments shall

 be recognized as a reduction in the liability

 for cleanup costs. These include the cost of

 PP&E or other assets acquired for use in

 cleanup activities.

 CLEANUP COST FOR STEWARDSHIP PP&E

101 Consistent with the treatment of the

 acquisition cost of stewardship PP&E (i.e.,

 expensing in the period placed in service),

 the total estimated cleanup cost shall be

 recognized as expense in the period that the

 stewardship asset is placed in service and a

 liability established.

102 The liability shall be adjusted when the

 estimated total cleanup costs are reestimated

 as described in paragraph 96. Adjustments to

 the liability shall be recognized in expense

 as "changes in estimated cleanup costs from

 prior periods."

103 As cleanup costs are paid, payments shall

 be recognized as a reduction in the liability

 for cleanup costs. These include the cost of

 PP&E or other assets acquired for use in

 cleanup activities.

IMPLEMENTATION GUIDANCE

104 Two implementation approaches have been

 provided for liabilities related to general

 PP&E in service at the effective date of this

 standard:

 - A liability shall be recognized for the

 portion of the estimated total cleanup
 cost that is attributable to that portion

 of the physical capacity used or that

 portion of the estimated useful life that

 has passed since the PP&E was placed in

 service. The remaining cost shall be

 allocated as provided in paragraphs 97

 through 99.

 - If costs are not intended to be recovered

 primarily through user charges, management

 may elect to recognize the estimated total

 cleanup cost as a liability upon

 implementation. In addition, in periods

 following the implementation period, any

 changes in the estimated total cleanup

 cost shall be expensed when reestimates

 occur and the liability balance adjusted.

 The provisions for cost allocation

 provided in paragraphs 97 through 99 shall

 not apply under this implementation

 method.

105 The offsetting charge for any liability

 recognized upon implementation shall be made

 to Net Position of the entity. The amount of

 the adjustment shall be shown as a "prior

 period adjustment" in any statement of

 changes in net position that may be required.

 No amounts shall be recognized as expense in

 the period of implementation. The amounts

 involved shall be disclosed and to the extent

 possible the amount associated with current

 and prior periods should be noted.

106 For stewardship PP&E that are in service at

 the effective date of this standard, the

 liability for cleanup costs shall be

 recognized and an adjustment made to the Net

 Position of the entity.The amount of the

 adjustment shall be shown as a "prior period

 adjustment" in any statement of changes in

 net position that may be required. The

 amounts involved shall be disclosed.

DISCLOSURE REQUIREMENTS
107 The sources (applicable laws and

 regulations) of cleanup requirements.

108 The method for assigning estimated total

 cleanup costs to current operating periods

 (e.g., physical capacity versus passage of

 time).

109 For cleanup cost associated with general

 PP&E, the unrecognized portion of estimated

 total cleanup costs (e.g., the estimated

 total cleanup costs less the cumulative

 amounts charged to expense at the balance

 sheet date).

110 Material changes in total estimated cleanup

 costs due to changes in laws, technology, or

 plans shall be disclosed. In addition, the

 portion of the change in estimate that

 relates to prior period operations shall be

 disclosed.

111 The nature of estimates and the disclosure

 of information regarding possible changes due

 to inflation, deflation, technology, or

 applicable laws and regulations.

The provisions of this

statement need not be

applied to immaterial items.

***********************************************

APPENDIX A -- BASIS FOR THE BOARD'S CONCLUSIONS

112 This appendix summarizes significant

 considerations by the Board in reaching the

 conclusions in this statement. In the

 following paragraphs, the Board's

 considerations in developing these standards

 as well as positions on specific issues

 raised in alternative views, comment letters,

 and during public hearings are explained. The

 Board relied extensively on input from a task
 force on Capital Expenditures as well as a

 small working subgroup on Physical Property.

 These paragraphs include reasons for

 accepting certain approaches and rejecting

 others. Individual members gave greater

 weight to some factors than to others.

113 This appendix addresses each of the three

 standards in sequence.

PROPERTY, PLANT, AND EQUIPMENT

BACKGROUND

114 Before addressing specific issues resolved

 following issuance of the exposure draft,

 this section provides a broad basis for the

 main provisions of the standard on

 investments in PP&E. The Federal Government

 makes many expenditures that can be

 characterized as investments or investment-

 type expenditures. These include expenditures

 for Federally owned PP&E.

115 Accounting for expenditures for PP&E as

 well as for the existing stock of PP&E is a

 significant undertaking because the Federal

 Government owns substantial amounts of

 diverse PP&E. Federal PP&E includes

 approximately 650 million acres of land,

 buildings containing over 1.5 billion square

 feet of floor space, many different forms of

 equipment, and military hardware.

116 These are used for a wide range of

 purposes; including, among others, operating,

 defense, conservation, and heritage purposes.

 Some of these purposes relate to the Federal

 Government's responsibility to provide for

 the Nation's common defense and general

 welfare. Specific types of PP&E are used by

 the Federal Government to meet this

 responsibility. Other types of PP&E are held

 and used for operating purposes that are not
 unlike those of non-federal entities.

117 Some Federal operations are similar to

 profit-seeking enterprises and can be

 described as business-type activities.

 However, these business-type activities

 account for a small portion of the investment

 in PP&E. The majority of the investment in

 PP&E is used to provide government services

 and goods where user charges are not the

 primary source of revenues.

118 The Board found that a single accounting

 method for such diverse Federal PP&E would

 not meet the objectives established in its

 Objectives of Federal Financial

 Reporting.Therefore, the Board identified

 categories of PP&E and set different

 accounting methods for each category.

 Categories Required

119 The PP&E standards incorporate the

 following categories:

 - general PP&E are PP&E used to provide

 general government services;

 - Federal mission PP&E are PP&E that are an

 integral part of the output of certain

 unique Federal Government missions;

 - heritage assets are those assets

 possessing significant educational,

 cultural, or natural characteristics; and

 - stewardship land [SEE NOTE 71] is land

 other than that included in general PP&E.

120 The latter three categories of assets are

 referred to as stewardship PP&E. The term

 "stewardship PP&E" is used simply to refer to

 those categories of PP&E to be reported on a

 stewardship report.

 General PP&E

121 General PP&E are items used to provide
 general government services; including PP&E

 that:

 - could be used for alternative purposes

 (e.g., by other Federal programs, state or

 local governments, or non-governmental

 entities) but is used to produce goods or

 services, or to support the mission of the

 entity, or

 - is used in business-type activities, or

 - is used by entities whose costs can be

 compared to other entities (e.g., Federal

 hospital services in comparison to other

 hospitals).

122 Allocation of the cost of general PP&E,

 excluding land, among accounting periods is

 essential to assessing operating performance.

 The Board's concepts statement, Objectives of

 Federal Financial Reporting, focuses on

 relating cost to accomplishments in reporting

 an entity's operating performance. Cost

 information is of fundamental importance both

 to program managers in operating their

 activities efficiently and effectively and to

 executive and congressional decision makers

 in deciding on resource allocation. General

 PP&E will be capitalized and depreciated to

 provide this information.

 Stewardship PP&E

123 For stewardship PP&E, [SEE NOTE 72] the

 predominant reporting objective is

 stewardship. This is in contrast to general

 PP&E, for which the Board is concerned with

 providing information to assess operating

 performance and, therefore, provided for

 depreciation accounting. The most relevant

 information is about the existence of

 stewardship PP&E and that information can be

 provided through a new type of reporting--

 supplementary stewardship reporting.

124 For stewardship PP&E, the Board believes

 that allocation of historical cost to
 operating expense for each period would not

 contribute to the measurement of entity

 operating performance. Prior to issuing its

 Objectives statement, the Board conducted a

 user needs study and met with representatives

 of a wide variety of user groups. Most users

 specifically indicated that depreciating

 stewardship PP&E such as weapons systems

 would not provide meaningful information for

 assessing the entity's operating performance.

 The Board believes that its standards should

 address the needs of users and the Board has

 found that users do not need information

 which includes depreciation expense on this

 category of PP&E.

125 The Board noted in its Objectives statement

 that the government's responsibility for the

 nation's common defense and general welfare

 is unique and that, in some cases, the most

 relevant measures of performance are

 nonfinancial. [SEE NOTE 73] Despite the

 preference for nonfinancial performance

 measures for stewardship PP&E, the government

 must demonstrate that it is being an

 appropriate "steward" for these assets. To

 meet the stewardship objective, the

 government must be able to answer basic

 questions such as:

 - What and where are the important assets?

 - Is the government effectively managing and

 safeguarding its assets?

126 Answers to these questions can be provided

 through supplementary stewardship reporting.

 The stewardship information provided would

 not necessarily have the same measurement

 basis as information shown on the balance

 sheet. Information could include value,

 quantity, and capacity depending on the

 category being reported on. These types of

 information are not typically found in

 balance sheet reporting. (Also, see

 discussion of deferred maintenance starting

 at paragraph 171, 181 regarding other
 information that users consider relevant.)

127 The Board is addressing supplementary

 stewardship reporting in another standard.

 The information to be provided for

 stewardship PP&E is proposed in detail in

 that standard. Each of the stewardship PP&E

 categories are discussed further in the

 following paragraphs.

 Federal Mission PP&E

128 Federal mission PP&E are specific PP&E

 acquired to provide a unique good or service

 for which there is not necessarily a periodic

 output against which to match costs. For

 example, the existence of and readiness of

 weapons systems supports national defense

 regardless of their actual combat use on a

 period by period basis. Also, space

 exploration equipment is used in long-term

 research efforts which may or may not produce

 an output each period but which nevertheless

 benefits the nation in the long run.

129 The standard specifically identifies

 weapons systems and space exploration

 equipment as Federal mission PP&E as well as

 providing a list of characteristics of

 Federal mission PP&E. The Board articulated

 characteristics of Federal mission PP&E

 because it recognizes that there are other

 types of PP&E, or PP&E may be developed in

 the future, that are similar to these two

 items. To be categorized as Federal mission

 PP&E an item shall meet at least one

 characteristic from each of the following two

 types of characteristics.

130 Characteristics related to the use of

 Federal mission PP&E are that it:

 - has no expected nongovernmental

 alternative uses; or

 - is held for use in the event of emergency,

 war or natural disaster; or
 - is specifically designed for use in a

 program for which there is no other

 program or entity (Federal or non-Federal)

 using similar PP&E with which to compare

 costs.

131 Characteristics related to the useful life

 are that it:

 - has an indeterminate or unpredictable

 useful life [SEE NOTE 74] due to the

 manner in which it is used, improved,

 retired, modified, or maintained; or

 - is at a very high risk of being destroyed

 during use or of premature obsolescence.

132 The cost of Federal mission PP&E acquired

 during the period be shown on the operating

 statement.

 Heritage assets

133 Heritage assets are held for their

 cultural, architectural, or aesthetic

 characteristics. Users have identified

 nonfinancial information as being relevant

 for these assets. For assessing operating

 performance, the Board believes that relevant

 cost information is provided through

 reporting of periodic maintenance cost since

 heritage assets are intended to be preserved

 as national treasures. It is anticipated that

 they will be maintained in reasonable repair

 and that there will be no diminution in their

 usefulness over time.

134 In addition to assets held purely for

 heritage purposes (e.g., the Washington

 Monument), the Federal Government uses

 heritage assets in its day-to-day operations.

 For example, many Federal office buildings,

 such as the Old Executive Office Building,

 have monumental characteristics. The Board

 considered whether these multi-use heritage

 assets would be more appropriately

 categorized as general PP&E.
135 Despite their heritage characteristics,

 these assets serve a function that could

 otherwise be served by assets that do not

 possess heritage characteristics. Therefore,

 the standards provide that costs of

 reconstruction, renovation, or improvements

 that are directly associated with supporting

 operations be treated in a manner consistent

 with general PP&E. The Board based this

 decision on the need to measure cost for

 operations and to compare cost between

 entities.

 Stewardship Land

136 The Federal Government owns vast amounts of

 land and its use of land is diverse. In some

 instances Federal land is integral to the

 ownership of general PP&E. For example, the

 cost of land upon which an office building is

 sited is integral to the cost of that

 building. Land acquired for or in connection

 with general PP&E will be recognized on the

 balance sheet to provide a more comprehensive

 measure of the assets devoted to general

 government operations. However, since land is

 not a depreciating asset, depreciation

 expense will not be recognized on land

 included in general PP&E.

137 Most Federal land is not directly related

 to general PP&E. For example, the national

 parks and forests are not used to support

 general PP&E. The Board concluded that land

 other than that acquired for or in connection

 with other general PP&E should not be

 reported on the balance sheet. This is

 consistent with the Board's treatment of

 heritage assets in that much of the

 government's land is held for the general

 welfare of the nation and is intended to be

 preserved and protected.

 ISSUES
138 Following issuance of the ED, the Board

 specifically considered several issues

 related to the PP&E standard. These issues

 are addressed in the sequence that they

 appear in the standard.

 Definitions

139 The Board asked respondents to comment on

 the appropriateness of the definitions of

 PP&E, general PP&E, Federal mission PP&E,

 heritage assets, and stewardship land.

 Respondents raised issues on the overall

 definition of PP&E including (1) internally-

 developed software, (2) land rights, (3)

 capitalization threshold, and (4)

 reversionary interests in property. These

 four issues are discussed below. An issue

 raised regarding the Federal mission PP&E

 definition is also addressed below.

 Internally-developed Software

140 The ED proposed that internally-developed

 software be excluded from PP&E -- in effect,

 that it be expensed when incurred. In making

 this proposal, the Board pointed to concerns

 affecting the objectivity/accuracy of any

 capitalized cost for internally-developed

 software in general PP&E. [SEE NOTE 75]

 The Board was concerned that costs could be

 overcapitalized thus understating expense for

 the period and that it would be difficult to

 provide for the removal or write-off of costs

 related to unsuccessful projects and/or cost

 overruns. Given these practical concerns and

 the expectation that costs for software

 development efforts would not fluctuate

 dramatically since they related to continuous

 agency efforts, the Board proposed that these

 costs be expensed. [SEE NOTE 76]

141 Many respondents supported the Board's

 view. They noted that, among other problems,
 it would be difficult to distinguish new

 development efforts from ongoing system

 maintenance. In fact, some respondents

 commented that software undergoes continuous

 improvement and updating.

142 On the other hand, the majority of

 respondents objected to the exclusion of

 these costs from PP&E. Many argued that

 internally-developed software met the overall

 definition of PP&E and that accounting could

 accommodate the problems of cost overruns and

 unsuccessful efforts. Many suggested that

 costs be held in a work-in-process account

 and any unsuccessful efforts subsequently

 written off in the period deemed

 unsuccessful. In addition, many believed that

 cost overruns were appropriate to include in

 the cost of the asset.

143 Ultimately, the Board made two changes to

 the PP&E definitions -- they removed the

 statement excluding internally-developed

 software from PP&E and they added a provision

 for recognition of internally-developed

 software as a component of general PP&E under

 certain circumstances. Since the Board's

 concern was with the potential for

 overcapitalization of these costs, they found

 that it was not necessary to exclude the

 costs from the PP&E categories for which

 costs would not be capitalized. Therefore,

 any internally-developed software costs

 appropriately classified as an item of

 stewardship PP&E may be included in those

 categories.

144 For internally-developed software costs

 that would be categorized as general PP&E,

 the Board placed several restrictions on the

 capitalization of costs. To be capitalized,

 it must be intended that the costs be

 recovered through charges to users. In

 addition, only certain costs may be

 capitalized after it has been established

 that the software project is likely to be
 successful. Once capitalized, the costs can

 not be amortized over a period longer than

 five years.

145 In addition to internally-developed

 software, the Board discussed accounting for

 contractor-developed software. In principle,

 the Board's consensus was that the same

 accounting should be provided for contractor-

 developed software as for internally-

 developed software. However, the Board

 believed that this proposal should be exposed

 for comment prior to establishing a standard

 to that effect. Therefore, the standards do

 not provide specific provisions restricting

 the capitalization of contractor-developed

 software.

 Land Rights

146 The Board received a request to address

 restrictive easements acquired by a Federal

 agency. This agency acquires restrictive

 easements limiting the use of land adjoining

 the agency's own property. The Board

 considers these easements a "land right."

 Land rights are interests and privileges held

 by an entity in land owned by others.

147 The Board provided for the recognition of

 land rights as part of PP&E since they are

 generally associated with other items of PP&E

 actually owned by the entity. In addition,

 where land rights are for a limited period of

 time and are includable in the general PP&E

 category, the Board provided for depreciation

 of the cost.

 Capitalization Threshold

148 Many respondents requested that the Board

 provide a capitalization threshold as an

 element of the PP&E definition. The Board

 addressed this issue in developing the ED. At

 that time, the Board carefully considered

 whether to take a prescriptive approach by
 setting a threshold or to permit entities the

 latitude to establish a threshold suited to

 their particular operating environment. The

 Board believes that Federal entities are

 sufficiently diverse that one threshold would

 not be suitable for all entities. For

 example, Title 2's $5,000 threshold would be

 immaterial for defense department operations

 but perhaps not for a smaller entity such as

 the Small Business Administration.

149 Instead of setting a specific threshold, the

 Board has adopted a materiality approach--

 just as is done in private sector accounting.

 Each entity would establish its own threshold

 as well as guidance on applying the threshold

 to bulk purchases. The Board believes that

 permitting management discretion in

 establishing capitalization policies will

 lead to a more cost-effective application of

 the accounting standards.

 Reversionary Interests in PP&E

150 The Board also received a request to

 address reversionary interests in PP&E. In

 some instances, the Federal Government

 provides grants to state and local

 governments for the acquisition of PP&E. If

 the state or local government eventually

 decides that it no longer needs to use the

 PP&E for the purpose specified in the

 original grant there is often a provision

 that the PP&E must revert to Federal

 ownership. In these cases, the Federal

 Government maintains a reversionary interest

 in PP&E. In essence, these are contingent

 assets and should not be recognized on the

 balance sheet. The Board elected to

 specifically exclude these items from PP&E.

 Federal Mission PP&E

151 Some respondents indicated that the term

 "Federal mission PP&E" had broader
 implications than intended by its definition.

 It was suggested that some may assume any

 PP&E used to meet an agency's mission would

 fit this category (e.g., essentially all

 Federally owned PP&E).

152 The Board agreed that it was possible that a

 mere reading of the term "Federal mission

 PP&E" could lead to broader application of

 the category than permitted under the

 standard. However, the Board found that there

 was no brief term that would effectively

 communicate the nature of the PP&E properly

 includable in this category. The Board

 believes that the characteristics provided as

 well as the illustrations included in

 Appendix B of this document will clearly

 establish the appropriate use of this

 category. In addition, the Board has

 incorporated in the standard a cautionary

 footnote regarding loose interpretations

 drawn from the term "Federal mission PP&E."

 Depreciation

153 The exposure draft posed several questions

 related to depreciation accounting for

 general PP&E. Briefly, the questions

 addressed:

 usefulness of depreciation expense for the

 assessment of operating performance,

 an alternative view suggesting that

 depreciation accounting be limited to

 business-type activities,

 usefulness of the allocation of

 depreciation expense to responsibility

 segments, and

 cost/benefit of allocating depreciation

 expense to programs

154 Overall, the respondents supported the

 Board's proposal to require depreciation

 accounting on all general PP&E. Many

 indicated that depreciation accounting would
 improve performance measurement by producing

 comprehensive, comparable cost information.

 In addition, operating expenses would not be

 overstated in periods that assets were

 purchased and understated in other periods.

155 A few respondents supported the alternative

 view that would limit depreciation accounting

 to business-type activities. They argued that

 depreciation was only necessary where

 expenses were to be matched to revenues. This

 view is contrary to the operating performance

 objective and would not support development

 of cost information to associate with

 performance measures.

156 The Board did not make any changes to its

 requirements to apply depreciation accounting

 to general PP&E.

 Multi-use Heritage Assets

157 The ED addressed renovation,

 reconstruction, improvement, and rebuilding

 costs for multi-use heritage assets (e.g.,

 monumental style office buildings). Under the

 ED's proposal, any costs not directly

 associated with the heritage nature of the

 asset would be capitalized and depreciated as

 general PP&E. The ED also provided that

 abnormally high costs due to the heritage

 features of the assets (e.g., replacement of

 a specialized roofing material versus a

 modern day equivalent) be treated as heritage

 asset costs.

158 Respondents indicated that it would be very

 difficult to apply the proposed standards.

 Difficulties would include segregating the

 cost associated with preserving the heritage

 assets and supporting operations as well as

 identifying abnormal costs. In response to

 these concerns, the Board modified the

 treatment of multi-use heritage assets. The

 standard now provides that only renovation,
 reconstruction, and improvement costs

 directly attributable to operations be

 capitalized as general PP&E.

 Current Value

159 The ED included an alternative view

 espousing the use of current value accounting

 for Federal Government PP&E. This view was

 not supported by the respondents. The

 majority of respondents believed that current

 values would be difficult and costly to

 obtain, and subject to manipulation. Many

 indicated that current values were often

 useful to decision makers and should be

 provided on an as needed basis rather than

 incorporated in the basic financial

 statements.

 Federal Mission PP&E

160 Overall, the reaction to the Federal

 mission PP&E category was favorable.

 Respondents indicated that they would not

 have difficulty applying the category

 descriptions. However, the Board received the

 following specific requests for major

 revisions in the Federal mission PP&E

 category:

 to retain the definition but include

 Federal mission PP&E on the balance sheet

 and apply depreciation accounting to these

 assets, and

 to make use of the category optional

 (e.g., managers would be free to use the

 general PP&E category for PP&E that would

 otherwise qualify as Federal mission

 PP&E).

 Depreciate Federal Mission PP&E

161 The Board did not adopt the first proposal-

 -to apply depreciation accounting to Federal

 mission PP&E. While there may be management
 uses of this information, no persuasive

 examples of management uses have been

 identified. The Board remains convinced that

 depreciation accounting for these unusual

 items of PP&E would not provide meaningful

 information--a view that is supported by the

 Board's 1992 user needs study. Further, the

 Board wishes to note that nothing precludes

 management from developing depreciation

 information through cost finding means if it

 desires to do so for particular management

 purposes.

 Make the Federal Mission

 PP&E Category Permissive

162 It was proposed that classification of PP&E

 as Federal mission be permissive rather than

 mandatory. Two reasons were given for this

 proposal:

 - some PP&E is used as both Federal mission

 and general PP&E (for example, office

 facilities located at nuclear weapons

 production plants), and

 - entity management should be free to decide

 that depreciation information on Federal

 mission PP&E is useful.

163 It was suggested that adopting this

 proposal would allow agencies to classify

 property as best suits their needs. The Board

 discussed this proposal at length. Some Board

 members were favorably inclined to permit

 entity managers to exercise judgment

 regarding the accounting treatment of Federal

 mission PP&E. However, the majority of the

 Board members believed that making the

 category optional would be inappropriate.

164 These members argued that (1) the user

 needs study supported their belief that

 historical cost depreciation on these types

 of items was not useful, (2) it would not be

 appropriate to give entities the latitude to

 use different accounting methods for similar
 assets, and (3) it would not be cost-

 beneficial to permit entities to make item by

 item judgments on appropriate accounting

 treatment. The members noted that, in

 connection with the proposal to require

 depreciation accounting for Federal mission

 PP&E (See paragraph 161), they had not been

 able to identify any management uses of

 depreciation information on Federal mission

 PP&E. The Board was concerned that entities

 may make unsupported, and costly, decisions

 regarding the election to categorize items as

 general or Federal mission PP&E. While

 entities can use cost finding to determine

 depreciation expense for internal purposes if

 they so desire, the Board does not believe

 that depreciation of Federal mission PP&E

 would be useful for general purpose financial

 reports.

165 The Board decided that use of the Federal

 mission PP&E category would remain mandatory

 for PP&E exhibiting the designated

 characteristics. The Board did add guidance

 in the standard regarding the selection of

 the base unit to be used in categorizing PP&E

 (See paragraph 22). One respondent had

 proposed that this guidance be added and

 stated that it would aid entities in

 establishing the level of detail necessary to

 properly categorize PP&E. For example, should

 PP&E be categorized on a site by site basis

 or by a smaller unit such as building by

 building. As with the capitalization

 threshold, the Board has indicated the

 factors that should enter into the selection

 of a base unit but has ultimately left the

 actual selection up to management.

 Other PP&E Meeting

 the Characteristics

166 The Board posed a question in the ED

 regarding the classification of nuclear

 weapons production facilities and military

 base facilities as Federal mission PP&E. [SEE
 NOTE 77] This question was posed because

 of a discussion among the Board members as to

 whether these items would or would not meet

 the Federal mission PP&E definition.

167 The majority of the respondents indicated

 that nuclear weapons production facilities

 meet the current characteristics of Federal

 mission PP&E--confirming the initial reaction

 of the Board members. One respondent did

 indicate that these facilities could be

 converted to other uses--as had munitions

 plants following World War II--however, the

 Board believes that the cost of such a

 conversion would be so great as to make it

 improbable in the near term. The Board has

 not elected to add this as another

 specifically identified item that qualifies

 as Federal mission PP&E because it is a good

 illustration of the purpose and application

 of the characteristics developed. In

 addition, the Board prefers not to engage in

 an exercise of listing all items that qualify

 since the absence of certain items may lead

 practitioners to assume that an item was

 specifically excluded.

168 The majority of respondents indicated that

 military base facilities would not as a group

 meet the definition of Federal mission PP&E

 and that the category should not be expanded

 to accommodate these assets. Many respondents

 pointed out that military base facilities

 have alternative uses and are currently being

 reviewed for just that purpose. The Board

 agrees with these views and has not modified

 the definition to permit inclusion of

 military base facilities in the category.

 Audit of Federal Mission PP&E

169 Several respondents expressed concern

 regarding the level of audit coverage

 applicable to Federal mission PP&E. Although

 the ED did not specifically address
 supplementary stewardship reporting for those

 categories of PP&E removed from the balance

 sheet, there was concern that removing these

 categories would lessen the audit coverage.

 Respondents noted that military weapons

 systems and space exploration equipment

 represented a substantial investment. They

 were concerned that the changes could lead to

 poor tracking systems for these items as well

 as weak internal controls over them. Other

 respondents pointed out that the key

 information is the existence and condition of

 these assets rather than the historical cost

 of the items. In addition, they suggested

 that devoting audit resources to verifying

 historical cost dollar amounts would detract

 from auditing more important existence and

 condition information.

170 The Board responded with the following

 points:

 - auditing standards are beyond the scope of

 the Board's responsibilities,

 - Board members representing the General

 Accounting Office (GAO) and the Office of

 Management and Budget (OMB) indicated that

 the audit coverage would be appropriately

 addressed in their work on Federal audit

 requirements,

 - accounting standards should be established

 based on information needs not audit

 concerns, and

 - the ED on supplementary stewardship

 reporting will include a statement to the

 effect that the Board expects that the

 responsible parties will produce audit

 requirements to satisfy concerns of the

 respondents.

DEFERRED MAINTENANCE

171 The deferred maintenance standard was well

 received by the majority of respondents. The

 Board addressed the issue in part due to the
 many state and local governments as well as

 national groups that concerned over the

 deteriorating condition of government owned

 PP&E. A report of the U.S. Advisory

 Commission on Intergovernmental Relations

 (ACIR), High Performance Public Works, [SEE

 NOTE 78] notes that maintenance competes

 for funding with other government programs

 and is often underfunded. Contributing to

 this underfunding is the fact that the

 consequences of underfunding maintenance are

 often not immediately reported. The

 consequences include increased safety

 hazards, poor service to the public, higher

 costs in the future, and inefficient

 operations.

172 The ACIR recommended that entities disclose

 information on:

 - the condition of assets,

 - the cost of unfunded maintenance,

 - the consequences of unfunded maintenance,

 and

 - the uncertainty in estimates of unfunded

 maintenance.

173 The Capital Expenditures task force also

 recognized that deferred maintenance was an

 issue for Federal PP&E and requested that the

 Board address it. The policies and

 initiatives related to deferred maintenance

 at three Federal agencies [SEE NOTE 79]

 were reviewed and it was found that Federal

 agencies are developing systems to report on

 deferred maintenance. Although the systems

 are different, the goals of the systems are

 consistent--to provide reliable information

 on the condition of PP&E and to estimate the

 cost of correcting deficiencies.

174 Under these accounting standards, deferred

 maintenance information will be incorporated

 in the financial reports despite the

 differences in measurement among the

 agencies. The Board believes that deferred
 maintenance is a cost--a cost that

 management, at whatever level, has elected

 not to fund. However, the Board found that

 deferred maintenance is not sufficiently

 measurable to be recognized in the accounting

 systems.

175 However, to highlight the reality that the

 cost remains despite being unfunded, the

 standards provide that deferred maintenance

 be disclosed by placing a line item on the

 statement of net cost with a note reference

 in lieu of a dollar amount on the financial

 statements. This recommendation is consistent

 with the findings of the Board's user needs

 study; that information on the cost of

 deferred maintenance is important to users.

 In addition, due to the measurement

 differences between entities, the disclosure

 requirements are flexible.

176 The standards provide two alternatives for

 estimating amounts to be disclosed--condition

 assessment surveys and life cycle cost

 analyses. Condition assessment surveys would

 provide disclosure of the estimated cost to

 return the PP&E to its desired condition.

 Life cycle cost analyses would highlight

 differences between planned maintenance and

 actual maintenance.

177 Both of these methods will be under the

 control of entity program managers since

 deferred maintenance is dependent on the

 purpose for which PP&E is held and on

 judgment regarding what condition PP&E should

 be in to meet that purpose. Entities are

 permitted flexibility in (1) setting

 standards for maintenance requirements and

 (2) establishing cost beneficial methods to

 estimate the cost of deferred maintenance.

178 The proposed standards require disclosure

 of information on the condition of PP&E,

 estimates of the cost of deferred

 maintenance, and methods used to assess
 deferred maintenance. The standards apply to

 both PP&E reported on the balance sheet and

 the stewardship report.

179 In response to the ED, two opposing

 suggestions were raised--(1) recognize the

 amounts as a liability, and (2) remove the

 information from the notes.

 RECOGNITION

180 A few respondents, including two appearing

 at the public hearing, suggested that the

 Board provide for recognition of the

 liability associated with deferred

 maintenance. The Board does not believe that

 deferred maintenance can or should be

 recognized as a liability because it is not

 sufficiently measurable to be recognized.

 Deferred maintenance reporting is in an

 evolutionary phase with Federal agencies

 currently developing a variety of systems to

 assess deferred maintenance. Measurement can

 not be described at this time as consistent

 or comparable. The deferred maintenance

 standard will remain as drafted. However, if

 and when government maintenance standards

 (e.g., minimum acceptable condition and

 standard repair costs) are set, the Board

 will revisit the accounting and consider

 requiring recognition of the liability and

 the cost.

 REMOVE FROM NOTES

181 A few respondents requested that the Board

 provide for deferred maintenance information

 through required supplemental information to

 lessen the audit burden associated with the

 information. The Board--as was the case with

 Federal mission PP&E--does not believe that

 audit coverage should govern the placement of

 information in the annual reports. Deferred

 maintenance information is considered

 important because it ensures that readers are
 informed of the condition of Federally owned

 PP&E. If there is a need to reduce the audit

 coverage, the Board believes that GAO and OMB

 can best address this need.

CLEANUP COST

182 The Board elected to address cleanup costs

 from long-term Federal operations as one of

 the costs associated with PP&E. For example,

 the Federal Government operates nuclear

 facilities and is required by law to cleanup

 any hazardous materials upon closing the

 facilities. This obligation meets the Board's

 definition of liability. [SEE NOTE 80]

 However, because the cleanup of these types

 of facilities would not occur until

 operations cease, additional guidance is

 needed to determine when and how to recognize

 these costs and liabilities.

183 The guidance in this standard builds on the

 accounting standards developed for

 liabilities. These standards were published

 in the Board's statement entitled Accounting

 for Liabilities of the Federal Government

 (liabilities standard). The liabilities

 standard includes:

 - the liability definition,

 - recognition criteria, and

 - disclosure requirements.

184 The liabilities standard is applicable to

 cleanup costs. For example, if cleanup costs

 are not both probable and measurable the

 disclosure requirements in the liabilities

 standard would apply. The standards in this

 statement address cleanup cost accounting

 including:

 - allocating cleanup costs to operating

 periods,

 - estimating cleanup costs to be paid far in

 the future (e.g., using a current cost
 approach), and

 - recognizing changes in estimates prior to

 actual cleanup.

185 Because of the differences in accounting

 for the costs of general PP&E and stewardship

 PP&E, the Board developed different methods

 for allocating cleanup costs to operating

 periods depending on the category of the

 related PP&E.

 CLEANUP OF GENERAL PP&E

186 The Board concluded that the liability for

 cleanup costs related to the operation of

 general PP&E would be recognized in a

 systematic and rational manner over the

 periods that the associated general PP&E is

 in use. This approach is consistent with the

 requirement to depreciate general PP&E. In

 addition, the Board requires disclosure of

 the estimate of total cleanup costs.

 CLEANUP OF STEWARDSHIP PP&E

187 For cleanup costs related to stewardship

 PP&E, the Board concluded that the total

 estimated liability for cleanup cost would be

 recognized at the time that the stewardship

 PP&E is placed in service. This is consistent

 with the treatment of the acquisition cost of

 the stewardship PP&E which is recognized as a

 cost of operations in the period that the

 PP&E is placed in service.

 ESTIMATING CLEANUP COSTS

188 With regard to estimating cleanup cost, the

 Board concluded that the estimate would be

 based on the current cost to perform the

 cleanup. Current cost should be based on

 existing laws, technology and management

 plans. An alternative to current cost would
 have been to estimate costs in the future,

 factoring in expected inflation, and

 discounting this amount to current dollars.

 The Board did not believe that this approach

 offered any greater degree of accuracy in

 return for the additional effort involved in

 making the estimate.

189 As with all estimates, the estimates of

 cleanup costs will change over time. These

 changes will be due to inflation as well as

 to changes in laws and technology.

190 For cleanup costs associated with general

 PP&E, changes in estimates related to current

 and prior period operations be recognized as

 an expense in the period of the change. For

 example, if a facility with a capacity to

 produce 100 tons of material has produced 60

 tons of material, then 60% of the change in

 estimate should be recognized as expense in

 the year that the estimate changes.

191 For cleanup costs associated with

 stewardship PP&E, the total change in

 estimate be recognized in the period of the

 change.

CLEANUP COST ISSUES

192 Respondents to the ED were supportive of

 the Board's efforts to address cleanup costs.

 However, several suggested that the Board's

 treatment of the liability associated with

 general PP&E--recognizing it incrementally

 over the life of the PP&E--was inconsistent

 with its definition of a liability. In some

 cases, respondents argued, the cleanup

 liability is incurred at the time the PP&E is

 placed in service. These respondents

 suggested that the Board provide for full

 recognition of the liability if an amount is

 reasonably measurable at that time.

193 The Board did not adopt this suggestion.
 While the Board recognizes that in fact the

 liability may be incurred at the date that

 general PP&E is put in service, the actual

 recognition of the liability is problematic

 in a double entry accounting system.

 Generally, the recognition of a liability, a

 credit account, generates a concurrent

 recognition of either an expense (e.g.,

 accounts payable for fuel bills is offset by

 fuel expense) or an asset (e.g., a capital

 lease liability is offset by an asset--PP&E),

 both typically debit accounts. In this case,

 the cleanup cost is not appropriately

 includable in operating expense of the period

 that the PP&E is placed in service. This

 would create a need for a balance sheet debit

 to offset the liability.

194 The Board does not believe that it would be

 appropriate to recognize an asset to offset

 the cleanup liability. Although some argue

 cleanup cost is a deferred cost of associated

 PP&E, the Board does not believe that these

 costs meet the asset definition and finds

 that recognition of cleanup cost as a

 component of PP&E would significantly

 overstate assets.

195 Other respondents expressed the opposite

 position, suggesting that it is not

 appropriate to recognize cleanup costs until

 they are budgeted for. This approach is not

 only inconsistent with the definition of a

 liability but would keep users of the

 financial statements in the dark as to the

 magnitude of Federal commitments for

 environmental cleanup.

196 The Board believes that the standards it

 has developed will contribute to meeting the

 operating performance and stewardship

 reporting objectives of Federal financial

 reporting. The cleanup cost standards have

 not been modified for either of these

 recommendations.
197 One modification that was made relates to

 implementation of the standard.

 Implementation is a significant issue given

 the magnitude of the Government's existing

 facilities and its obligations for cleanup of

 those facilities. One Board member requested

 that the implementation guidance related to

 cleanup of general PP&E provide an

 alternative method. It was suggested that

 provision of a second method would lower the

 cost of implementing the standard in

 situations where the related PP&E had been in

 service for a substantial portion of its

 estimated useful life.

198 The second method would be to recognize the

 entire estimated total cleanup cost as a

 liability upon implementation. In periods

 following implementation, entities electing

 this method would recognize any changes in

 the estimated total cleanup cost as expense

 for that period in lieu of the pro-rata

 amount of the estimated total cleanup cost.

 This method could be applied only by entities

 not seeking to recover their costs through

 user charges.

199 The Board adopted this recommendation in

 light of the large number of Federal

 facilities that will be affected by this

 standard and the cost of implementing the

 standard.

*********************************************

APPENDIX B -- ILLUSTRATIONS OF CATEGORIES

200 In developing categories for Federal

 mission PP&E, Heritage Assets and Stewardship

 Land (See paragraphs 46, 57 and 66), the

 Board sought input from Federal agencies, the

 Standard General Ledger Issues Resolution

 Committee (SGLIRC), and other subgroup

 members. The Board found that there were many

 cases where similar assets could fit more

 than one category.
201 For example, aircraft and ships are used by

 law enforcement agencies as well as by the

 Department of Defense. Under the proposed

 categories, only those used by the Department

 of Defense would meet the criteria for

 Federal mission PP&E. The illustrations

 provided are intended to clarify the

 application of the categories to actual

 assets.

ILLUSTRATION 1:

FEDERAL MISSION PROPERTY, PLANT, AND EQUIPMENT

 ILLUSTRATION 1A:

 COAST GUARD PP&E

202 The Coast Guard has unique duties as both a

 peacetime operating agency and one of the

 military services. Its mission includes:

 - public safety,

 - law enforcement, and

 - service in the event of conflict, national

 emergency, or natural and man-made

 disasters.

203 The Coast Guard uses vessels and aircraft

 in its operations. Vessels include buoy

 tenders, buoy boats, and lifeboats. This is

 general PP&E rather than Federal mission

 PP&E. The cost of PP&E used in providing

 general government services (e.g., law

 enforcement) is relevant for assessing

 operating performance on a period-by-period

 basis since PP&E is used routinely in

 providing these services. The Coast Guard's

 accomplishments are linked to the inputs

 available to it (e.g., PP&E) and associating

 the cost of inputs with accomplishments or

 outputs is useful for assessing operating

 performance.

 ILLUSTRATION 1B:

 SPACE EXPLORATION EQUIPMENT
204 The application of the Federal mission PP&E

 characteristics to NASA's space shuttles is

 illustrated in this section. Of the three

 characteristics related to the use of the

 PP&E, the shuttle only meets the third--that

 is, it was specifically developed for use in

 a program for which there is no other program

 or entity using similar PP&E with which to

 compare costs.

205 Of the characteristics related to useful

 life, the shuttle meets the first--that is,

 it has an indeterminate or unpredictable

 useful life. A shuttle was first flown in

 1981. Since that first flight, the fleet has

 completed 68 missions. Several factors would

 influence estimates of shuttles' useful

 lives:

 - following the Challenger accident, the

 fleet was grounded for 32 months with some

 predicting that another similar accident

 could end the shuttle program,

 - current schedules call for seven flights

 in 1996 but the space station project

 would require more frequent space shuttle

 flights in the future, and

 - the possible development of a replacement

 vehicle which may be available by 2010.

206 Given the uncertainties and variables in

 estimating a useful life, it would be

 difficult, and not very meaningful, to assign

 the shuttle's acquisition cost to the

 shuttle's output--for example, flights. In

 the event that charges are made to users,

 NASA may wish to develop depreciation

 information for internal use only in setting

 prices. However, there is no broad need for

 depreciation information related to use of

 the shuttle.

207 Another example of space exploration

 equipment involves equipment that is used

 once and never recovered. The spacecraft

 Magellan was launched by a space shuttle in
 1989 and is expected to burn up in the

 atmosphere around Venus. During the flight to

 Venus, the Magellan's signal was lost and

 recovered five times. In addition, many

 technical problems endangered the mission.

 However, in 1990, the Magellan reached Venus

 and began transmitting data back to NASA.

 Research based on this data is expected to

 continue for years following the life of the

 spacecraft. In contrast, the Mars Observer

 space probe disappeared during its approach

 to Mars and never reappeared.

208 Given the uncertainties involved in space

 exploration and the timing of any benefits,

 it is not useful to capitalize and depreciate

 space exploration equipment.

ILLUSTRATION 1C:

 LAW ENFORCEMENT EQUIPMENT

209 A respondent to the ED Accounting for

 Property, Plant, and Equipment, questioned

 whether vehicles used in law enforcement

 activities qualified as Federal mission PP&E.

 It was noted that vehicles used for law

 enforcement purposes may have an abbreviated

 life expectancy. In addition, these vehicles

 may be modified for law enforcement uses.

210 However, in applying the two types of

 characteristics to these items of PP&E, one

 finds that they do not exhibit one

 characteristic from each category. The

 characteristics are repeated below for

 convenience.

211 Characteristics related to the use of the

 Federal mission PP&E are that it:

 - has no expected nongovernmental

 alternative uses; or

 - is held for use in the event of emergency,

 war or natural disaster; or

 - is specifically designed for use in a

 program for which there is no other
 program or entity (Federal or non-Federal)

 using similar PP&E with which to compare

 costs.

212 Characteristics related to the useful life

 are that it:

 - has an indeterminate or unpredictable

 useful life [SEE NOTE 81] due to the

 unusual manner in which it is used,

 improved, retired, modified, or

 maintained, and

 - is at a very high risk of being destroyed

 during use or premature obsolescence.

213 Vehicles used in law enforcement programs do

 not exhibit any of the three characteristics

 in the first group since (1) the basic

 vehicle can be used by other entities in

 other activities, (2) it is used routinely in

 operations rather than being held in

 anticipation of use, and (3) other entities,

 primarily state and local governments, have

 law enforcement activities and use similar

 vehicles. With regard to the second group of

 characteristics, the useful life may be

 abbreviated due to the manner in which it is

 used but it should nevertheless be

 predictable based on past experience with

 similar use. While it is possible that the

 vehicles are at somewhat greater risk of

 being destroyed than other vehicles, it is a

 matter of judgment whether this qualifies as

 very high risk. Overall, it is apparent that

 these items do not possess one characteristic

 from each group and do not qualify as Federal

 mission PP&E.

ILLUSTRATION 2:

HERITAGE ASSETS

214 Many assets are clearly heritage assets.

 For example, the National Park Service

 manages the Washington Monument, the Lincoln

 Memorial and the Mall. However, other assets,

 particularly Federal office buildings, have
 historical, cultural or architectural

 significance as well as being used for

 general operations.

215 The Board has found that these multi-use

 heritage assets should still be categorized

 as heritage assets. Any costs to maintain the

 assets themselves should be treated as

 heritage assets. However, any costs that are

 operational in nature (e.g., reconfiguring of

 office space or modernized communications

 wiring) should be classified as general PP&E.

 Costs of these types of improvements or

 renovations would then be capitalized and

 depreciated--providing useful information for

 performance measurement.

216 For assets that are used solely for

 heritage purposes (e.g., the Washington

 Monument), the Board believes that the cost

 of operation, maintenance, and other periodic

 expenses combined with deferred maintenance

 disclosures, are sufficient to assess

 operating performance. Allocating the cost of

 heritage assets to accounting periods through

 depreciation would not enhance the

 information available for performance assessment.

217 Following are examples of general PP&E that

 exhibit characteristics of heritage assets.

 ILLUSTRATION 2A:

 MAJOR OFFICE BUILDING

218 A Federal agency constructed a central

 office building in 1950 to house its

 headquarters personnel. The building was

 subsequently placed on the historical

 registry but continued to serve as

 headquarters' office space.

219 Public tours are available and educational

 exhibits are provided in the hallways.

 However, public access is restricted to

 guided tours. The majority of floor space is

 devoted to offices, meeting rooms,
 cafeterias, and storage.

220 The building is currently undergoing major

 renovations. The cost of these renovations

 should be capitalized and depreciated over

 their expected useful lives only to the

 extent that the work is tied to operations

 rather than to preserving the building.

 Additional information on the heritage nature

 of the asset would be provided through

 stewardship reporting.

 ILLUSTRATION 2B:

 NEW OFFICE BUILDING

221 A Federal facility previously used for

 industrial purposes (e.g., production of

 equipment parts) is being renovated and

 remodeled to serve as office space. The brick

 facade is being preserved because of its

 historic significance. Office space is being

 constructed inside of the brick facade.

222 The building can be viewed by visitors to

 the Federal facility, however, access to the

 office space will be restricted.

223 The original cost of the brick facade

 should not be included in the cost of the new

 office building. The cost of new construction

 should be capitalized and depreciated as part

 of general PP&E and none should be treated as

 a heritage asset. Additional information on

 the heritage nature of the existing brick

 facade, if material, would be provided

 through stewardship reporting.

 ILLUSTRATION 2C:

 LIBRARY OF CONGRESS

224 The Library of Congress is undergoing

 restoration and renovation. This includes:

 - restoring artwork and architectural features,

 - installing wiring for workstations, and

 - building office space.
225 Expenditures for restoration of heritage

 aspects of the buildings should be treated as

 a period cost for heritage assets. However,

 expenditures for operational aspects of the

 renovation should be categorized as general

 PP&E. Additional information on the heritage

 nature of the asset would be provided through

 stewardship reporting.

ILLUSTRATION 3:

LAND

226 The proposed standard provides that land

 acquired for or in connection with other

 general PP&E be included in that category.

 For example, the cost of land on which

 facilities are located would be included in

 general PP&E. Other land would be subject to

 stewardship reporting.

227 The following illustrations cover two

 potential issues associated with land. First,

 identifying land associated with general

 PP&E. Second, identifying land improvements

 as general PP&E or PP&E subject to

 stewardship reporting.

 ILLUSTRATION 3A:

 MILITARY USES OF LAND

228 In general, land used for military bases

 would be considered general PP&E. However, in

 some cases, land is used by the military as a

 site for missile silos, testing grounds or

 firing ranges. Land used for these purposes

 meets the definition of stewardship land. The

 Board believes that period-by-period cost

 information related to holding land for

 defense purposes is not relevant to assessing

 operating performance.

 ILLUSTRATION 3B:

 ROADS ON PUBLIC LANDS
229 Public lands have various types of roads to

 provide access. These types include:

 - rough dirt roads created from years of

 use,

 - dirt roads created by non-Federal land

 users (e.g., oil & gas exploration crews)

 and then abandoned, and

 - roads created by Federal entities to

 provide access (e.g., gravel & paved

 roads).

230 Some of these roads are maintained while

 others merely exist until natural conditions

 overtake them.

231 Under private sector accounting, permanent

 improvements to land are included in the cost

 of land on the balance sheet. Typically, the

 cost of clearing and establishing the road

 bed is considered a permanent improvement

 because, with routine maintenance, it will

 remain indefinitely. Any pavement or gravel

 that must be replaced periodically would be

 considered depreciable PP&E. For a Federal

 entity, if the road could be categorized as

 general PP&E this practice would be

 appropriate since the period-by-period cost

 of assets is relevant for assessing operating

 performance.

232 For land subject to stewardship reporting,

 the cost of establishing the roadbed would be

 expensed in the year incurred since the land

 improved by the roadbed is not capitalized on

 the balance sheet. On the other hand, the

 paved and gravel roads are general PP&E

 because they are operational and the period-

 by-period cost is essential for assessing

 operating performance. The cost of pavement

 or gravel would be capitalized and

 depreciated. Decisions about the quality of

 the road conditions (e.g., how often roads

 are repaved) are an element of operating

 performance and of the cost of providing

 government services.
**************************************************

APPENDIX C -- DEFERRED MAINTENANCE ILLUSTRATION

233 This appendix illustrates the footnote

 disclosures in paragraphs 77-83. The example

 shown here is for illustrative purposes only.

 Different entities may developed different

 asset categories, condition codes and

 descriptive terminology. The Board intends

 that this standard provide flexibility while

 providing relevant information on the

 condition of Federal assets. The following

 illustration presents text from a footnote

 meeting the requirements of the standard.

 XYZ Hospital Facility

 Note 4. Deferred Maintenance

 XYZ operates a hospital facility at one of

 its remote sites. During the period

 maintenance expense is recognized as

 incurred. However, maintenance was

 insufficient over the past several years and

 resulted in deferred maintenance.

 Information on deferred maintenance is

 based on an annual inspection of facilities.

 Standards are provided for evaluating

 facility condition. These standards include:

 - minimum and desirable condition

 descriptions for facilities

 - suggested maintenance schedules

 - standard costs for maintenance actions

 - standardized condition codes

 There have not been material changes in the

 standards in recent years.

 The following chart presents information on

 deferred maintenance on major categories of

 PP&E experiencing material amounts of

 deferred maintenance:

[SEE PRINTED COPY FOR TABLE 1]
******************************************

APPENDIX D -- CLEANUP COST ILLUSTRATIONS

234 This appendix illustrates one method of

 complying with the standards proposed for

 cleanup costs. The examples shown in this

 appendix are for illustrative purposes only.

 There are many types of cleanup that may be

 accounted for under this proposed standard

 (e.g., nuclear facilities, landfills, or

 laboratories). Applying this proposed

 standard may require consideration of

 estimated cost components other than those

 shown here.

235 The computations are based on a formula

 allocating the estimated total cleanup costs

 (i.e., the total amount to be spent in the

 future to accomplish cleanup) to accounting

 periods. In identifying the amount to be

 expensed for the period, the formula

 considers the cumulative amounts:

 - of capacity used at the end of the

 accounting period; and

 - recognized as expense in prior accounting

 periods.

236 The components of the formula are defined

 below:

 a = total cleanup cost estimated as of end of

 period

 b = cumulative capacity used at end of period

 [SEE NOTE 82]

 c = total estimated capacity [SEE NOTE

 83]

 d = amount previously recognized as expense-

 beginning of period

 e = cleanup expense recognized in the current

 period

237 To calculate the appropriate expense

 amount, the following formula is used:

 (a X b/c) - d = e
238 Simply put, the end of period estimated

 total cleanup cost (a) is multiplied by the

 percentage of capacity used up at the end of

 that period (b/c) to arrive at the portion of

 cleanup cost that has been generated by

 operations through the end of the period.

 Theoretically, that amount of expense has

 been incurred and should be recognized.

 Amounts recognized as expense in prior

 periods (d) should be deducted to arrive at

 the current period expense amount (e). If

 this is the first period, the deduction for

 expense recognized in prior periods (d) is

 zero.

ILLUSTRATION 1:

HAZARDOUS WASTE DISPOSAL SITE

 Operating Assumptions

239 The hazardous waste disposal site will

 begin accepting waste in 1995. The following

 assumptions apply:

 - the site capacity is 100,000 cubic yards

 of waste

 - it is estimated that the site will accept

 waste for ten years at an average rate of

 10,000 cubic yards per year

 - after the site is closed the following

 cleanup efforts are required by state,

 local and Federal laws:

 * site closure & sealing

 * thirty year monitoring

 * remediation

 - 1995 cost estimates are based on current

 cost for 1995

 - 1996 cost estimates are based on 1996

 costs adjusted for inflation at a rate of

 1.0%

 - 1997 cost estimates are based on current

 costs for 1997 and include new technology

 and changes in monitoring requirements

 RECOGNITION OF EXPENSE AND LIABILITY AMOUNTS
 FOR 1995 (Dollars in thousands)

 Estimated Total Cleanup Cost [SEE NOTE

 84] based on Current Cost in 1995

 1. Site Closure and Sealing Cost:

 Facilities for monitoring operations

 $ 100

 Sealing site 750

 Erosion and control facilities 500

 2. Monitoring Cost (for a period of 30

 years):

 Inspection 3,000

 Sampling & Testing 2,250

 Maintenance of facilities 300

 3. Remediation Cost:

 Projected remediation based on

 statistical studies 500

 TOTAL ESTIMATED CLEANUP COST $7,400

 Calculation of Annual Expense and Accrued

 Liability Amounts

 This proposed standard would require that a

 portion of the estimated total cleanup costs

 be recognized as an expense and as a

 liability each period that the site operates.

 During 1995, the site accepts 15,000 cubic

 yards of waste. The following calculations

 show the amounts required to be recognized:

 (a x b/c) - d = e

 ($7,400 x 15,000/100,000) - 0 = e

 $7,400 x .15 = e

 $1,110 = e

 where:

 a = total cleanup cost estimated as of end

 of period

 b = cumulative capacity used at end of period

 [SEE NOTE 85]

 c = total estimated capacity [SEE NOTE

 86]

 d = amount previously recognized as expense-

 beginning of period

 e = cleanup expense recognized in the current
 period

 The following journal entry would be

 required:

 Dr. Cleanup expense $1,110

 Cr. Cleanup liability $1,110

 To recognize estimated cleanup costs.

 RECOGNITION OF EXPENSE AND LIABILITY AMOUNTS

 FOR 1996 (Dollars in thousands)

 Estimated Total Cleanup Cost based on Current

 Cost in 1996

 1. Site Closure and Sealing Cost:

 Facilities for monitoring operations

 $ 101

 Sealing site 758

 Erosion and control facilities 505

 2. Monitoring Cost (for a period of 30

 years):

 Inspection 3,030

 Sampling & Testing 2,273

 Maintenance of facilities 303

 3. Remediation Cost:

 Projected remediation based on

 statistical studies 505

 TOTAL ESTIMATED CLEANUP COST $7,475

 Calculation of Annual Expense and Accrued

 Liability Amounts

 During 1996, the estimated total cleanup

 costs were adjusted for inflation of 1.0% and

 site accepted 10,000 cubic yards of waste.

 The following calculations show the amounts

 required to be recognized:

 (a x b/c) - d = e

 ($7,475 x 25,000/100,000) - $1,110 = e

 $7,475 x .25 - $1,110 = e

 $759 = e
 where:

 a = total cleanup cost estimated as of end of

 period

 b = cumulative capacity used at end of period

 [SEE NOTE 87]

 c = total estimated capacity [SEE NOTE

 88]

 d = amount previously recognized as expense-

 beginning of period

 e = cleanup expense recognized in the current

 period

 The following journal entry would be

 required:

 Dr. Cleanup expense $759

 Cr. Cleanup liability $759

 To recognize estimated cleanup costs.

 In addition, the proposed standard would

 require that any material changes in the

 estimate due to changes in laws, technology,

 or cleanup plans be disclosed. However, there

 is no indication that material changes

 occurred.

 RECOGNITION OF EXPENSE AND LIABILITY AMOUNTS

 FOR 1997 (Dollars in thousands)

 Estimated Total Cleanup Cost Based on Current

 Cost in 1997

 1. Site Closure and Sealing Cost:

 Facilities for monitoring operations

 $ 115

 Sealing site 740

 Erosion and control facilities 500

 2. Monitoring Cost (for 30 years):

 Inspection 2,250

 Sampling & Testing 1,300

 Maintenance of facilities 300

 3. Remediation Cost:

 Projected remediation based on

 statistical studies 400

 TOTAL ESTIMATED CLEANUP COST $5,605
 Calculation of Annual Expense and Accrued

 Liability Amounts

 During 1997, a new estimate of total cleanup

 costs was prepared and the site accepted

 10,000 cubic yards of waste. The following

 calculations show the amounts required to be

 recognized:

 (a X b/c) - d =e

 ($5,605 x 35,000/100,000) - ($1,110 + 759)

 $5,605 x .35 - $1,869 = e

 $1,962 - $1,869 = e

 $ 93 = e

 where:

 a = total cleanup cost estimated as of end of

 period

 b = cumulative capacity used at end of period

 [SEE NOTE 89]

 c = total estimated capacity [SEE NOTE

 90]

 d = amount previously recognized as expense-

 beginning of period

 e = cleanup expense recognized in the current

 period

 The following journal entry would be

 required:

 Dr. Cleanup expense $93

 Cr. Cleanup liability $93

 To recognize estimated cleanup costs.

 In addition, the proposed standard would

 require that material changes in estimated

 cleanup costs be disclosed and that amounts

 attributable to prior period operations be

 disclosed. One means of calculating this

 amount is to segregate the amount recognized

 as cleanup expense for the current period

 between "changes in estimated cleanup cost

 from prior periods" and "current period

 cleanup cost." These two amounts would be
 disclosed.

 Changes in estimated cleanup costs from prior

 periods are:

 f = (a X b1/c) - d

 f = ($5,605 x 25,000/100,000) - ($1,110 +

 759)

 f = $5,605 x .25 - $1,869

 f = $1,401 - $1,869

 f = $( 468)

 where:

 a = total cleanup cost estimated as of end

 of period

 b1 = cumulative capacity used at beginning of

 period [SEE NOTE 91]

 c = total estimated capacity [SEE NOTE

 92]

 d = amount previously recognized as expense

 at beginning of period

 f = changes in estimated cleanup cost from

 prior periods

 Current period cleanup costs are:

 g = e - f

 g = $ 93 - $( 468)

 g = $ 561

 where:

 e = cleanup cost recognized in the current

 period

 f = changes in estimated cleanup cost from

 prior periods

 g = current period cleanup costs

 SUMMARY:

FINANCIAL STMT. 1995 1996 1997

Operating expense $1,110 $ 759 $ 93

Liability $1,110 $1,869 $1,962
ILLUSTRATION 2:

NUCLEAR FACILITY QUALIFYING

AS GENERAL PP&E

 Operating Assumptions

240 A nuclear facility was placed in operation in

 1981. No recognition of cleanup cost was made

 under past accounting policy. At the end of

 1995, the entity adopts the accounting

 policies presented in this proposed standard.

 The following assumptions apply:

 the entity has an expected useful life of

 thirty years

 after the site is closed the following

 cleanup efforts are required by state, local

 and Federal laws:

 - site closure & sealing

 - thirty year monitoring

 - remediation

 1995 cost estimates are based on current

 cost for 1995

 RECOGNITION OF LIABILITY AMOUNTS FOR 1995

 (Dollars in thousands)

 Estimated Total Cleanup Cost Based on Current

 Cost in 1995

 1. Site Closure and Sealing Cost:

 Facilities for monitoring operations

 $1,000

 Sealing site 3,000

 2. Monitoring Cost (for 30 years:

 Inspection 6,000

 Sampling & Testing 3,000

 Maintenance of facilities 600

 3. Remediation Cost:

 Projected remediation based on

 statistical studies 2,000

 TOTAL ESTIMATED CLEANUP COST $15,600

 Calculation of Liability Amount To be

 Recognized Upon Implementation
 At the end of 1995, the estimated total

 cleanup costs was $15,600,000. The following

 calculations show the amounts that should

 have been recognized as of the end of 1995 if

 the proposed standard had been in effect

 since the facility began operating on October

 1, 1980:

 (a X b/c) - d = l

 ($15,600 x 15/30) - $0 = l

 $15,600 x .5 - $0 = l

 $7,800 = l

 where:

 a = total cleanup cost estimated as of end of

 period

 b = number of years of operation

 c = estimated useful life

 d = amount previously recognized as expense-

 beginning of period

 l = liability to be recognized at the end of

 1995

 Dr. Net Position $7,800

 Cr. Cleanup liability

 $7,800

 To recognize estimated cleanup

 liability.

 No expense is recognized in the year of

 implementation.

 SUMMARY:

FINANCIAL STMT. 1995

Prior Period Adjustment $7,800

 Liability $7,800

**************************************************

APPENDIX E -- GLOSSARY
Assets - Tangible or intangible items owned by the

Federal Government which would have probable

economic benefits that can be obtained or

controlled by a Federal Government entity.

Book value - The net amount at which an asset or

liability is carried on the books of account (also

referred to as carrying value or amount). It

equals the gross or nominal amount of an asset or

liability minus an allowance or valuation amount.)

Business type activity - Significantly selfsustaining activity which finances its continuing

cycle of operations through collection of exchange

revenue (See FASAB Exposure Draft, Statement of

Recommended Accounting Standards, Revenue and

Other Financing Sources).

Capital leases - Leases that transfer

substantially all the benefits and risks of

ownership to the lessee.

Capitalize - To record and carry forward into one

or more future periods any expenditure the

benefits or process from which will then be

realized. (Kohler's Dictionary for Accountants)

Cleanup costs - The costs of removing, containing,

and/or disposing of (1) hazardous waste from

property, or (2) material and/or property that

consists of hazardous waste at permanent or

temporary closure or shutdown of associated PP&E.

Condition assessment surveys - Periodic

inspections of PP&E to determine their current

condition and estimated cost to correct any

deficiencies.

Cost object (also referred to as cost objective) -

An activity, output, or item whose cost is to be

measured. In a broad sense, a cost object can be

an organizational division, a function, task,

product, service, or a customer.

Deferred maintenance - Maintenance that was not

performed when it should have been or was
scheduled to be and which, therefore, is put off

or delayed for a future period.

Depreciation accounting - The systematic and

rational allocation of the acquisition cost of an

asset, less its estimated salvage or residual

value, over its estimated useful life.

Direct Cost - The cost of resources directly

consumed by an activity. Direct costs are assigned

to activities by direct tracing of units of

resources consumed by individual activities. A

cost that is specifically identified with a single

cost objective.

Disclosure - Reporting information in notes

regarded as an integral part of the basic

financial statements.

Discount rate - The interest rate used to adjust

for the time value of money. (SFAS #87)

Donated capital - The amount of nonreciprocal

transfers of assets or services from State, local,

and foreign governments; individuals; or others

not considered parties related to the Government.

(Project on Standardization of Basic Financial

Information Requirements of Central Agencies,

JFMIP, October 1991)

Economic life - The period during which a fixed

asset is capable of yielding services of value to

its owner. (See "useful life".)

Expense - Outflows or other using up of assets or

incurrences of liabilities (or a combination of

both) during a period from providing goods,

rendering services, or carrying out other

activities related to an entity's programs and

missions, the benefits from which do not extend

beyond the present operating period. (Adapted from

Kohler's Dictionary and FASB Concepts Statement

No. 6)

Executory cost - Those costs such as insurance,

maintenance, and taxes incurred for leased
property, whether paid by the lessor or lessee.

(FASB, SFAS #13)

Good - A tangible product produced to provide to a

customer.

Hazardous waste - A solid, liquid, or gaseous

waste, or combination of these wastes, which

because of its quantity, concentration, or

physical, chemical, or infectious characteristics

may cause or significantly contribute to an

increase in mortality or an increase in serious

irreversible, or incapacitating reversible,

illness or pose a substantial present or potential

hazard to human health or the environment when

improperly treated, stored, transported, disposed

of, or otherwise managed.

Historical cost - Initially, the amount of cash

(or its equivalent) paid to acquire an asset;

subsequent to acquisition, the historical amount

may be adjusted for amortization. (Kohler's

Dictionary for Accountants)

Indirect cost - A cost that cannot be identified

specifically with or traced to a given cost object

in an economically feasible way.

Interest - The service charge for the use of money

or capital, paid at agreed intervals by the user,

commonly expressed as an annual percentage of

outstanding principal. (Kohler's Dictionary for

Accountants)

Liability - For Federal accounting purposes, a

probable future outflow or other sacrifice of

resources as a result of past transactions or

events.

Life-cycle costing - An acquisition or procurement

technique which considers operating, maintenance,

and other costs in addition to the acquisition

cost of assets.

Maintenance - The act of keeping fixed assets in

useable condition. It includes preventive
maintenance, normal repairs, replacement of parts

and structural components, and other activities

needed to preserve the asset so that it continues

to provide acceptable services and achieves its

expected life. Maintenance excludes activities

aimed at expanding the capacity of an asset or

otherwise upgrading it to serve needs different

from, or significantly greater than, those

originally intended.

Market value - The estimated amount that can be

realized by disposing of an item through arm's

length transactions in the marketplace; the price

(usually representative) at which bona fide sales

have been consummated for products of like kind,

quality, and quantity in a particular market at

any moment of time.

Measurable - Can be determined with reasonable

certainty or is reasonably estimable.

Operating lease - An agreement conveying the right

to use property for a limited time in exchange for

periodic rental payments. (Adapted from Financial

Accounting: Principles and Issues, 4th Edition,

Michael H. Granof and Philip W. Bell, p. 416.)

Opportunity Cost - The value of the alternatives

foregone by adopting a particular strategy or

employing resources in a specific manner. Also

called Alternative Cost or Economic Cost.

Outputs - Any product or service generated from

the consumption of resources. It can include

information or paper work generated by the

completion of tasks of an activity.

Output measure - A tabulation, calculation, or

recording of activity or effort that can be

expressed in a quantitative or qualitative manner.

It shall have two key characteristics: 1) it shall

be systematically or periodically captured through

accounting or management information system, and

2) there shall be a logical connection between the

reported measures and the program's purpose.
Probable - That which can reasonably be expected

or believed to be more likely than not on the

basis of available evidence or logic but which is

neither certain nor proven.

Product - Any discrete, traceable, or measurable

good or service provided to a customer. Often

goods are referred to as tangible products, and

services are referred to as intangible products. A

good or service is the product of a process

resulting from the consumption of resources.

Recognize - To record an amount in entity accounts

and to report that amount in the entity financial

statements either individually or in aggregate

with other amounts.

Service - An intangible product or task rendered

directly to a customer.

Useful Life - The normal operating life in terms

of utility to the owner.

Weapon System - A combination of one or more

weapons with all related equipment, materials,

services, personnel and means of delivery and

deployment required for self-sufficiency.

Write-off - An action to remove an amount from an

entity's assets or financial resources.

 Major Contributors

This document reflects extensive input from a

number of individuals, including those listed

below.

Robert Anderson Office of Management and

Budget

Christine Bonham General Accounting

Office
Debra Carey U. S. Department of the

Interior

Phil Calder General Accounting

 Office

Sheila Conley Office of Management and

Budget

Tom Cuny Congressional Budget

Office

Ken Dressner General Services

Administration

Tim Gonzales Environmental Protection

Agency

Bob Kilpatrick Office of Management and

Budget

Allan Lund Department of the

Treasury

JoEllen McCormack General Accounting

Office

Gordon Peterson Department of Education

Cathy Presnell U. S. Army Audit Agency

De Ritchie Department of Defense

Justine Rodriguez Office of Management and

Budget

 FASAB Board Members

 Elmer B. Staats, Chairman
 James L. Blum

 Donald H. Chapin

 Martin Ives

 Norwood Jackson

 Gerald Murphy

 James E. Reid

 Cornelius E. Tierney

 Alvin Tucker

 Ronald S. Young, Executive Director

 Project Staff:

 Wendy M. Comes

 Lucy Lomax

 Richard Wascak

 Federal Accounting Standards Advisory Board

 750 First Street, NE, Room 1001

 Washington, DC 20002

 Telephone (202) 512-7350

 Fax (202) 512-7366

 ENDNOTES

NOTE

1 Department of the Treasury, Financial

 Management Service, Consolidated Financial

 Statements of the United States Government,
 prototype 1993, p. 23. The prototype

 statements provide gross historical cost

 investment amounts for all PP&E recorded by

 government entities. These amounts have not

 been audited.

NOTE

2 Land acquired for or in connection with

 general PP&E would be included in that

 category. Land not associated with general

 PP&E would be subject to supplementary

 stewardship reporting and is referred to

 throughout this document as stewardship land.

NOTE

3 Business-type activity is defined as a

 significantly self-sustaining activity which

 finances its continuing cycle of operations

 through collection of exchange revenue as

 defined in the Board's exposure draft on

 Revenue and Other Financing Sources.

NOTE

4 "Acquired for or in connection with other

 general PP&E" is defined as land acquired

 with the intent to construct general PP&E and

 land acquired in combination with general

 PP&E, including not only land used as the

 foundation, but also adjacent land considered

 to be the general PP&E's common grounds.

NOTE

5 "Balance sheet" refers to the statement that

 reports on assets, liabilities, and net

 position of the entity at the end of the

 reporting period. This statement is referred

 to in OMB Bulletin 94-01, Form and Content of

 Agency Financial Statements, as the Statement

 of Financial Position.

NOTE

6 "Statement of Net Cost" refers to the

 statement providing information on the

 entity's flows of exchange revenues,

 expenses, gains, and losses. The Board

 presented this new statement in its Statement
 of Recommended Accounting Concepts No. 2,

 Entity and Display. In addition, the Board

 has exposed for comment a standard for

 reporting net costs and has provided an

 illustrative statement which might give

 effect to this standard in the ED on Revenue

 and Other Financing Sources, July, 1995.

NOTE

7 "Recognize" means to record an amount in

 entity accounts and to report a dollar amount

 on the face of the Statement of Net Costs or

 the Balance Sheet either individually or so

 that the amounts are aggregated with related

 amounts.

NOTE

8 "Depreciation" is the systematic and rational

 allocation of the acquisition cost of an

 asset, less its estimated salvage or residual

 value, over its estimated useful life.

NOTE

9 "Internally-developed software" means

 software developed by personnel employed by

 the reporting entity. This includes

 modifications made by entity personnel to

 purchased or contractor-developed software.

 Standards for internally-developed software

 are not to be applied to purchased or

 contractor developed software. The Board

 recognizes that contractor-developed software

 is conceptually similar to internally-

 developed software and that standards for

 each should be similar. The Board intends to

 address the inconsistent treatment of these

 items at a later date.

NOTE

10 "Disclosure" refers to reporting information

 in notes regarded as an integral part of the

 basic financial statements.

NOTE

11 The term "federal mission" refers to
 activities that are typically Federal--such

 as national defense. In addition, Federal

 mission PP&E is limited to PP&E that would

 not typically be used by non-Federal

 entities. Clearly, any functions performed by

 a "Federal" entity could be labeled "Federal

 mission." The definition of this category

 clarifies the characteristics of PP&E

 appropriately includable in this category--a

 much narrower group than inferred by the

 category's title.

NOTE

12 This may be evidenced by the ability (1) to

 retire the PP&E and later return it to

 service or (2) to continually upgrade the

 PP&E to maintain its usefulness.

NOTE

13 FASAB's Statement of Recommended Accounting

 Standards No. 5, Accounting for Liabilities

 of the Federal Government, recommends the

 following definition for liability: a

 probable future outflow or other sacrifice of

 resources as a result of past transactions or

 events. The standards require recognition, in

 general purpose Federal financial reports, of

 probable and measurable liabilities arising

 from past exchange transactions; government-

 related injuries or damage; or non-exchange

 amounts that, according to current law and

 applicable policy, are due and payable to the

 ultimate recipient. The standards also

 provide guidance for disclosures related to

 liabilities that are not both probable and

 measurable at the balance sheet date.

NOTE

14 The term "probable" means that which can

 reasonably be expected or believed to be more

 likely than not on the basis of available

 evidence or logic but which is neither

 certain nor proven. For example, cleanup

 costs would be probable if (1) laws and

 regulations that have been approved as of the

 balance sheet date, regardless of the
 effective date of those laws and regulations,

 require cleanup or (2) compliance agreements

 (e.g., agreements with state or local

 authorities relating to the extent and the

 timing of remedial action) had been entered

 into by a Federal entity.

NOTE

15 Federal financial reporting should assist

 report users in evaluating the service

 efforts, costs, and accomplishments of the

 reporting entity; the manner in which these

 efforts and accomplishments have been

 financed; and the management of the entity's

 assets and liabilities. Federal financial

 reporting should provide information that

 helps the reader to determine:

 a. the costs of providing specific programs

 and activities and the composition of, and

 changes in, these costs.

 b. the efforts and accomplishments associated

 with Federal programs and the changes over

 time and in relation to costs.

 c. the efficiency and effectiveness of the

 government's management of its assets and

 liabilities.

NOTE

16 Federal financial reporting should assist

 users in assessing the impact on the country

 of the government's operations and

 investments for the period and how, as a

 result, the government's and the nation's

 financial conditions have changed and may

 change in the future. Federal financial

 reporting should provide information that

 helps the reader to determine:

 a. whether the government's financial

 position improved or deteriorated over the

 period.

 b. whether the future budgetary resources

 will likely be sufficient to sustain public

 services and to meet obligations as they come

 due.

 c. whether government operations have

 contributed to the nation's current and
 future well-being.

NOTE

17 Useful life is the normal operating life in

 terms of utility to the owner. (adapted from

 Kohler's Dictionary for Accountants)

NOTE

18 "Land rights" are interests and privileges

 held by the entity in land owned by others,

 such as leaseholds, easements, water and

 water power rights, diversion rights,

 submersion rights, rights-of-way, and other

 like interests in land.

NOTE

19 Accounting for operating materials and

 supplies is addressed in Statement of Federal

 FInancial Accounting Standards No. 3

 Accounting for Inventory and Related

 Property.

NOTE

20 The Federal Government sometimes retains an

 interest in PP&E acquired with grant money.

 In the event that the grant recipient no

 longer uses the PP&E in the activity for

 which the grant was originally provided the

 PP&E reverts to the Federal Government.

NOTE

21 Note that the criteria for identifying

 capital leases for financial reporting

 purposes differ from OMB criteria for budget

 scoring of leases. OMB Circular No. A-11,

 Preparation and Submission of Budget

 Estimates, includes criteria for identifying

 operating leases in Appendix B. OMB provides

 four additional criteria which relate to the

 level of private sector risk involved in a

 lease-purchase agreement. This is necessary

 because, for budget purposes, there is a

 distinction between lease-purchases with more

 or less risk. This distinction is not made in

 the financial reports and, therefore, FASAB

 does not include the four criteria related to
 risk levels.

NOTE

22 "Operating leases" of PP&E are leases in

 which the Federal entity does not assume the

 risks of ownership of the PP&E. Multi-year

 service contracts and multi-year purchase

 contracts for expendable commodities are not

 capital leases.

NOTE

23 "Estimated economic life of leased property"

 is the estimated remaining period during

 which the property is expected to be

 economically usable by one or more users,

 with normal repairs and maintenance, for the

 purpose for which it was intended at the

 inception of the lease, without limitation by

 the lease term.

NOTE

24 "Fair value" is the price for which an asset

 could be bought or sold in an arm's-length

 transaction between unrelated parties (e.g.,

 between a willing buyer and a willing

 seller). (adapted from Kohler's Dictionary

 for Accountants)

NOTE

25 "Base unit" refers to the level of detail

 considered in categorizing PP&E. Generally,

 the base unit is the smallest or least

 expensive item of property to be categorized.

 The term "base unit" may be used by others to

 have a different meaning--the meaning

 intended in this standard is limited to that

 specified above.

NOTE

26 The concept described here is intended for

 PP&E categorization purposes only. However,

 for the purpose of record keeping, greater

 detail may be necessary to maintain

 accountability for PP&E so that assets can be

 safeguarded against loss, theft,

 misappropriation, etc. Categorizing PP&E with
 less detail considered does not necessarily

 mean that (1) accounting systems or (2)

 property records must follow the same level

 of detail.

NOTE

27 Business-type activity is defined as a

 significantly self-sustaining activity which

 finances its continuing cycle of operations

 through collection of exchange revenue as

 defined in the Board's exposure draft on

 Revenue and Other Financing Sources.

NOTE

28 The Board is not making a recommendation that

 cost comparisons actually be made. Nor is it

 suggesting that costs can be easily compared

 for a Federal and non-Federal entity. If the

 activities are somewhat comparable then one

 should presume that a cost comparison could

 be made.

NOTE

29 "Acquired for or in connection with other

 general PP&E" is defined as land acquired

 with the intent to construct general PP&E and

 land acquired in combination with general

 PP&E, including not only land used as the

 foundation, but also adjacent land considered

 to be the general PP&E's common grounds.

NOTE

30 "Interest costs" refers to any interest paid

 by the reporting entity directly to providers

 of goods or services related to the

 acquisition or construction of PP&E.

NOTE

31 "Internally-developed" means that employees

 of the entity are actively involved in

 developing the software. This is

 distinguished from contractor developed

 software and purchased software which are

 subject to the provisions of the PP&E

 standard.
NOTE

32 Currently, the US Standard General Ledger

 includes an account titled Automated Data

 Processing Software, number 1830, which is

 not part of the PP&E account series. These

 standards do not require that software be

 accounted for as a component of the PP&E

 accounts. It is permissible to maintain a

 separate account for software and the

 accumulated amortization on software.

NOTE

33 In this case, users may be internal or

 external to the entity.

NOTE

34 Technological feasibility has been

 established when the entity has completed all

 planning, designing, coding, and testing

 activities that are necessary to establish

 that the software can meet its design

 specifications.

NOTE

35 See Statement of Recommended Accounting

 Standards No. 5, Accounting for Liabilities

 of the Federal Government.

NOTE

36 A will or clause of a will disposing of

 property.

NOTE

37 This paragraph applies only to exchanges

 between a Federal entity and a non-Federal

 entity. Exchanges between Federal entities

 shall be accounted for as transfers (See

 paragraph 31).

NOTE

38 If the entity enters into an exchange in

 which the fair value of the PP&E acquired is

 less than that of the PP&E surrendered, the

 PP&E acquired shall be recognized at its cost

 as described in paragraph 32 and subsequently

 reduced to its fair value. A loss shall be
 recognized in an amount equal to the

 difference between the cost of the PP&E

 acquired and its fair value..

NOTE

39 SFFAS 3 requires that forfeited real and

 personal property be valued at market value

 less an allowance for any liens or claims

 from a third party.

NOTE

40 Delivery or constructive delivery shall be

 based on the terms of the contract regarding

 shipping and/or delivery. For PP&E acquired

 by a contractor on behalf of the entity

 (e.g., the entity will ultimately hold title

 to the PP&E), PP&E shall also be recognized

 upon delivery or constructive delivery

 whether to the contractor for use in

 performing contract services or to the

 entity.

NOTE

41 Software and land rights, while associated

 with tangible assets, may be classified as

 intangible assets by some entities. In this

 event, they would be subject to amortization

 rather than depreciation. "Amortization" is

 applied to intangible assets in the same

 manner that depreciation is applied to

 general PP&E--tangible assets.

NOTE

42 Land rights that are for a specified period

 of time shall be depreciated or amortized

 over that time period.

NOTE

43 A contra asset account is an account which

 partially or wholly offsets an asset account.

 On financial statements they may be either

 merged or appear together.

NOTE

44 For example, amounts realized may include

 cash received for scrap materials or fair
 value of items received in exchange for PP&E

 removed from service.

NOTE

45 Net remaining cost is the original cost of

 the asset less any accumulated

 depreciation/amortization to date.

NOTE

46 "Major classes" of general PP&E shall be

 determined by the entity. Examples of major

 classes include buildings and structures,

 furniture and fixtures, equipment, vehicles,

 and land.

NOTE

47 The name "Federal Mission PP&E" may cause

 readers to erroneously assume that this

 category should include any PP&E supporting a

 Federal mission. Federal mission PP&E is

 limited to those items specifically

 identified herein as well as any other items

 exhibiting at least one characteristic from

 each of the two groups listed.

NOTE

48 This may be evidenced by the ability (1) to

 retire the PP&E and later return it to

 service or (2) to continually upgrade the

 PP&E to maintain its usefulness.

NOTE

49 Weapons are instruments of combat used to

 destroy, injure, defeat or threaten an enemy.

 (adapted from Dictionary of Weapons and

 Military Terms)

NOTE

50 Joint Chiefs of Staff, Department of Defense

 Dictionary of Military and Associated Terms,

 Joint Publication 1-02, March 23, 1994.

NOTE

51 Disclosure shall be either on the face of the

 statement of net cost or in footnotes

 depending on the materiality of the amounts
 and the need to distinguish such amounts from

 other costs relating to measures of outputs

 or outcomes of the reporting entity.

NOTE

52 Disclosure shall be either on the face of the

 statement of net cost or in footnotes

 depending on the materiality of the amounts

 and the need to distinguish such amounts from

 other costs relating to measures of outputs

 or outcomes of the reporting entity.

NOTE

53 A will or clause of a will disposing of

 property.

NOTE

54 Theoretically, the amount of donated heritage

 assets should be included in the statement of

 net cost. However, the cost of providing this

 information is not warranted since heritage

 assets are more difficult to value than items

 that would typically be included in general

 PP&E.

NOTE

55 "Acquired for or in connection with other

 general PP&E" is defined as land acquired

 with the intent to construct general PP&E and

 land acquired in combination with general

 PP&E, including not only land used as the

 foundation, but also adjacent land considered

 to be the general PP&E's common grounds.

NOTE

56 Disclosure shall be either on the face of the

 statement of net cost or in footnotes

 depending on the materiality of the amounts

 and the need to distinguish such amounts from

 other costs relating to measures of outputs

 or outcomes of the reporting entity.

NOTE

57 A will or clause of a will disposing of

 property.
NOTE

58 Acceptable services and condition may vary

 both between entities and among sites within

 the same entity. Management shall determine

 what level of service and condition is

 acceptable.

NOTE

59 This requirement applies to all four

 categories of PP&E.

NOTE

60 If management determines that there are no

 material amounts of deferred maintenance,

 this line item need not appear.

NOTE

61 Other methods may be used which are similar

 or identical to condition assessment survey

 or life-cycle costing. These methods would

 also be acceptable sources of information on

 deferred maintenance.

NOTE

62 Management shall determine what methods and

 standards to apply. Once determined, it is

 desirable but not required that methods and

 standards be applied consistently from period

 to period.

NOTE

63 "Major classes" of general PP&E shall be

 determined by the entity. Examples of major

 class include, among others, buildings and

 structures, furniture and fixtures,

 equipment, vehicles, and land.

NOTE

64 Examples of condition information include,

 among others, (1) averages of standardized

 condition rating codes, (2) percentage of

 assets above, at or below acceptable

 condition, or (3) narrative information.

NOTE

65 Adjustments may be necessary because the cost
 of maintenance foregone may not be

 cumulative. For example, if periodic painting

 is skipped twice it is not necessarily true

 that the cost would be double the scheduled

 amount.

NOTE

66 Accounting for environmental liabilities such

 as cleanup costs is currently undergoing

 change--due to both improved measurement

 techniques and increased attention from the

 accounting community. The Board will monitor

 these changes and revisit these standards as

 needed.

NOTE

67 Probable means that the future confirming

 event or events is more likely than not to

 occur.

NOTE

68 The unit of analysis for estimating

 liabilities can vary based on the reporting

 entity and the nature of the transaction or

 event. The liability recognized may be the

 estimation of an individual transaction or

 event; or a group of transactions and events.

 For example, an estimate of the cleanup costs

 could be made on a facility by facility

 basis, or an entity by entity basis.

NOTE

69 Cleanup may be deferred for other reasons,

 such as availability of resources. However,

 this type of deferral does not affect the

 recognition of the liability.

NOTE

70 Laws and regulations approved as of the

 balance sheet date, regardless of the

 effective date of those laws and regulations,

 shall be considered.

NOTE

71 Note that land acquired for or in connection

 with general PP&E would be included in that
 category. All other land would be subject to

 stewardship reporting and is referred to

 throughout this document as stewardship land.

NOTE

72 The term "stewardship PP&E" is used to refer

 collectively to federal mission PP&E,

 heritage assets, and stewardship land.

NOTE

73 Objectives, paragraph 54.

NOTE

74 This may be evidenced by the ability (1) to

 retire the PP&E and later return it to

 service, or (2) to continually upgrade the

 PP&E to maintain its usefulness. In addition,

 PP&E that is held for "one-time" use, such as

 a warhead, has an indeterminate life.

NOTE

75 Internally-developed software may be a

 component of general PP&E or stewardship

 PP&E.

NOTE

76 In fact, the majority of private-sector

 entities do not capitalize the cost of

 internally-developed software. The Financial

 Accounting Standards Board has not developed

 guidance on this issue.

NOTE

77 FASAB Exposure Draft, Accounting for

 Property, Plant, and Equipment, February 28,

 1995, page 19, paragraph 71, Item IC.

NOTE

78 U.S. Advisory Commission on Intergovernmental

 Relations, High Performance Public Works: A

 New Federal Infrastructure Investment

 Strategy for America, November 1993.

NOTE

79 These agencies are the Department of Energy,

 the Department of the Navy, and the National
 Aeronautics and Space Administration.

NOTE

80 FASAB, Recommended Accounting Standard No. 5,

 Accounting for Liabilities, September 1995.

NOTE

81 This may be evidenced by the ability (1) to

 retire the PP&E and later return it to

 service or (2) to continually upgrade the

 PP&E to maintain its usefulness.

NOTE

82 If recognition of the costs is based on the

 passage of time rather than physical

 capacity, the cumulative amount of time

 passed since the associated PP&E began

 operating shall be substituted.

NOTE

83 If recognition is based on the passage of

 time, the estimated useful life of the

 associated asset shall be substituted.

NOTE

84 This estimate includes any costs of any

 cleanup efforts required during the thirty

 year cleanup period. While these activities

 will not occur until the associated PP&E is

 closed, the costs are estimated at the

 current cost to conduct similar efforts.

NOTE

85 If recognition of the costs is based on the

 passage of time rather than physical

 capacity, the cumulative amount of time

 passed since the associated PP&E began

 operating shall be substituted.

NOTE

86 If recognition is based on the passage of

 time, the estimated useful life of the

 associated asset shall be substituted.

NOTE

87 If recognition of the costs is based on the
 passage of time rather than physical

 capacity, the cumulative amount of time

 passed since the associated PP&E began

 operating shall be substituted.

NOTE

88 If recognition is based on the passage of

 time, the estimated useful life of the

 associated asset shall be substituted.

NOTE

89 If recognition of the costs is based on the

 passage of time rather than physical

 capacity, the cumulative amount of time

 passed since the associated PP&E began

 operating shall be substituted.

NOTE

90 If recognition is based on the passage of

 time, the estimated useful life of the

 associated asset shall be substituted.

NOTE

91 If recognition of the costs is based on the

 passage of time rather than physical

 capacity, the cumulative amount of time

 passed since the associated PP&E began

 operating shall be substituted.

NOTE

92 If recognition is based on the passage of

 time, the estimated useful life of the

 associated asset shall be substituted.