Primer:

GASB 34
PRIMER: GASB 34 1

November 2000

Primer: GASB 34

U.S. Department of Transportation

Federal Highway Administration

Office of Asset Management

An FHWA Primer on the Governmental Accounting Standards Board’s Statement 34:

Basic Financial Statements—and Management’s Discussion and Analysis—for State

and Local Governments
2 PRIMER: GASB 34

ACKNOWLEDGMENT

The Office of Asset Management gratefully acknowledges the cooperation of the Governmental Accounting Standards Board (GASB) for permission to reprint from its publications and for assistance during the development of the Primer. We particularly thank

James R. Fountain, Assistant Director of Research, and his staff, who graciously provided valuable review and comments.

NOTE TO THE READER

Appendices 1 and 2 contain sections from both GASB Statement No. 34, “Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments,” and the GASB Implementation Guide for Statement No. 34, copyright by

Governmental Accounting Standards Board, 401 Merritt 7, Norwalk, CT 06856. This

material is included by permission. Complete copies of both GASB documents can be

obtained from the GASB.
PRIMER: GASB 34 3

TABLE OF CONTENTS

Note from the Director, Office of Asset Management 5

Introduction 7

History 7

Overview of the New Governmental Reporting Model 8

Significance 9

Statement 34 Infrastructure Requirements 12

Infrastructure Will Be Included in the Asset Base 12

Infrastructure Will Be Reported at Historical Cost 12

Infrastructure Will Be Reported at the Network, 12

Subsystem, or Individual Asset Level

Infrastructure Will Be Depreciated or Reported 13

Using a Modified Approach

Reporting Infrastructure Cost of Use 14

The Traditional Approach (Depreciation)14

The Modified Approach (Preservation)14

Implications 15

Implementation 20

Timing 20

Challenges 20

Status 22

Asset Management and GASB Statement 34 23

Asset Management Overview 23

Driving Forces 23

Implementing Asset Management 25

Asset Management and GASB Implementation 27

Conclusion 29

Glossary 30

Other Resources 31

Appendix 1 32

Summary of Capital Asset and Infrastructure Requirements Excerpted

from Statement No. 34 of the Governmental Accounting Standards

Board: “Basic Financial Statements—and Management’s Discussion and

Analysis—for State and Local Governments”

Appendix 2 46

Excerpts from “Guide to Implementation of GASB Statement 34 on

Basic Financial Statements—and Management’s Discussion and Analysis

—for State and Local Governments: Questions and Answers”
4 PRIMER: GASB 34
PRIMER: GASB 34 5

NOTE FROM THE DIRECTOR

I

am pleased to offer this Primer on the Governmental Accounting Standards Board

(GASB) Statement 34 (GASB 34), “Basic Financial Statements—and Management’s

Discussion and Analysis—for State and Local Governments,” which was promulgated by GASB on June 15, 1999. Statement 34 calls for state, local, and municipal

governments to calculate the original cost of infrastructure constructed or improved

during the 20-year period prior to the Statement’s issuance date in their annual financial reports. Governments may choose to report how much of the estimated original

cost has been “used up” (i.e., depreciated) in the intervening years, or they can, if they

meet certain requirements, report as expense the cost to maintain and renew that infrastructure on an annual basis. All new infrastructure must also either be depreciated or

have its maintenance requirements accounted for.

The changes spurred by GASB Statement 34 are not only significant for public accounting, and therefore the financial markets, but are also important because they alter

the way state and local governments offer financial information to the public. Finally,

and importantly for the transportation community, the Statement encourages a mechanism by which the traveling public can be kept informed about the infrastructure issues

of concern to them.

With GASB’s issuance of Statement 34, the Office of Asset Management has received a myriad of questions regarding the new standard. To fill this void in information, I determined that a primer on GASB 34 was in order. A previous primer issued by

the Office, the “Asset Management Primer,” was received with enthusiasm and has

proved helpful in explaining Transportation Asset Management concepts to a wide audience. This Primer is the second of what is anticipated to be a comprehensive series of

documents exploring various issues related to Transportation Asset Management.

Office of Asset Management, Infrastructure Core Business Unit,

Federal Highway Administration
6 PRIMER: GASB 34

Since Transportation Asset Management is a business approach that transportation agencies are exploring and adopting as a way to make effective resource allocation decisions,

this new Primer looks at Statement 34 from the perspective of transportation officials. It is

intended to explain the Statement, set out what is required for compliance with the infrastructure provisions, and delineate how Asset Management can be of assistance. This Primer

also provides a discussion of what GASB 34 may provide in terms of benefits to transportation agencies and is timely because of upcoming implementation deadlines. Large governments, those with over $100 million in total annual revenues (which includes all states),

must prospectively report on new infrastructure assets starting in the fiscal year beginning

after June 15, 2001, with reporting of previously acquired infrastructure assets 4 years

later.

Clearly GASB Statement 34 presents transportation agencies with an unparalleled opportunity to make other government officials and citizens aware of the value of the significant transportation assets that governments own and operate and the maintenance they

require. Statement 34 will heighten awareness of the importance of investment in these

assets and pinpoint the need to preserve their condition. State transportation officials, therefore, will continue to be interested in the Statement to the degree that it impacts their

accountability for these same transportation assets.

Madeleine Bloom

Director, Office of Asset Management
PRIMER: GASB 34 7

I

n June 1999, the Governmental Accounting Standards

Board (GASB) established new financial reporting

standards that will fundamentally change the way State

and local governments report their financial results.

Among other provisions, GASB Statement 34 (GASB 34),

“Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments,”

requires that major infrastructure assets acquired or having major additions or improvements in fiscal years beginning after June 15, 1980, be capitalized in financial

statements. In addition, the cost of using the assets must

be reflected.

HISTORY

The GASB, a private, nonprofit organization, was established in 1984 by the Financial Accounting Foundation.

The Foundation oversees GASB, provides funding, and

appoints the members of GASB’s board. The Foundation has a similar relationship with GASB’s sister organization, the private-sector, standard-setting Financial Accounting Standards Board.

GASB’s span of influence covers over 84,000 state,

county, and other local governmental units. Also impacted

by GASB’s financial reporting standards are organizations

such as public utilities, municipal hospitals, and state universities. GASB, which does not impact the Federal government, establishes concepts and standards that guide

the preparation of external financial reports. GASB establishes generally accepted accounting principles that are

utilized by auditors charged with evaluating state and local

government financial statements.

INTRODUCTION

GASB has been working toward a revised governmental reporting model since being organized in 1984. This

initiative responded to a belief that the financial reports

of state and local governments were not providing information sufficient to assess financial position and cost of

services. Fund information, while useful, did not meet

many user needs(see “Basic Financial Statementssidebar,”

pages 10-11.)

GASB’s approach to developing Statement 34 was characterized by a comprehensive outreach effort. First, the

permanent Governmental Accounting Standards Advisory Council contributed significant input as the standard was being developed. The Council is comprised of

individuals representing financial statement users from

the government; the financial community; public interest

groups; accountants, auditors, preparers; and others.

In addition, GASB established a special task force to

focus on Statement 34. The task force included, among

others, infrastructure experts from the American Association of State Highway and Transportation Officials

(AASHTO) and the Federal Highway Administration

(FHWA). Further, the outreach and review process included comments from interested individuals and organizations as well as GASB-sponsored public hearings and

focus groups.

GASB listened to the input from its broad constituency. As a result, the Board altered its initial position to

be more flexible on issues such as the magnitude of assets

to be retroactively reported, procedures for capitalization, the implementation schedule, and the requirement

that smaller governments report their assets retroactively.

In addition, it is this dialogue that generated the “modified approach” as an alternative to depreciation. (The

alternative approach is discussed in detail beginning on

page 14.)
8 PRIMER: GASB 34

OVERVIEW OF THE NEW GOVERNMENTAL

REPORTING MODEL

GASB Statement 34 specifies that full accrual accounting principles will be used for the government-wide

statements. In other words, revenues and costs will be

accounted for as they occur; costs may not be shifted to a

future year by delaying payment. Therefore, Statement

34 calls for all long-lived capital assets—including infrastructure such as roads and bridges—to be reported in

state and local government financial statements.

Also important is the requirement for a Management’s

Discussion and Analysis (MD&A) section. The MD&A

is intended as a nontechnical presentation—suitable for

a knowledgeable lay audience—of the government’s financial performance over the year, including a comparison with the previous year’s performance. The discussion will offer insights on the government’s overall

financial standing, provide an assessment of the change

in financial position relative to the last reporting period,

and identify current factors with the potential to influence the government’s future financial position. This

requirement follows the private-sector model, which requires similar information for publicly traded companies.

To meet the specifications of this new standard, governments will need to determine the cost associated with

their transportation infrastructure assets. This includes initial

construction costs and the cost

of subsequent capital improvements as well as the associated

expense of using the assets.

In terms of determining the

cost of using the assets, GASB

will allow governments to report a depreciation expense or

apply an alternative modified/

preservation approach. Governments may use the modified

approach in lieu of depreciating their assets if they have a

systematic approach to managing those assets that, at a

minimum, meets the following four requirements:

• Having a current inventory of eligible assets

• Documenting the condition of those assets via a reproducible assessment procedure

• Demonstrating that assets are being preserved at a level

predetermined by the government

• Estimating the actual cost to maintain and preserve

the assets.

The new infrastructure-related reporting features in

Statement 34 provide for snapshots of long- and shortterm financial performance and condition. For the first

time, governments will account for all of the capital resources they use in delivering services. In other words,

they will provide the full cost of serving the public. Previously only short-term resources were addressed, and

infrastructure and associated usage costs were not considered by governmental funds. The governmental fund’s

balance sheets included only financial resources, or, basically, “cash on hand.” Statement 34 more closely aligns

government financial reporting practices with those that

are presently used by proprietary funds and for corporate-style accounting because governments are now required to accrue costs in the same way businesses do.
PRIMER: GASB 34 9

SIGNIFICANCE

Statement 34 establishes methods for governments to be

more accountable to bond market analysts and underwriters, citizens, and other financial users. The Statement

provides for a comprehensive understanding of a

government’s financial position, making transparent the

ability to repay long-term debt and deal with infrastructure maintenance obligations. The implications for issuance of bonds appear highly significant.

However, the potential impact of GASB 34 extends

beyond financial reporting statements and may influence

the manner in which infrastructure is thought of by citizens, the media, legislators, and others interested in public finance and infrastructure performance. State and local governments accounted for over $75 billion in

expenditures on highways and bridges in 1997. These

expenditures are significant by any standard, and there is

enormous concern regarding how this money is being

spent. It is notable that literally trillions of dollars in public

infrastructure have not, until now, been included in the

financial statements of state and local governments.

In a general sense, implementation of Statement 34

may highlight the fact that considerable resources are

spent on transportation infrastructure assets and that the

benefits from these facilities extend many years beyond

the initial investment. Infrastructure expenditures may

be viewed more as investments.

For transportation agencies, Statement 34 is an opportunity to demonstrate that they are properly caring

for the assets with which they have been entrusted. Indeed, by making the total cost of providing infrastructure-based transportation services explicit, an agency

could anticipate a heightened interest in transportation

issues. Specifically, questions such as the following could

be raised:

• Does the agency allocate its resources in an efficient

manner?

• Are citizen needs and wants being adequately addressed?

• What is the prognosis for the future condition of the

system?

• How does the performance of one transportation

agency compare to other similar agencies?

• Are the government’s maintenance strategies resulting in the renewal of infrastructure assets?

Finally, Statement 34 has the potential to reinforce a

transportation agency’s choice to preserve a given asset

instead of deferring maintenance. Because an increased

emphasis is placed on reducing life-cycle costs, the preservation choice may be demonstrated as more reasonable than deferring maintenance. Deferred maintenance

may result in prematurely replacing the asset, potentially

at higher cost.

It is not an overstatement to say that Statement 34

will shape the environment in which transportation decisions are made. Asset Management, while independent

of this GASB Statement, offers a means of enhancing the

positive implications of Statement 34 and also of establishing more effective interactions with the public who

utilize or are impacted by the assets.
10 PRIMER: GASB 34

BASIC FINANCIAL STATEMENTS

With GASB Statement 34, the following statements

are required as part of the state and local financial reports and are audited.

GOVERNMENT-WIDE FINANCIAL STATEMENTS

The government-wide statements are a new requirement and include a statement of net assets and a statement of activities. The subject statements focus on the

government as a whole and report all assets (including

infrastructure), liabilities, revenues, and expenses of the

government. These statements follow the flow of economic resources method (see the Financial versus Economic Measures sidebar, page 11), using full accrual

basis accounting. Accrual accounting means that transactions are recorded when they occur, rather than when

cash is disbursed or received.

These methods are similar to those used in the private sector and for enterprise funds of State and local

governments (for example, tollways). GASB believes

that this approach will provide better information about

(1) operating results, (2) the government’s financial

position as a whole, (3) how and when expenses to provide government services are incurred, and (4) how one

government compares to another.

Statement of Net Assets

The statement of net assets accounts for the entity’s

assets and liabilities at a given point in time. Net assets

are simply the difference between assets and liabilities.

All financial and capital resources are reported. Infrastructure assets that are being or have been depreciated are reported at historical cost (or estimated

historical cost, at transition), less accumulated depreciation. Infrastructure assets that are reported using the

“modified approach” are presented separately, capitalized at historical cost. Because preservation costs are

expensed, there is no accumulated depreciation. In

either case, additions and improvements to infrastructure are capitalized at historical or estimated historical

cost.

Statement of Activities

The statement of activities reports government operating revenues and expenses. Expenses are reported by

function and program, such as transportation, and any

revenue (except taxes) attributable to that function or

program is reported with the function or program and

net expense or revenue presented. A review of this statement will indicate which programs contribute to and

which draw from general revenues. Annual depreciation expense is generally reported with each program

or function. For those assets reported via the modified

approach, preservation expenditures are expensed; no

depreciation expense is reported.

FUND FINANCIAL STATEMENTS

Fund accounting is used only by governments. A selfbalancing set of accounts is maintained for various categories—or funds—for the organization. With GASB

34, the presentation, measurement focus, and basis of

accounting of funds did not change. Fund accounting

will continue alongside the new government-wide

statements. Reconciliation of the fund statements with

the government-wide statements will be required.

The funds reported by governments are organized

into three categories: governmental, proprietary, and

fiduciary. Each of these broad categories includes a

number of different funds. The three broad categories

are described below:

Governmental Funds

The entity’s basic activities are reported in the “governmental fund” statements. These funds are prepared

using the current financial resources measurement focus (see the Financial versus Economic Measures

sidebar, page 11) and a modified, as opposed to full,

accrual basis of accounting. This means that governmental funds do not report fixed assets, and therefore

do not have depreciation expense. Further, they do not

show long-term debt.

An example of a fund included in the broad governmental fund subdivision is the general fund. Departments generally funded with unrestricted income
PRIMER: GASB 34 11

FINANCIAL VERSUS ECONOMIC

MEASURES

Within governmental financial reporting,

one of two different measurement focuses

is employed. The choice depends on accounting assumptions regarding what the

transaction represents in terms of how the

resources will be used.

The financial resources measurement

focus is similar to a cash basis and measures

outlays in terms of cash expended (e.g.,

short-term payments). This means that

even disbursements to secure a capital investment item are classified as expenditures.

The economic resources measurement

focus accounts for all assets and liabilities.

This is the focus used in proprietary funds

of governments, government-wide financial statements, and for-profit accounting.

Under this approach, an expenditure for a

capital asset is noted on the balance sheet

as an asset; the purchase is not reflected

on the operations statement. The asset is

depreciated over its useful life with its cost

being allocated to the years for which it is

used.

sources (e.g., general sales tax) are reported in this area.

Another example of a governmental fund is the capital-project fund, which includes funds earmarked for

building and/or acquiring major capital assets such as

infrastructure.

Governmental funds will continue to be reported

on a flow of current financial resources measurement

focus and modified accrual basis of accounting. The

required financial statements are a balance sheet and a

statement of revenues, expenditures, and changes in

fund balances.

Proprietary Funds

Proprietary fund statements are used to report on activities financed and operated in a fashion similar to

the private sector. Included in this major category are

enterprise funds and internal service funds. Enterprise

funds account for services where cost recovery is via

user fees. Examples of enterprise fund activities include

electrical and water utilities. Internal service funds report on departments that provide services to other

governmental activities (e.g., a motor pool).

Proprietary fund statements will continue to record

transactions using the economic resources measurement focus and accrual basis of accounting (with depreciation). Required proprietary fund statements are

as follows: statement of net assets; a statement of revenues, expenses, and changes in fund net assets; and

cash flow statements.

Fiduciary Funds

Fiduciary funds account for assets held and administered by a government for others. In other words, the

government is acting as the trustee, and the funds may

not be used by the government to support its own programs. An example of such an activity is a pension trust

fund. Like proprietary fund statements, fiduciary statements are prepared using the economic resources focus and the accrual basis of accounting. According to

GASB, required fiduciary fund statements include a

statement of net assets and a statement of changes in

net assets.
12 PRIMER: GASB 34

STATEMENT 34 INFRASTRUCTURE REQUIREMENTS

T

he following discussion highlights the key infrastructure features of GASB Statement 34. A summary of the actual Statement, from the transportation community’s perspective, is included at

Appendix 1. The reader is referred to Appendix 2 for

GASB’s answers to commonly asked questions.

INFRASTRUCTURE WILL BE INCLUDED

IN THE ASSET BASE

The asset base will include all long-lived capital assets

that are employed in a government’s operations. The term

“long-lived” refers to assets that have initial useful lives

that go beyond one reporting period. Examples of such

assets include land, improvements to land, buildings,

equipment, and infrastructure.

Infrastructure assets such as roads, bridges, and tunnels represent a somewhat special case among capital assets in that they are stationary and can generally be preserved for an indefinite period of time.

INFRASTRUCTURE WILL BE REPORTED AT

HISTORICAL COST

GASB 34 calls for capital assets to be capitalized at historical cost. To “capitalize” means to record the amount

expended to acquire a capital resource as an asset, rather

than as an expense. The capitalized amount includes all

charges for establishing the subject asset in a condition

and location where it is available for its intended use.

GASB’s preference is that the initial capitalization

amount represent historical cost. However, if reporting

entities have difficulty securing historical cost amounts

at the time of transition to Statement 34, either prospectively or retrospectively, the use of “estimated historical

cost” and “deflated current replacement cost” methods

will be allowed for infrastructure assets.

INFRASTRUCTURE WILL BE REPORTED AT THE

NETWORK, SUBSYSTEM, OR INDIVIDUAL

ASSET LEVEL

Statement 34 provides entities with the option of reporting at the network, subsystem, or individual asset level.

This provision is particularly helpful in the case of infrastructure where it is less burdensome to report on a major subsystem, such as the Interstate system, rather than

each numbered highway.

GASB defines a “network” as a group of assets where

the individual members either provide similar services or

work together to provide one service. Thus, a network

can range from one asset that is made up of many components to a collection of assets that are roughly the same.

For example, an entire roadway system, including all types

of highways, signages, and rest areas, can be considered a

transportation network. Similarly, a “subsystem” is a part

of a network of assets. Components of the subsystem together perform a unique function, related to but distinct

from the network. For example, a municipality’s road system constitutes a network, whereas residential streets

could be a considered a subsystem of the network.

GASB has established the concept of major networks

and major subsystems. A government, at a minimum, must

identify and report on major networks where, according

to Statement 34, “the cost or estimated cost of the network is expected to be at least 10 percent of the total cost

of all general capital assets reported in the first fiscal year

after June 15, 1999,” or on subsystems where estimated

costs are expected to be at least 5 percent of the entity’s

capital assets. Governments organizing their assets in this

manner may choose not to report on non-major networks

and still be consistent with the generally accepted accounting standards under Statement 34.
PRIMER: GASB 34 13

INFRASTRUCTURE WILL BE DEPRECIATED OR

REPORTED USING A MODIFIED APPROACH

To be in compliance with Statement 34, governments

must report capital assets—including infrastructure—at

historical cost and then depreciate those assets over their

useful lives. However, if infrastructure assets are maintained so as to preserve remaining service potential, the

“modified approach” may be employed instead of reporting

depreciation for the assets. GASB recognizes that when assets are consistently maintained and renewed so as to

ensure essentially an indefinite life, they are not being

“used up” as is assumed under traditional depreciation rules.

Under the modified approach, governments must inventory and assess the condition of the assets comprising

a network (or subsystem), decide on a minimum level of

acceptable condition, estimate the amount necessary to

maintain and renew the assets, and then demonstrate that

investment has been sufficient to maintain the target condition level established by the government. If these requirements are met, the government may report as expense the cost of maintaining and preserving or renewing

the asset network as opposed to reporting depreciation.

The traditional and modified approaches are explained

in greater detail in the following sections.
14 PRIMER: GASB 34

THE TRADITIONAL APPROACH (DEPRECIATION)

T

he traditional accounting approach to reporting

the annual cost of using capital assets involves two

components: (1) operating maintenance and repairs, and (2) depreciation. Depreciation is a

method of accounting for the “using up” of long-lived

assets due to use or obsolescence. It is not intended as a

measure of actual deterioration. In fact, deterioration may

not actually occur in any given year, and, further the “real

world” value of the asset may increase.

For each year of the asset’s useful life, expenses associated with routine maintenance and repairs and depreciation are reported in the statement of activities. Capital

assets are reported net of accumulated depreciation, if

any, in the statement of assets. (See Basic Financial Statements sidebar, pages 10-11.)

Depreciation expense is the share of the net acquisition cost of an asset allocated to the current period. To

calculate the net acquisition cost, the initial cost of the

capital asset is determined and then adjusted to reflect

the salvage value, or that portion of the initial cost that

will remain when the asset is taken out of use. To determine depreciation expense, the net acquisition cost is allocated to each year over the total years of its useful life,

usually by dividing net acquisition cost by the estimated

years of useful life (e.g., straight line depreciation).

“Useful life” is an estimate of how long the asset will

be in use. The useful life estimate assumes a given maintenance and repair schedule. Thus, the costs associated

with such maintenance and repair activities are reported

as expenses when incurred because they do not extend

the life of the asset. For example, maintenance only helps

ensure that the asset will reach its useful life and provide

acceptable service during that period.

REPORTING INFRASTRUCTURE COST OF USE

Depreciation expense also includes an allocation of the

costs of any additions or improvements that occur after

initial acquisition and that benefit more than one period.

In other words, the “net acquisition cost” (i.e., the amount

that is depreciated) will be adjusted over time if the asset

is materially improved in terms of quantity or quality or

if its service life is expected to increase beyond the prior

reported estimate. This is because the benefits associated

with such improvements will be received over an extended

period. Consistent with this approach, the cost of preservation/renewal activities will be capitalized and assigned

to future periods through depreciation. Alternatively,

amounts that benefit only the current period, such as routine operating maintenance and repair, are shown in the

financial statements as expenses and are not capitalized.

There are many ways to allocate the net cost of depreciable assets. In the case of Statement 34, any established

depreciation method may be used. Further, reporting

entities may use composite methods.

THE MODIFIED APPROACH (PRESERVATION)

The modified approach recognizes that transportation

agencies typically strive to maintain their assets at a specified level in perpetuity. Transportation agencies are constantly renewing their assets and thereby extending their

useful lives. Therefore, preservation costs may reasonably be considered an appropriate measure for the cost of

use because the expenditures necessary to preserve the

system at its current condition are reported as period costs.

Like the cost of routine operating maintenance—which

benefits only one period—preservation costs would be

reported as an expense in the financial statements. The

reader will recall that in the case of depreciation, preservation/renewal expenditures are capitalized and then, over

time, depreciated. Similarly, under the modified approach,

improvements and additions that increase capacity or

efficiency are capitalized, however, they are not depreciated.
PRIMER: GASB 34 15

A government using the modified approach will not

have to depreciate infrastructure assets as long as certain

requirements are met. First, the reporting entity must

establish, and make public, condition goals for the subject assets on which they are reporting. Second, the government must estimate the spending levels necessary to

achieve or maintain the condition target. Third, the

amount required to maintain the pre-determined condition level must be compared to actual spending. Fourth,

the government must document that the assets are being

preserved approximately at or above the condition goal it

pre-selected.

To comply with the requirements of the modified reporting approach, the government must have in place a

system of managing assets that will produce a current inventory, assess the condition of that inventory, calculate

the maintenance and preservation levels associated with

alternative condition targets and estimate the spending

levels necessary to achieve those targets. This information will provide a basis from which to establish attainable condition goals. Further, Statement 34 requires that

governments be able to demonstrate these capabilities.

GASB also requires that governments address the following questions for assets reported using the modified

approach in the “Required Supplementary Information”

section of the financial statements:

• What is the “current” condition of the assets? (Assessments are required at least every 3 years, with the past

three assessments being reported.)

• At what condition level does the government intend

to maintain its assets?

• How is the government doing in terms of maintaining

and preserving the assets relative to the government’s

stated goal?

• How do actual maintenance and preservation expenditures compare with the amount estimated as being

required to approximately meet or exceed the target

condition level?

• What is the basis for tracking condition (e.g., the International Roughness Index might be used for pavements)?

• Has the reporting entity done anything that might

impact the reported trends (e.g., changes in the basis

for tracking and reporting condition)?

If a government is not able to maintain the pre-specified condition level for a given category of assets, then

the entity will no longer be eligible to report using the

modified approach and will need to depreciate those assets; alternatively the government may lower their preestablished condition level. It is important to note that

the condition target specified for Statement 34 purposes

may be less ambitious than the management target. For

example, the management target could be that 85 percent of roads are in good or better condition while the

target for GASB 34 compliance purposes could be that

75 percent of roads are in good or better condition.

IMPLICATIONS

In summary, under the depreciation option, infrastructure assets are capitalized based on historical cost and

reported (net of accumulated depreciation) in the statement of net assets. Also capitalized are improvements,

additions, and preservation activities. Depreciation expense is reported in the statement of activities.

In the case of the modified approach, infrastructure

assets are capitalized based on historical cost. These costs

are recorded in the statement of net assets. However, they

are not depreciated. Instead, preservation costs are recorded as expenses in the statement of activities. As with

depreciation, expenditures that materially improve the

quantity or quality of the subject asset are to be capitalized.

Figure 1, Depreciation and Preservation on the Financial Statements, pages 16-17, illustrates the treatment

of expenses associated with depreciation, preservation, improvements, and additions for the traditional and preservation approaches to reflecting the cost of use of capital

assets under Statement 34.
16 PRIMER: GASB 34

DEPRECIATION AND PRESERVATION ON THE FINANCIAL STATEMENTS

Depreciation and Modified Approaches

The reader should note that examples of completed statements, provided as schematics in this figure, may be found in Appendix 1.

Statement of Net Assets

Primary Government

Governmental Business-type Component

Activities (1) Activities (2) Total Units (3)

ASSETS

Cash and cash equivalents

Investments

Receivables (net)

Internal balances

Inventories

Capital assets, net

Total Assets

LIABILITIES

Accounts payable

Deferred revenue

Noncurrent liabilities

Total Liabilities

NET ASSETS

Invested in capital assets,

net of related debt

Restricted for (4):

Capital projects

Debt service

Community development projects

Other purposes

Unrestricted (deficit)

Total Net Assets

(1) Examples: Public safety, health and sanitation, transportation

(2) Examples: Water, sewer

(3) Examples: Landfill, public schools

(4) Assets whose use is constrained by law or externally

Note: See also Question No. 57, Appendix 2.

Preservation capitalized

(if depreciation approach)

Capitalized infrastructure

assets net of past depreciation

(if depreciation approach) or

at original cost (if modified

approach)

Depreciation expense (if depreciation approach)

or

Preservation expense (if modified approach)

FIGURE 1. Depreciation and Preservation on the Financial Statements

Improvements/Additions

capitalized (depreciation

and modified approaches)
PRIMER: GASB 34 17

General revenues:

Taxes:

Property

Franchise

Public service

Investment Earnings

Miscellaneous

Special Items

Transfers

Changes in net assets

Net assets – beginning

Net assets – ending

DEPRECIATION AND PRESERVATION ON THE FINANCIAL STATEMENTS

Depreciation and Modified Approaches (continued)

Statement of Activities Net Revenue and

Changes in Net Assets

Primary Component

Expenses Program Revenues Government Units

Functions/Programs

Primary Government

Governmental activities

General government

Public safety

Public works

Engineering services

Health and sanitation

Cemetery

Culture and recreation

Community development

Education

Interest on long-term debt

Total governmental activities

Business-type activities

Water

Sewer

Parking facilities

Total business-type activities

Total primary government

Component units

Landfill

Public school system

Total component units

Maintenance and depreciation expenses

are recorded as expenses if the depreciation

approach is used.

or

Maintenance and preservation/renewal expenses

are recorded as expenses if the modified

approach is used.

FIGURE 1. Depreciation and Preservation on the Financial Statements continued
18 PRIMER: GASB 34

Technical Application

There are significant technical hurdles to overcome in

applying depreciation to long-lived transportation infrastructure assets. First, transportation agencies attempt to

maintain such assets at a constant condition level indefinitely. This makes it difficult to estimate the number of

years constituting useful life. In fact, depreciation expense

would be marginal if the estimated useful life of an asset

reflected the agency’s efforts to continually renew the

asset’s life. Nonetheless, agencies implementing the depreciation approach will have to determine useful life

given a set of assumptions regarding the level of future

preservation and maintenance activity. Such assumptions

will need to be documented and validated for the auditors of the financial reports.

Another issue that arises is determining which expenditures should be capitalized and depreciated and which

should be expended. Also, it is difficult to ascertain when

remaining useful life should be revised given changes in

maintenance and preservation activities or in the use of

the asset relative to assumptions made when useful life

was initially determined. As an illustration, if a government does not perform maintenance and preservation

activities as planned—or if wear and tear on the road increases to the point where it is expected to reduce useful

life, useful service life should be reduced, thereby increasing the depreciation expense.

There are difficulties with the modified approach as

well. One is that it may be viewed as subjective since decisions regarding condition targets and assessments are

made by individuals with the potential to be directly impacted by the outcome. Further, some believe it is difficult for accountants to audit the processes and procedures

used by the transportation agency in complying with the

requirements of the modified approach. It should be

noted, however, that accounting involves estimation and

application of judgment whether the modified or the depreciation approach is used.
PRIMER: GASB 34 19

Public Interpretation

Depreciation is a systematic allocation of the cost of an

asset over its estimated useful life; it is not meant to indicate the cost of actually using the asset in any particular

time frame. Further, the net cost of

an asset, as reported in the statement of assets, reports the

undepreciated or remaining cost of

the asset, not its physical condition

or its replacement cost. As a result,

the depreciation approach does not

provide information to the public

regarding the actual cost of use of

infrastructure assets.

Further, depreciation expense

could be viewed by the public as

evidence that the asset is being allowed to deteriorate over time

when most agencies continuously

maintain these assets to a given

level of condition. In fact, these

same agencies would view a decline

in condition as a problem to be corrected. Finally, the depreciation approach does not capture the effect

of preservation or renewal efforts

and therefore does not provide information for assessing deferred

maintenance.

In contrast, the modified approach provides a venue

to document asset management efforts in general and

preservation or renewal activities in particular. Governments will have a platform from which to discuss the

merits of highway preservation compared to deferred

maintenance.

Another potential advantage of the modified approach

is its requirement for documentation, which may provide trend information indicating changes in condition

over time. This material may be a useful avenue for transportation agencies to outline the effectiveness of their

stewardship activities and to demonstrate the requirement

for and use of future resources.
20 PRIMER: GASB 34

TIMING

I

n the fiscal year beginning after June 15, 2001, large

governments with annual revenues of $100 million

or more must prospectively report all major infrastructure assets built, restored, or improved after the

effective date of GASB Statement 34. And, they must

report on those assets in subsequent years, using either

the depreciation or the modified approach. Medium and

small size governments have later effective dates (see

Timeline sidebar, below).

While all governments are encouraged to report all

infrastructure assets as of the effective date of Statement

34, large governments are only required to begin reporting all major infrastructure acquired, renovated, or improved in terms of quantity or quality after June 30, 1980,

for years following June 15, 2005. Medium governments

have until 2006 before they must satisfy the retroactive

reporting requirements. This requirement is optional for

small governments.

IMPLEMENTATION

Statement 34 allows for transition to the new requirement. For example, governments may begin using the

modified approach as long as at least one condition assessment has been completed and the results of the assessment show that the infrastructure assets are being

preserved at approximately the condition level selected

by the government. Eventually the prior three condition

assessments will be required to be disclosed.

CHALLENGES

State and local governments are grappling with questions

such as those listed in the sidebar on page 21. The answers will determine the cost, difficulty and time frame

of complying with GASB’s Statement 34. For example, to

the extent that transportation agencies are able to build on

existing information and capabilities, cost will be minimized.

Difficulty will be determined by how easy or hard it is to

secure the necessary information. And the time frame that

a government requires for compliance will depend on how

long it takes to set up the necessary mechanisms.

TIMELINE Phase 1

Governments

Annual Revenues

>= $100 million

in FY99

Phase 2

Governments

Annual Revenues

$10 million up to

$100 million

in FY99

Phase 3

Governments

Annual Revenues

< $10 million

in FY99

PROSPECTIVE REPORTING

Report on all infrastructure built or

improved after the effective date of

GASB

RETROACTIVE REPORTING

Report on all infrastructure built or

improved on or after June 15, 1980

Fiscal year

beginning after

June 15, 2001

Fiscal year

beginning after

June 15, 2002

Fiscal year

beginning after

June 15, 2003

Fiscal year

beginning after

June 15, 2005

Fiscal year

beginning after

June 15, 2006

Optional
PRIMER: GASB 34 21

IMPLEMENTATION QUESTIONS

How concerned should we be about our reporting

practices being consistent with those of other governmental units?

What method should we use to arrive at the historical cost of our infrastructure, especially if our historical records are inadequate?

How should we define “maintenance” versus “preservation” versus “additions” versus “improvements” for reporting purposes? Depending on the

assumptions, these activities will be capitalized and

depreciated or expensed.

If we choose to implement the depreciation approach,

what method will we use? Also, what should be depreciated, what should be the useful life of the asset, and what should be the capitalization dollar

threshold?

Do we have a sufficient understanding of GASB Statement 34 to effectively communicate with our

Comptroller’s Office?

Do we have the ability to explain, to external groups,

how we arrived at our spending/investment decisions?

Do we have available the information necessary to provide for an informed resource allocation process as

it takes place outside our agency as well as at the

highest levels within our organizations? For example, can we demonstrate the merits of preserving assets as opposed to deferring maintenance?

As state and local transportation agencies begin to

investigate the requirements for complying with

GASB Statement 34, they will need to address questions such as those presented below:

How will we define our networks/subsystems for reporting purposes? For example, the highway infrastructure could be reported, in its entirety, as a

network. Alternatively, it could be broken down

into subsystems such as pavements and bridges,

or it could be reported by functional class. How

should asset classes such as signs be treated?

Is it better to depreciate or apply the modified approach? How concerned should we be about the

information we provide to readers of the financial

statements? How much effort will one approach

require, versus the other? What will be the relative cost?

Do we have management systems in place that will

support the modified approach?

• Do we know our inventory?

• Are we able to assess the current condition of

our inventory? Are we using a reproducible

approach?

• Do we have the ability to set minimum condition targets that we can defend and achieve?

• Can we estimate future system condition given

alternative investment levels?

• Can we estimate investment requirements to

achieve a given system condition level?

• Can we determine the level of funding associated with a particular network or subsystem?
22 PRIMER: GASB 34

However governments choose to respond to Statement

34, they will want to be sensitive to the issue of citizen

concerns. From a public perspective, the new financial

statements will be similar to a report card that can be

used to assess government performance with regard to

the effect of infrastructure decisions on financial position and cost of services.

STATUS

As this Primer went to publication, it was not totally clear

how states would initially respond to Statement 34. That

is, would they report their infrastructure assets using the

depreciation or modified approach? Preliminary evidence

suggested that perhaps a majority of states would use depreciation; however, a significant number, it appeared,

would use the modified approach. In many states, the

comptroller will make the decision, and may be particularly concerned with the technical application issues for

the modified approach. Also, it is noted that state comptrollers must consider infrastructure assets other than

those related to transportation, and they may have concerns with consistency.

It is important to remember that states may change

their reporting approach at any time in the future, i.e.,

they could move from depreciation to the modified approach. Of course, if a state is not able to meet its condition targets, it will have to depreciate the assets or lower

its acceptable condition target. What was clear as the first

implementation date approached was that virtually all

states planned to comply with Statement 34.
PRIMER: GASB 34 23

ASSET MANAGEMENT OVERVIEW

Asset Management is a framework for making

cost-effective resource allocation decisions. The

decisions are strategic rather than tactical. That

is, they are based on a wide, systems view of all

the assets under the transportation agency’s umbrella, and

they reflect an extended time horizon. An Asset Management approach has at its foundation technical, fact-based,

information for decision-making and is driven by goals,

policies, and budgets.

The technical information supporting the framework

is derived from engineering, economic, performance, and

behavioral models. Raw data such as inventory statistics

are also required to make Asset Management work. The

ability to gather timely and useful technical information,

critical to Asset Management, has been made possible by

the technological revolution that has brought about faster

and more capable computers.

Obtaining the necessary information and appropriately

applying the tools require horizontal and vertical communication. Vertical communication means that everyone involved in the process—from elected officials to

front-line practitioners—has access to reliable,

overarching information. Successful Asset Management

also requires information that flows horizontally, across

functions, asset classes, and modes.

Customer-based performance targets and organizational goals, policies, and budget levels establish the guiding principles for making decisions using an Asset Management framework. Knowing these factors is critical

when applying the analytical tools. Performance goals

reflect input from citizens, legislators, and policy makers, and they provide a focal point from which transportation officials may explain their programs and performance to the public. In addition, they assist transportation

executives in identifying and focusing on critical system

requirements.

Implementing an Asset Management framework provides not only the means to identify optimal investment

strategies but also a way to articulate them. These capabilities arise from the transportation agency having the

ability to weigh one alternative over another—in other

words, to conduct “what if” analysis. For example, an

agency faced with the possibility of a decrease in funding

can readily demonstrate the resulting impact on system

condition and performance.

Figure 2 includes a flow diagram characterizing a generic Asset Management framework and an overview of

the process. It should be noted that, in application, Asset

Management will vary significantly from organization to

organization.

DRIVING FORCES

Those charged with managing highway assets are faced

with a mature system that is experiencing high and growing demand as well as the ongoing deterioration associated with an aging asset. At the same time, system users

expect high quality service.

Transportation officials are being asked to deal with

this challenge in an era of increasingly constrained funding. The transportation sector faces difficult competition

from other components of a State’s budget. In addition,

legislative provisions directing transportation funds to

activities other than traditional infrastructure projects

have become more common.

Further complicating the new transportation environment is the changing transportation agency workplace.

First, staffing is down as the result of the recent

downsizing initiatives associated with government reinvention as well as a robust economy that has made it

difficult to attract and retain capable staff. Second, a dramatic increase in outsourcing and a move toward public/

private ventures has brought more players into the process of managing the system.

ASSET MANAGEMENT AND GASB STATEMENT 34
24 PRIMER: GASB 34

First, performance expectations, consistent

with goals, available budgets, and organization policies, are established and used to guide

the analytical processes, as well as the decision-making framework. Second, inventory

and performance information are collected

and analyzed. This information provides input on future system requirements (also called

“needs”). Third, the use of analytical tools and

reproducible methods produces viable costeffective strategies for allocating budgets to

satisfy agency needs and user requirements,

using performance expectations as critical inputs. Alternative choices are then evaluated,

consistent with long-range plans, policies, and

goals. Fourth, projects are selected and programs are implemented. The entire process is

periodically evaluated through performance

monitoring and systematic processes.

Goals and Policies 

(Reflects Customer Input)

Performance Monitoring

(Feedback)

Condition Assessment

and Performance 

Modeling

Alternatives Evaluation 

and Program

Optimization

Short- and LongRange Plans

(Project Selection)

Program Implementation

Asset Inventory

Budget/

Allocations

FIGURE 2. Generic Asset Management System Components and Overview

 SYSTEM COMPONENTS OVERVIEW

A GENERIC ASSET MANAGEMENT FRAMEWORK

Source: Adapted from Asset Management Primer, Federal Highway Administration, 1999
PRIMER: GASB 34 25

Just a few decades ago “accountability” was a relatively

unfamiliar term in the transportation community. This

has changed dramatically. Now these agencies understand

that citizens expect them to be responsible stewards of

their investment. Therefore, transportation agencies are

increasingly sensitive to the probability that they will be

called upon to communicate and explain their management approach and results.

Because GASB Statement 34 will make public the impact of transportation decisions, public demands for accountability are likely to intensify. Statement 34 will

clearly help to move Asset Management forward. However, even if Statement 34 had never been formalized,

Asset Management would still be viewed as a valuable

way of doing business. In fact, in response to the above

indicated driving forces, the interest in Transportation

Asset Management was here well before Statement 34.

IMPLEMENTING ASSET MANAGEMENT

For decades, all transportation agencies have actively

managed their assets. In response to the driving forces

discussed above, some have explored sophisticated engineering, economic, data integration, and business practices. These practices have made it possible to begin the

move from decision-making styles that result in tactical

solutions to ones that provide more

strategic options.

In the past, many transportation

agencies made investment and

maintenance decisions based on the

counsel of high-level staff. These

individuals typically had extensive

experience and a broad knowledge

base. However, both the experience

and the knowledge were often specialized, and decisions tended to be

based on information pertaining to

a specific asset class, such as pavements. In fact, the management

systems supporting the decisionmaking process were developed

along the silo pattern, with, for example, separate systems for bridges

and pavements.

Not surprisingly, program development decisions were

based more on historical spending patterns, political considerations, and intuition. Success was measured as the

extent to which backlog was reduced, and decisions were

often made using “worst first” criteria.

Transportation agencies are interested in moving from

asset management (e.g., managing their assets individually) to Asset Management (with a capital “A” and a capital “M,” that is, managing their assets under a comprehensive framework). To assist in this process, AASHTO

and FHWA have underway initiatives to develop and enhance the building blocks of Asset Management. In addition, a number of transportation agencies have contracted

with subject-matter experts to evaluate their particular

situations and recommend future action.

In 1999, FHWA established the Office of Asset Management. Its research agenda is intended to bring stateof-the-art management system technology and best practice to state and local practitioners. Work is ongoing to

enhance and encourage the application of existing management systems and to integrate these systems. New

management systems, such as for tunnels and roadway

hardware, are under development or are being explored.
26 PRIMER: GASB 34

HIGHWAY ECONOMIC REQUIREMENTS SYSTEM

A major new initiative being sponsored by FHWA’s Office of Asset Management is a program to provide an economic/engineering programming tool

called the Highway Economic Requirements System (HERS) model to interested states. HERS is currently used by FHWA at the national level to

identify the costs, benefits, and national economic implications associated

with highway investment options.

FHWA believes that HERS may also be useful for state-level highway

investment planning. A pilot program is planned where a number of states

will evaluate the applicability of the model for their use. If the model is

found to be appropriate, FHWA is committed to bringing the HERS capability to all interested states.

HERS uses incremental benefits-versus-cost analysis to optimize highway investment. The model addresses highway deficiencies by quantifying

the agency and user costs of various types and combinations of improvements, each subjected to a rigorous benefits-versus-cost analysis that considers travel time, safety, and vehicle operating and emissions costs.

Within the HERS process, state travel forecasts are analyzed, using a set

of user-defined standards based on accepted engineering practice, to predict

future pavement and capacity deficiencies. HERS selects the “best” set of

highway improvements to satisfy economically sound highway performance

objectives. When funding is not available to achieve “optimal” spending

levels, HERS prioritizes economically worthwhile potential improvement

options according to relative merit (that is, benefit-to-cost ratios) and selects the “best” set of projects. Given funding constraints or user-specified

performance objectives, HERS minimizes the expenditure of public funds

while simultaneously maximizing highway user benefits.

The state version of HERS (HERS/ST) has the potential to help statelevel policy makers address resource allocation questions because it is able

to perform “what if” analyses. For example, HERS/ST would allow users to

examine the economic and system impacts of a 20 percent reduction in investment levels. In this way, HERS could provide an objective platform from

which state DOTs could communicate with other state officials. In addition,

HERS/ST may assist state DOTs in meeting the new Governmental Accounting Standards Board provisions.

Source: Asset Management Primer, Federal Highway Administration, 1999
PRIMER: GASB 34 27

The Office also provides technical assistance to transportation agencies interested in developing or improving maintenance and construction and system preservation programs. Recent activities have focused on the

development of training courses and a national specifications database.

Developing, recommending, and advancing engineering/economic analysis (EEA) tools for use by state transportation agencies is another Office priority area. Activities are currently focused on development of a generic

life cycle cost analysis (LCCA) model to support pavement design decisions and evaluating the applicability, at

the state level, of the Highway Economic Requirements

System (HERS) (see sidebar page 26). The HERS is able

to predict future investment requirements necessary to

correct pavement and/or capacity deficiencies given specific performance goals. Alternatively, HERS can predict

future user cost as well as system condition and performance levels given alternative investment levels. This

model may be of use for states reporting the cost of infrastructure use using GASB 34’s modified approach.

Integrated data systems are an essential component of

an Asset Management framework. The Office is developing a Data Integration Primer that will present stateof-the art data integration procedures and provide information on best practices.

AASHTO, through the National Cooperative Highway Research Program, is sponsoring development of a

first generation Guide to Asset Management. This document will provide the states with assistance, guidance, and

tools as they incorporate Asset Management principles

and procedures into their organizations.

ASSET MANAGEMENT AND GASB IMPLEMENTATION

Regardless of which approach—depreciation or modified—is selected to report on the use of capital assets over

time, an Asset Management framework can be helpful in

responding to Statement 34 requirements as well as in

explaining to the public the transportation material included in financial reports. In addition, an Asset Management framework that operates as presented in Figure

3, page 28, will assist transportation agencies in complying with the requirements of the modified approach.

Also, Asset Management will result in better, more

cost-effective decisions—thereby improving a state’s ability to set system condition and performance targets and

to meet them through effective decisions.

It should be noted that Statement 34, in its presentation of the modified approach, calls for “an asset management system” to be in place. However, the requirement is not so much for an Asset Management framework

(with a capital “A” and capital “M”) but rather any comprehensive, fully employed management system, such as

a pavement or bridge management system.
28 PRIMER: GASB 34

• Condition Goals

• Inventory Information

• Investment Level Required to Achieve

the Condition Goals

• Current Condition Levels

• Budget Information (Actual versus

Required to Achieve Condition Goals)

Goals and Policies 

(Reflects Customer Input)

Performance Monitoring

(Feedback)

Condition Assessment

and Performance 

Modeling

Alternatives Evaluation 

and Program

Optimization

Short- and LongRange Plans

(Project Selection)

Program Implementation

Asset Inventory

Budget/

Allocations

FIGURE 3. Asset Management and the Modified Approach

GENERIC ASSET MANAGEMENT

FRAMEWORK*

THE ASSET MANAGEMENT FRAMEWORK AND THE MODIFIED APPROACH

*Source: Asset Management Primer, Federal Highway Administration, 1999

INFORMATION REQUIRED FOR

THE MODIFIED APPROACH
PRIMER: GASB 34 29

C

learly, GASB Statement 34 is a major step toward greater accountability to the

public regarding transportation services. By keeping track of transportation

assets and efforts to preserve them, governments will be able to demonstrate

prudent stewardship of their infrastructure. Also, the Statement’s provisions help to

highlight the significance of infrastructure as an investment and the importance of maintenance activities.

It appears that an Asset Management decision-making framework will not only help

transportation agencies comply with Statement 34, but will also assist them in realizing

its potential benefits. The Statement is one more reason why transportation agencies

are becoming more enthusiastic about moving from managing assets to Asset Management—that is, with a capital “A” and a capital “M.”

CONCLUSION
30 PRIMER: GASB 34

Accrual Basis of Accounting

Revenue, expenses, and other changes in the financial

condition of an organization are accounted for when they

occur, without consideration of the timing of actual cash

received or expenditures made.

Capital Asset

A long-term, productive asset, such as a building or a road.

Capitalize

To record an expenditure as capital asset (long-term)

rather than an expense. If the benefits from an expenditure will be realized over several future periods, the expenditure is capitalized and the cost is allocated to future

periods through depreciation, that is, if it has a definite

life and the modified approach is not used.

Composite Depreciation Expense

Refers to grouping similar assets or dissimilar assets within

the same class together for the purpose of computing a

single depreciation rate to be applied to all assets in the

group. (Source: GASB)

Depreciation

A systematic allocation to current operating cost, over

the asset’s estimated useful life, of the original cost of the

asset. (See useful life.)

Expense

To record an expenditure as an expense to current operations (as opposed to capitalizing the expenditure). (See

capitalize.)

Fund Accounting

A system of accounting used by governments that presents an array of self-balancing accounts representing

governmental categories, or funds.

Generally Accepted Accounting Principles

(GAAP)

The standards and conventions recognized by certified

public accountants as required in the preparation of financial statements.

GLOSSARY

Governmental Accounting Standards Board

(GASB)

An organization established in 1984 to establish generally accepted accounting standards for state and local governments. GASB operates with oversight from the Financial Accounting Foundation.

Infrastructure Assets (GASB Statement 34

Context)

Infrastructure assets are long-lived capital assets that normally can be preserved for a significantly greater number

of years than most capital assets and that normally are

stationary in nature. Examples of infrastructure assets

include roads, bridges, tunnels, drainage systems, water

and sewer systems, dams, and lighting systems. Buildings,

except those that are an ancillary part of a network of

infrastructure assets, are not considered infrastructure

assets. (Source: GASB)

Modified Approach (GASB Statement 34

Context)

An alternative to depreciating infrastructure assets. The

modified approach recognizes that such assets are routinely preserved (or renewed) so as to indefinitely extend

useful life. Under this approach, preservation (or renewal)

expenditures are expensed rather than being capitalized

and the original cost and improvements and additions to

the asset are not depreciated. (See capitalize, expense.)

Prospective Reporting (GASB Statement 34

Context)

Reporting on long-lived capital assets that were acquired

or materially improved after Statement 34’s effective date.

Retroactive Reporting (GASB Statement 34

Context)

Reporting on long-lived capital assets that were acquired

or materially improved after June 15, 1980.

Useful Life

An estimate of how long the asset will be in use assuming

a given maintenance and repair schedule.
PRIMER: GASB 34 31

American Institute of Certified Public Accounts

http://www.aicpa.org

AICPA is currently working on new audit guidance for Audits of State and Local Governments.

Federal Highway Administration

Office of Asset Management

Economic Evaluation and Investment Team

http://www.fhwa.dot.gov/infrastructure/asstmgmt

Provides miscellaneous information on Transportation Asset Management and GASB Statement 34.

FinanceNet

http://financenet.gov

Provides general information.

Governmental Accounting Standards Board

http://gasb.org

Provides the latest on GASB Statement 34 implementation.

Government Finance Officers Association

http://www.gfoa.org

Provides a forum for GASB Statement 34 questions and answers.

National Association of State Comptrollers

http://sso.org/nasact/nasact.htm

Sponsors a web site and educational materials directed at GASB Statement 34 implementation.

OTHER RESOURCES
32 PRIMER: GASB 34

Statement 34 establishes new requirements for the annual

financial reports of state and local governments. Financial statements for the funds are similar to current requirements. The

principal change to fund statements is that only major funds

and non-major funds in aggregate are required to be reported.

The greatest changes are to the government-wide financial

statements. The focus of these statements is on the government as a whole, with governmental and business-type activities presented separately. The government-wide statements,

consisting of a statement of net assets and a statement of activities

that presents revenues and expenses by function or program in

a net expense format, use the economic resources measurement

focus and accrual basis of accounting for both governmental

and business-type activities. The change in measurement focus

and basis of accounting for governmental activities requires that

all capital assets, including infrastructure, be recorded and depreciated. Additionally, management’s discussion and analysis,

that gives readers an objective and easily readable analysis of

the government’s financial performance for the year, should be

presented as required supplementary information.

Capital Assets Include Infrastructure

All capital assets are required to be reported at historical cost and

should be depreciated over their estimated useful lives unless they

are either inexhaustible or are infrastructure assets reported using

the modified approach. Infrastructure assets are included as capital assets in the statement of net assets. (¶ 18, 19, 21)**

Required Note Disclosures about Capital Assets

The notes to the financial statements should provide the following detail for historical cost and accumulated depreciation

for each major class of capital asset:

1. Beginning- and end-of-year balances

2. Capital acquisitions

3. Sales or other dispositions

4. Depreciation expense.

Capital assets that are not being depreciated should be disclosed

separately from those that are being depreciated. Additionally,

the amounts of depreciation charged to each of the functions

in the statement of activities should be disclosed. (¶ 117)

Modified Approach for Infrastructure

Infrastructure assets are not required to be depreciated if the

assets are:

1. Managed using an asset management system

2. Preserved at an established condition level.

The asset management system should include an inventory of

infrastructure assets, perform condition assessments of the infrastructure and estimate the annual level established by the

government. (¶ 23)

The government should perform condition assessments at

least every three years, and the results of the three most recent

assessments should show that the infrastructure assets are being

preserved at or above the established condition level. (¶ 24)

Disclosures for Modified Approach for Reporting

Infrastructure

For infrastructure assets reported using the modified approach,

the following disclosures should be presented as required supplementary information:

1. The assessed condition from the three most recent condition assessments

2. Annual maintenance and preservation cost, both estimated

and actual, for the past five years

3. The basis and scale for the condition measurement

4. The condition level established by the government as

acceptable

5. Factors that significantly affect trends in the information in

1. and 2. (¶ 132, 133)

Effective Date and Transition

The provisions of Statement 34, except for retroactive recording

of infrastructure, are effective for fiscal years beginning after:

1. June 15, 2001 for governments with revenues of $100 million and greater

2. June 15, 2002 for governments with revenues between $10

and $100 million

3. June 15, 2003 for governments with revenues less than $10

million. (¶ 143)

Depreciation of capital assets and prospective capitalization of

infrastructure assets are two of the requirements that must be

adopted according to the schedule above.

APPENDIX 1:

SUMMARY OF CAPITAL ASSET AND INFRASTRUCTURE REQUIREMENTS: GASB STATEMENT NO. 34, BASIC FINANCIAL

STATEMENTS—AND MANAGEMENT’S DISCUSSION AND ANALYSIS—FOR STATE AND LOCAL GOVERNMENTS*

* This is an incomplete document. The material in this appendix is excerpted

from Governmental Accounting Standards Series, Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and

Local Governments, June 1999, copyright by Governmental Accounting Standards Board, 401 Merritt 7, Norwalk, Connecticut 06856. Reprinted by permission. The complete document should be read for a full understanding of

infrastructure issues, including the Board’s Basis for Conclusions. For information, see www.rutgers.edu/Accounting/raw/gasb/gasb34.html.

Endnotes appear on page 43.

**Specific paragraphs mentioned refer to the Governmental Accounting Standards Series, Statement No. 34, Basic Financial Statements—and Management’s

Discussion and Analysis—for State and Local Governments, June 1999.
PRIMER: GASB 34 33

Reporting General Infrastructure Assets at Transition

The requirement for retroactive recording of general infrastructure is effective for fiscal years beginning after:

1. June 15, 2005 for governments with revenues of $100 million and greater

2. June 15, 2006 for governments with revenues between $10

and $100 million

For governments with revenues less than $10 million, retroactive recording of infrastructure is not required. (¶ 148)

Modified Approach for Reporting Infrastructure Assets

at Transition

Governments may begin using the modified approach as long

as at least one condition assessment has been completed and

the results of the assessment show that the infrastructure assets

are being preserved at the established condition level. (¶ 152)

Initial Capitalization of General Infrastructure Assets

Only major general infrastructure assets that were acquired in

fiscal years ending after June 30, 1980 are required to be capitalized. The threshold for a major asset is set at a percentage of

the cost of all general capital assets reported for the year ended

June 30, 1999. If the asset to be capitalized is a subsystem, the

threshold is 5% of capital assets; if the asset is a network, the

threshold is 10%. (¶ 156)

The initial capitalization amount should be based upon historical cost or estimated historical cost. One method of estimating historical cost is deflating the current replacement cost

of a similar asset using price-level indexes to the acquisition

year. Bond documents, capital outlay expenditures in prior financial statements or engineering document may also be used

for estimating historical cost. (¶ 158, 160)

Methods for Calculating Depreciation

Any established depreciation method may be used. Depreciation may be calculated for a class of assets, a network of assets,

a subsystem of a network, or individual assets. (¶ 161)

Governments may use composite methods to calculate depreciation expense. Composite methods refer to grouping similar assets or dissimilar assets within the same class together for

the purpose of computing a single depreciation rate to be applied to all assets in the group. (¶ 163)

INFRASTRUCTURE OUTTAKES

Reporting Capital Assets

18. Capital assets should be reported at historical cost. The

cost of a capital asset should include capitalized interest

and ancillary charges necessary to place the asset into its

intended location and condition for use. Ancillary charges

include costs that are directly attributable to asset acquisition—such as freight and transportation charges, site

preparation costs, and professional fees. Donated capital

assets should be reported at their estimated fair value at

the time of acquisition plus ancillary charges, if any.

19. As used in this Statement, the term capital assets includes

land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works

of art and historical treasures, infrastructure, and all other

tangible or intangible assets that are used in operations

and that have initial useful lives extending beyond a single

reporting period. Infrastructure assets are long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number

of years than most capital assets. Examples of infrastructure assets include roads, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems.

Buildings, except those that are an ancillary part of a network of infrastructure assets, should not be considered infrastructure assets for purposes of this Statement.

20. Capital assets that are being or have been depreciated (paragraph 22) should be reported net of accumulated depreciation in the statement of net assets. (Accumulated depreciation may be reported on the face of the statement or

disclosed in the notes.) Capital assets that are not being

depreciated, such as land or infrastructure assets reported

using the modified approach (paragraphs 23 through 25),

should be reported separately if the government has a significant amount of these assets. Capital assets also may be

reported in greater detail, such as by major class of asset

(for example, infrastructure, buildings and improvements,

vehicles, machinery and equipment). Required disclosures

are discussed in paragraphs 116 and 117.

21. Capital assets should be depreciated over their estimated

useful lives unless they are either inexhaustible or are in-
34 PRIMER: GASB 34

frastructure assets reported using the modified approach

in paragraphs 23 through 25. Inexhaustible capital assets

such as land and land improvements should not be depreciated.

22. Depreciation expense should be reported in the statement

of activities as discussed in paragraphs 44 and 45. Depreciation expense should be measured by allocating the net

cost of depreciable assets (historical cost less estimated salvage value) over their estimated useful lives in a systematic and rational matter. It may be calculated for (a) a class

of assets, (b) a network of assets,

1 (c) a subsystem of a network,

2 or (d) individual assets. (Composite methods may

be used to calculate depreciation expense. See paragraphs

161 through 166 for a more complete discussion of depreciation.)

Modified approach

23. Infrastructure assets that are part of a network orsubsystem

of a network3

 (hereafter, eligible infrastructure assets) are

not required to be depreciated as long as two requirements

are met. First, the government manages the eligible infrastructure assets using an asset management system that has

the characteristics set forth below; second, the government

documents that the eligible infrastructure assets are being

preserved approximately at (or above) a condition level established and disclosed by the government.

4 To meet the

first requirement, the asset management system should:

a. Have an up-to-date inventory of eligible infrastructure assets

b. Perform condition assessments5 of the eligible

infrastructure assets and summarize the results using

a measurement scale

c. Estimate each year the annual amount to maintain

and preserve the eligible infrastructure assets at the

condition level established and disclosed by the

government.

24. Determining what constitutes adequate documentary evidence to meet the second requirement in paragraph 23 for

using the modified approach requires professional judgment because of variations among governments’ asset management systems and condition assessment methods. These

factors also may vary within governments for different eligible infrastructure assets. However, governments should

document that:

a. Complete condition assessments of eligible infrastructure assets are performed in a consistent manner

at least every three years.6

b. The results of the three most recent complete

condition assessments provide reasonable assurance

that the eligible infrastructure assets are being

preserved approximately at (or above) the condition

level

7 established and disclosed by the government.

25. If eligible infrastructure assets meet the requirements of

paragraphs 23 and 24 and are not depreciated, all expenditures made for those assets (except for additions and improvements) should be expensed in the period incurred.

Additions and improvements to eligible infrastructure assets should be capitalized. Additions or improvements increase the capacity or efficiency of infrastructure assets

rather than preserve the useful life of the assets.

26. If the requirements of paragraphs 23 and 24 are no longer

met, the depreciation requirements of paragraphs 21 and

22 should be applied for subsequent reporting periods.8

[SECTION ON Reporting works of art and historical

treasures (paragraphs 27, 28, 29) OMITTED HERE]

Required Financial Statements—Statement of Net

Assets

30. The statement of net assets should report all financial and

capital resources. Governments are encouraged to present

the statement in a format that displays assets less liabilities

equal net assets, although the traditional balance sheet format (assets equal liabilities plus net assets) may be used.

Regardless of the format used, however, the statement of

net assets should report the difference between assets and

liabilities as net assets, not fund balances or equity.

31. Governments are encouraged to present assets and liabilities in order of their relative liquidity.

10 An asset’s liquidity

should be determined by how readily it is expected to be

converted to cash and whether restrictions limit the

government’s ability to use the resources. A liability’s liquidity is based on its maturity, or when cash is expected

to be used to liquidate it. The liquidity of an asset or liability may be determined by assessing the average liquidity of the class of assets or liabilities to which it belongs,

even though individual balances may be significantly more

or less liquid than others in the same class and some items

may have both current and long-term elements. Liabilities whose average maturities are greater than one year

should be reported in two components—the amount due

within one year and the amount due in more than one year.

Additional disclosures concerning long-term liabilities are

discussed in paragraph 119.
PRIMER: GASB 34 35

32. The difference between a government’s assets and its liabilities is its net assets. Net assets should be displayed in

three components—invested in capital assets, net of related

debt; restricted (distinguishing between major categories of

restrictions); and unrestricted.

Invested in Capital Assets, Net of Related Debt

33. This component of net assets consists of capital assets (see

paragraph 19), including restricted capital assets, net of accumulated depreciation and reduced by the outstanding

balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction,

or improvement of those assets. If there are significant unspent related debt proceeds at year-end, the portion of the

debt attributable to the unspent proceeds should not be

included in the calculation of invested in capital assets, net of

related debt. Rather, that portion of the debt should be included in the same net assets component as the unspent

proceeds—for example, restricted for capital projects.

* * * * *

Required Note Disclosures about Capital Assets

and Long-term Liabilities

116. Governments should provide detail in the notes to the financial statements about capital assets and long-term liabilities of the primary government reported in the statement of net assets. The information disclosed should be

divided into major classes of capital assets and long-term

liabilities as well as between those associated with governmental activities and those associated with business-type

activities. Capital assets that are not being depreciated

should be disclosed separately from those that are being

depreciated. (See paragraph 20.)

117. Information presented about major classes of capital assets should include:

a. Beginning- and end-of-year balances (regardless of

whether beginning-of-year balances are presented on

the face of the government-wide financial statements), with accumulated depreciation presented

separately from historical cost

b. Capital acquisitions

c. Sales or other dispositions

d. Current-period depreciation expense, with disclosure

of the amounts charged to each of the functions in

the statement of activities.

118. For collections not capitalized (see paragraphs 27-29), disclosures should provide a description of the collection and

the reasons these assets are not capitalized. For collections

that are capitalized, governments should make the disclosures required by paragraphs 116 and 117.

119. Information about long-term liabilities should include both

long-term debt (such as bonds, notes, loans, and leases payable) and other long-term liabilities11 (such as compensated absences, and claims and judgments). Information

presented about long-term liabilities should include:

a. Beginning- and end-of-year balances (regardless of

whether prior-year data are presented on the face of

the government-wide financial statements)

b. Increases and decreases (separately presented)

c. The portions of each item that are due within one

year of the statement date

d. Which governmental funds typically have been used

to liquidate other long-term liabilities (such as

compensated absences and pension liabilities) in prior

years.

120. Determining whether to provide similar disclosures about

capital assets and long-term liabilities of discretely presented component units is a matter of professional judgment. The decision to disclose should be based on the individual component unit's significance to the total of all

discretely presented component units and that component

unit’s relationship with the primary government.

* * * * *

Modified Approach for Reporting Infrastructure

132. Governments should present the following schedules, derived from asset management systems, as RSI for all eligible infrastructure assets12 that are reported using the

modified approach:

a. The assessed condition, performed at least every

three years, for at least the three most recent

complete condition assessments, indicating the dates

of the assessments

b. The estimated annual amount calculated at the

beginning of the fiscal year to maintain and preserve

at (or above) the condition level established and

disclosed by the government compared with the

amounts actually expensed (as discussed in paragraph

25) for each of the past five reporting periods.
36 PRIMER: GASB 34

133. The following disclosures13 should accompany the schedules required by paragraph 132:

a. The basis for the condition measurement and the

measurement scale used to assess and report condition. For example, a basis for condition measurement

could be distresses found in pavement surfaces. A scale

used to assess and report condition could range from

zero for a failed pavement to 100 for a pavement in

perfect condition.

b. The condition level at which the government intends

to preserve its eligible infrastructure assets reported

using the modified approach.

c. Factors that significantly affect trends in the information reported in the required schedules, including any

changes in the measurement scale, the basis for the

condition measurement, or the condition assessment

methods used during the periods covered by the

schedules. If there is a change in the condition level

at which the government intends to preserve eligible

infrastructure assets, an estimate of the effect of the

change on the estimated annual amount to maintain

and preserve those assets for the current period also

should be disclosed.

* * * * *

EFFECTIVE DATE AND TRANSITION

142. The requirements of this Statement are effective in three

phases based on total annual revenues, as discussed in paragraph 143, below. Earlier application is encouraged. Governments that elect early implementation of this Statement

for periods beginning before June 15, 2000, also should

implement Statement 33 at the same time. If a primary

government chooses early implementation of this Statement, all of its component units also should implement

this standard early to provide the financial information

required for the government-wide financial statements.

143. The requirements of this Statement are effective in three

phases based on a government’s total annual revenues in

the first fiscal year ending after June 15, 1999:

• Phase 1 governments—with total annual revenues of

$100 million or more—should apply the requirements of this Statement in financial statements for

periods beginning after June 15, 2001.

• Phase 2 governments—with total annual revenues of

$10 million or more but less than $100 million—

should apply the requirements of this Statement in

financial statements for periods beginning after June

15, 2002.

• Phase 3 governments—with total annual revenues of

less than $10 million—should apply the requirements

of this Statement in financial statements for periods

beginning after June 15, 2003.

For purposes of identifying the appropriate implementation phase, revenues includes all revenues (not other financing sources) of the primary government’s governmental

and enterprise funds, except for extraordinary items as defined in paragraph 55. Special-purpose governments engaged only in fiduciary activities should use total annual

additions, rather than revenues, to determine the appropriate implementation phase. All component units should

implement the requirements of this Statement no later than

the same year as their primary government, regardless of

the amount of each component unit’s total revenues. Paragraphs 148 through 153 provide additional phase-in provisions for reporting general infrastructure assets.

144. Adjustments to governmental, proprietary, and fiduciary

funds resulting from a change to comply with this Statement should be treated as adjustments of prior periods,

and financial statements presented for the periods affected

should be restated. If restatement of the financial statements for prior periods is not practical, the cumulative effect of applying this Statement should be reported as a

restatement of beginning fund balance or fund net assets,

as appropriate, for the earliest period restated (generally,

the current period). In the first period that this Statement

is applied, the financial statements should disclose the nature of the restatement and its effect.

145. In the first period that this Statement is applied, governments are not required to restate prior periods for purposes of providing the comparative data for MD&A as required in paragraph 11. However, governments are

encouraged to provide comparative analyses of key elements of total governmental funds and total enterprise

funds in MD&A for that period. Also, in the first year of

implementation, MD&A should include a statement that,

in future years, when prior-year information is available, a

comparative analysis of government-wide data will be presented.

146. The requirements of APB Opinions No. 12, Omnibus Opinion—1967, and No. 21, Interest on Receivables and Payables,

as amended, require deferral and amortization of debt issue premium or discount. These Opinions may be applied

prospectively to governmental activities in the statement

of net assets and the statement of activities, except for governmental activity debt that is deep-discount or zerocoupon debt.

14 Similarly, FASB Statement No. 34, Capitalization of Interest Cost, as amended, which requires capitalization of interest cost as a component of the historical
PRIMER: GASB 34 37

cost of capital assets, also may be applied prospectively by

governmental activities, Finally, Statement 23, which requires deferral and amortization of the difference between

the reacquisition price and the net carrying amount of old

debt in debt-refunding transactions, may be applied prospectively by governmental activities. The retroactive

effect of applying those standards is not required to be

considered in determining beginning net assets for governmental activities.

Governmental Entities That Use the AICPA

Not-for-Profit Model

147. Governmental entities that report as of the date of this

Statement using the AICPA Not-for-Profit model, as defined in Statement 29, but that do not meet the criteria in

paragraph 67 may use enterprise fund accounting and financial reporting.

Reporting General Infrastructure Assets at

Transition

148. Prospective reporting of general infrastructure assets in

the statement of net assets is required beginning at the

effective dates of this Statement. Retroactive reporting of

all major general infrastructure assets15 is encouraged at

that date. Phase 1 governments as described in paragraph

143 should retroactively report all major general infrastructure assets for fiscal years beginning after June 15, 2005.

Phase 2 governments should retroactively report all major

general infrastructure assets for fiscal years beginning after June 15, 2006. Phase 3 governments are encouraged

but are not required to report major general infrastructure assets retroactively.

149. If determining the actual historical cost of general infrastructure assets is not practical because of inadequate

records, governments should report the estimated historical cost for major general infrastructure assets that were

acquired or significantly reconstructed, or that received

significant improvements, in fiscal years ending after June

30, 1980. (See paragraphs 155 through 166 for a more complete discussion of methods of estimating the cost of infrastructure assets and, if appropriate, accumulated depreciation on infrastructure assets.)

150. If, during the transition period, information is not available for all networks of infrastructure assets, those networks for which information is available may be reported.

151. While governments are applying the transition provisions,

they should make these disclosures:

a. A description of the infrastructure assets being

reported and of those that are not

b. A description of any eligible infrastructure assets that

the government has decided to report using the

modified approach (paragraphs 23-25).

Modified Approach for Reporting Infrastructure

Assets

152. Governments may begin to use the modified approach for

reporting eligible infrastructure assets (as described in paragraphs 23-25) as long as at least one complete condition

assessment is available and the government documents that

the eligible infrastructure assets are being preserved approximately at (or above) the condition level the government has established and disclosed.

153. The three most recent complete condition assessments and

the estimated and actual amounts to maintain and preserve

the infrastructure assets for the previous five reporting

periods required by paragraph 132 may not be available

initially. In these cases, the information required by that

paragraph should be presented for as many complete condition assessments and years of estimated and actual expenses as are available.

INITIAL CAPITALIZATION OF

GENERAL INFRASTRUCTURE ASSETS

Determining Major General Infrastructure Assets

154. At the applicable general infrastructure transition date,

phase 1 and 2 governments are required to capitalize and

report major general infrastructure assets that were acquired (purchased, constructed, or donated)

16 in fiscal years

ending after June 30, 1980, or that received major renovations, restorations, or improvements during that period.

155. The approaches in paragraphs 158 though 160 may be used

to estimate the costs of existing general infrastructure assets

when actual historical cost data are not available. These

approaches are examples only; governments may use any

approach that complies with the intent of this Statement. General infrastructure assets acquired after the effective dates of

this Statement should be reported using historical costs.
38 PRIMER: GASB 34

156. The determination of major general infrastructure assets

should be at the network or subsystem level and should be

based on these criteria:

a. The cost or estimated cost of the subsystem is

expected to be at least 5 percent of the total cost of all

general capital assets reported in the first fiscal year

ending after June 15, 1999, or

b. The cost or estimated cost of the network is expected

to be at least 10 percent of the total cost of all general

capital assets reported in the first fiscal year ending

after June 15, 1999.

Reporting of nonmajor networks is encouraged but not

required.

Establishing Capitalization at Transition

157. The initial capitalization amount should be based on historical cost. If determining historical cost is not practical

because of inadequate records, estimated historical cost

may be used.

Estimated Historical Cost—Current Replacement Cost

158. A government may estimate the historical cost of general

infrastructure assets by calculating the current replacement

cost of a similar asset and deflating this cost through the

use of price-level indexes to the acquisition year (or estimated acquisition year if the actual year is unknown). There

are a number of price-level indexes that may be used, both

private- and public-sector, to remove the effects of pricelevel changes from current prices. Accumulated depreciation would be calculated based on the deflated amount,

except for general infrastructure assets reported according to the modified approach.

159. The following example illustrates the calculation of estimated historical cost. In 1998, a government has sixty-five

lane-miles of roads in a secondary road subsystem, and

the current construction cost of similar roads is $1 million

per lane-mile. The estimated total current replacement cost

of the secondary road subsystem of a highway network,

therefore, is $65 million ($1 million x 65). The roads have

an estimated weighted-average age of fifteen years; therefore, 1983 is considered to be the acquisition year. Based

on the U.S. Department of Transportation, Federal Highway Administration’s Price Trend Information for FederalAid Highway Construction (publication number FHWA-IF99-001) for 1983 and 1998, 1983 construction costs were

69.03 percent of 1998 costs. The estimated historical cost

of the subsystem, therefore, is $44,869,500 ($65 million x

0.6903). In 1998, the government would have reported the

subsystem in its financial statements at an estimated historical cost of $44,869,500 less accumulated depreciation

for fifteen years based on that deflated amount.

Estimated Historical Cost from Existing

Information

160. Other information may provide sufficient support for establishing initial capitalization. This information includes

bond documents used to obtain financing for construction or acquisition of infrastructure assets, expenditures

reported in capital project funds or capital outlays in governmental funds, and engineering documents.

Methods for Calculating Depreciation

161. Governments may use any established depreciation

method. Depreciation may be based on the estimated useful life of a class of assets, a network of assets, a subsystem

of a network, or individual assets. For estimated useful lives,

governments can use (a) general guidelines obtained from

professional or industry organizations, (b) information for

comparable assets of other governments, or (c) internal

information. In determining estimated useful life, a government also should consider an asset’s present condition

and how long it is expected to meet service demands.

162. Continuing the example from paragraph 159, assume that,

in 1998, the road subsystem had a total estimated useful

life of twenty-five years from 1983 and therefore has an

estimated remaining useful life of ten years. Assuming no

residual value at the end of that time, straight-line depreciation expense would be $1,794,780 per year

($44,869,500/25), and accumulated depreciation in 1998

would be $26,921,700 ($1,794,780 x 15).

Composite Methods

163. Governments also may use composite methods to calculate depreciation expense. Composite methods refer to depreciating a grouping of similar assets (for example, interstate highways in a state) or dissimilar assets of the same

class (for example, all the roads and bridges of a state) using the same depreciation rate. Initially, a depreciation rate

for the composite is determined. Annually, the determined

rate is multiplied by the cost of the grouping of assets to

calculate depreciation expense.

164. A composite depreciation rate can be calculated in different ways. The rate could be calculated based on a weighted

average or on an unweighted-average estimate of useful

lives of assets in the composite. For example, the compos-
PRIMER: GASB 34 39

ite depreciation rate of three interstate highways with

estimated remaining useful lives of sixteen, twenty, and

twenty-four years could be calculated using an unweighted

average estimated as follows:

A composite depreciation rate may also be calculated based

on an assessment of the useful lives of the grouping of assets. This assessment could be based on condition assessments or experience with the useful lives of the grouping

of assets. For example, based on experience, engineers may

determine that interstate highways generally have estimated remaining useful lives of approximately twenty years.

In this case, the annual depreciation rate would be 5 percent.

165. The composite depreciation rate is generally used throughout the life of the grouping of assets. However, it should

be recalculated if the composition of the assets or the estimate of average useful lives changes significantly. The average useful lives of assets may change as assets are capitalized or taken out of service.

166. The annual depreciation expense is calculated by multiplying the annual depreciation rate by the cost of the assets. For example, if the interstate highway subsystem cost

$100 million and the annual depreciation rate was 10 percent, then the annual depreciation charge would be $10

million. Accumulated depreciation should not exceed the

reported cost of the assets.

1

(16 + 20 +24)/3 = 5% annual depreciation rate
40 PRIMER: GASB 34

MANAGEMENT’S DISCUSSION AND ANALYSIS

Our discussion and analysis of Sample City’s financial performance provides an overview of the City’s financial activities for the

fiscal year ended December 31, 2002. Please read it in conjunction with the transmittal letter on pages 38-42 and the City’s

financial statements, which begin on page XXX. (Note: The preparer would cite the page numbers of the transmittal letter if one

is provided.)

CAPITAL ASSETS

At the end of 2002, the City had $321 million invested in a broad range of capital assets, including police and fire equipment,

buildings, park facilities, roads, bridges, and water and sewer lines. (See Table 4 below.) This amount represents a net increase

(including additions and deductions) of just under $12 million, or 3.8 percent, over last year.

TABLE 4

Capital Assets at Year-end

(Net of Depreciation, in Millions)

Governmental Activities Business-type Activities Totals

2002 2001 2002 2001 2002 2001

Land $27.1 $29.4 $3.8 $3.7 $30.9 $33.1

Buildings and improvements 30.2 30.5 115.5 113.6 145.7 144.1

Equipment 21.2 22.9 1.2 1.0 22.4 23.9

Infrastructure 91.5 79.3 30.9 29.3 122.4 108.6

Totals $170.0 $162.1 $151.4 $147.6 $321.4 $309.7

This year’s major additions included (in millions):

• Route 7 reconstruction project, paid for with proceeds of general $11.3

obligation bonds issued last year

• Replacement of older segments of the wastewater collection system 3.2

and treatment facilities, paid for with proceeds from a revenue

note issued last year

• Redevelopment housing construction, paid for with revenue bonds 2.2

issued this year

• Land acquired through the City’s power of eminent domain, paid for 2.0

with General Fund resources

• Water distribution mains, hydrants, and meters, paid for with water 1.6

and sewer revenue bonds issued this year

$20.3

The City’s fiscal-year 2003 capital budget calls for it to spend another $16 million for capital projects, principally for the completion of its Route 7 reconstruction project and to create housing units in the City’s new community redevelopment housing

program. The City has no plans to issue additional debt to finance these projects. Rather, we will use bond proceeds from the

community redevelopment bonds issued this year and resources on hand in the City’s Gas Tax Fund. More detailed information

about the City’s capital assets is presented in Note 1 to the financial statements.

ILLUSTRATIONS
PRIMER: GASB 34 41

STATEMENT OF NET ASSETS

Primary Government

Governmental Business-type Component

Activities Activities Total Units

ASSETS

Cash and cash equivalents $ 13,597,899 $ 10,279,143 $ 23,877,042 $ 303,935

Investments 27,365,221 – 27,365,221 7,428,952

Receivables (net) 12,833,132 3,609,615 16,442,747 4,042,290

Internal balances 175,000 (175,000) – –

Inventories 322,149 126,674 448,823 83,697

Capital assets, net (Note 1) 170,022,760 151,388,751 321,411,511 37,744,786

Total assets 224,316,161 165,229,183 389,545,344 49,603,660

LIABILITIES

Accounts payable 6,783,310 751,430 7,534,740 1,803,332

Deferred revenue 1,435,599 – 1,435,599 38,911

Noncurrent liabilities (Note 2):

Due within one year 9,236,000 4,426,286 13,662,286 1,426,639

Due in more than one year 83,302,378 74,482,273 157,784,651 27,106,151

Total liabilities 100,757,287 79,659,989 180,417,276 30,375,033

NET ASSETS

Invested in capital assets, net of related debt 103,711,386 73,088,574 176,799,960 15,906,392

Restricted for:

Capital projects 11,705,864 – 11,705,864 492,445

Debt service 3,020,708 1,451,996 4,472,704 –

Community development projects 4,811,043 – 4,811,043 –

Other purposes 3,214,302 – 3,214,302 –

Unrestricted (deficit) (2,904,429) 11,028,624 8,124,195 2,829,790

Total net assets $123,558,874 $ 85,569,194 $ 209,128,068 $ 19,228,627

ILLUSTRATIONS CONTINUED
42 PRIMER: GASB 34

STATEMENT OF CHANGES IN NET ASSETS

Net (Expense) Revenue

Program Revenues and Changes in Net Assets

Operating Capital Primary Government

Charges for Grants and Grants and Governmental Business-type Component

Functions/Program Expenses Service Contributions Contributions Activities Activities Total Units

Primary government:

Governmental activities:

General government $ 9,571,410 $ 3,146,915 $ 843,617 $ – $ (5,580,878) $ – $ (5,580,878) $ –

Public safety 34,844,749 1,198,855 1,307,693 62,300 (32,275,901) – (32,275,901) –

Public works 10,128,538 850,000 – 2,252,615 (7,025,923) – (7,025,923) –

Engineering services 1,299,645 704,793 – – (594,852) – (594,852) –

Health and sanitation 6,738,672 5,612,267 575,000 – (551,405) – (551,405) –

Cemetery 735,866 212,496 – – (523,370) – (523,370) –

Culture and recreation 11,532,350 3,995,199 2,450,000 – (5,087,151) – (5,087,151) –

Community development 2,994,389 – – 2,580,000 (414,389) – (414,389) –

Education 21,893,273 – – – (21,893,273) – (21,893,273) –

(payment to school district)

Interest on long-term debt 6,068,121 – – – (6,068,121) – (6,068,121) –

Total governmental activities 105,807,103 15,720,525 5,176,310 4,894,915 (80,015,263) – (80,015,263) –

Business-type activities:

Water 3,595,733 4,159,350 – 1,159,909 – 1,723,526 1,723,526 –

Sewer 4,912,853 7,170,533 – 486,010 – 2,743,690 2,743,690 –

Parking facilities 2,796,283 1,344,087 – – – (1,452,196) (1,452,196) –

Total business-type activities 11,304,869 12,673,970 – 1,645,919 – 3,015,020 3,015,020 –

Total primary government $117,111,882 $28,394,495 $ 5,176,310 $ 6,540,834 (80,015,263 3,015,020 (77,000,243) –

Component units:

Landfill $ 3,382,157 $ 3,857,858 $ – $ 11,397 – – – 487,098

Public school system 31,186,498 705,765 3,937,083 –––– (26,543,650)

Total component units $ 34,568,655 $ 4,563,623 $ 3,937,083 $ 11,397 – – – (26,056,552)

51,693,573 – 51,693,573 –

4,726,244 – 4,726,244 –

4,055,505 – 4,055,505 –

8,969,887 – 8,969,887 –

– – – 21,893,273

1,457,820 – 1,457,820 6,461,708

1,958,144 601,349 2,559,493 881,763

884,907 104,925 989,832 22,464

2,653,488 – 2,653,488 –

501,409 (501,409) – –

76,900,977 204,865 77,105,842 29,259,208

(3,114,286) 3,219,885 105,599 3,202,656

126,673,160 82,349,309 209,022,469 16,025,971

$ 123,558,874 $85,569,194 $209,128,068 $19,228,627

General revenues:

Taxes:

Property taxes, levied for general purposes

Property taxes, levied for debt service

Franchise taxes

Public service taxes

Payment from Sample City

Grants and contributions not restricted to specific programs

Investment earnings

Miscellaneous

Special item – gain on sale of park land

Transfers

Total general revenues, special items, and transfers

Change in net assets

Net assets—beginning

Net assets—ending

ILLUSTRATIONS CONTINUED
PRIMER: GASB 34 43

CAPITAL ASSETS NOTE DISCLOSURES

Note 1—Illustrative Disclosure of Information about Capital Assets

Capital asset activity for the year ended December 31, 2002 was as follow (in thousands):

Primary Government

Beginning Ending

Balance Additions Retirements Balance

Governmental activities:

Land $ 29,484 $ 2,020 $ (4,358) $ 27,146

Buildings and improvements 40,861 334 – 41,195

Equipment 32,110 1,544 (1,514) 32,140

Infrastructure 94,575 13,220 – 107,795

Totals at historical cost 197,030 17,118 (5,872) 208,276

Less accumulated depreciation for:

Buildings and improvements (10,358) (691) – (11,049)

Equipment (9,247) (2,676) 1,040 (10,883)

Infrastructure (15,301) (1,020) – (16,321)

Total accumulated depreciation for: (34,906) (4,387) 1,040 (38,253)

Governmental activities capital assets, net $162,124 $ 12,731 $ (4,832) $170,023

Business-type activities:

Land $ 3,691 $ 145 $ – $ 3,836

Distribution and collection systems 36,977 2,527 – 39,504

Buildings and equipment 126,370 2,827 (32) 129,165

Totals at historical cost 167,038 5,499 (32) 172,505

Less accumulated depreciation for:

Distribution and collection systems (7,654) (897) – (8,551)

Buildings and equipment (11,789) (808) 32 (12,565)

Business-type activities capital assets, net $147,595 $ 3,794 $ 0 $151,389

*Depreciation expense was charged to governmental functions as follows:

General government $ 275

Public safety 330

Public works, which includes the depreciation

of general infrastructure assets 1,315

Health and sanitation 625

Cemetery 29

Culture and recreation 65

Community development 40

In addition, depreciation on capital assets

held by the City’s internal service funds

(see D-3) is charged to the various

functions based on their usage of the assets 1,708

Total depreciation expense $ 4,387

ILLUSTRATIONS CONTINUED
44 PRIMER: GASB 34

REQUIRED SUPPLEMENTARY INFORMATION FOR GOVERNMENTS USING THE MODIFIED APPROACH

Comparison of Needed-to-Actual Maintenance/Preservation

(in Thousands)

2002 2001 2000 1999 1998

Main arterial:

Needed $ 2,476 $ 2,342 $ 2,558 $ 2,401 $ 2,145

Actual 2,601 2,552 2,432 2,279 2,271

Arterial:

Needed 1,485 1,405 1,535 1,441 1,287

Actual 1,560 1,531 1,459 1,367 1,362

Secondary:

Needed 990 937 1,023 960 858

Actual 1,040 1,021 972 911 908

Overall system:

Needed 4,951 4,684 5,116 4,802 4,290

Actual 5,201 5,104 4,863 4,557 4,541

Difference 250 420 (253) (245) 251

Note: The condition of road pavement is measured using the XYZ pavement management system, which is based on a weighted average of six

distress factors found in pavement surfaces. The XYZ pavement management system uses a measurement scale that is based on a condition index

ranging from zero for a failed pavement to 100 for a pavement in perfect condition. The condition index is used to classify roads in good or better

condition (70-100), fair condition (50-69), and substandard condition (less than 50). It is the City’s policy to maintain at least 85 percent of its

street system at a good or better condition level. No more than 10 percent should be in a substandard condition. Condition assessments are

determined every year.

Condition Rating of the City’s Street System

Percentage of Lane-Miles in Good or Better Condition

2002 2001 2000

Main arterial 93.2% 91.5% 92.0%

Arterial 85.2% 81.6% 84.3%

Secondary 87.2% 84.5% 86.8%

Overall system 87.0% 85.5% 87.3%

Percentage of Lane-Miles in Substandard Condition

2002 2001 2000

Main arterial 1.7% 2.6% 3.1%

Arterial 3.5% 6.4% 5.9%

Secondary 2.1% 3.4% 3.8%

Overall system 2.2% 3.6% 3.9%

ILLUSTRATIONS CONTINUED
PRIMER: GASB 34 45

ENDNOTES TO APPENDIX 1

1 A network of assets is composed of all assets that provide a

particular type of service for a government. A network of

infrastructure assets may be only one infrastructure asset

that is composed of many components. For example, a network of infrastructure assets may be a dam composed of a

concrete dam, a concrete spillway, and a series of locks.

2 A subsystem of a network of assets is composed of all assets that make up a similar portion or segment of a network of assets. For example, all the roads of a government

could be considered a network of infrastructure assets. Interstate highways, state highways, and rural roads could

each be considered a subsystem of that network.

3 If a government chooses not to depreciate a subsystem of

infrastructure assets based on the provisions of this paragraph, the characteristics of the asset management system

required by this paragraph and the documentary evidence

required by paragraph 24 should be for that subsystem of

infrastructure assets.

4 The condition level should be established and documented

by administrative or executive policy, or by legislative action.

5 Condition assessments should be documented in such a

manner that they can be replicated. Replicable condition

assessments are those that are based on sufficiently understandable and complete measurement methods such that

different measurers using the same methods would reach

substantially similar results. Condition assessments may

be performed by the government itself or by contract.

6 Condition assessments may be performed using statistical

samples that are representative of the eligible infrastructure assets being preserved. Governments may choose to

assess their eligible infrastructure assets on a cyclical basis. For example, one-third may be assessed each year. If a

cyclical basis is used, a condition assessment is considered

complete for a network or subsystem only when condition

assessments have been performed for all (or statistical

samples of) eligible infrastructure assets in that network

or subsystem.

7 For example, condition could be measured either by a condition index or as the percentage of a network of infrastructure assets in good or poor condition.

8 This change should be reported as a change in accounting

estimate.

[Footnote 9 intentionally omitted.]

10 Use of a classified statement of net assets, which distinguishes between all current and long-term assets and liabilities, is also acceptable. (Paragraphs 97 through 99 provide guidance on presenting classified balance sheets,

including reporting on restricted assets.)

11 Information about net pension obligations should be reported in a separate pension note, as required by Statement 27.

12 If a government applies the provisions of paragraphs 23

and 24 to a subsystem of infrastructure assets (for example,

interstate highways), then the RSI disclosures required by

this paragraph should be for that subsystem.

13 Governments with asset management systems for infrastructure assets that gather the information required by

paragraphs 132 and 133 and that do not use the modified

approach are encouraged to provide the information as

supplementary information.

14 For purposes of this Statement, deep-discount debt is debt

that is sold at a discount of 20 percent or more from its

face or par value at the time it is issued. Zero-coupon debt

is originally sold at far below par value and pays no interest until it matures.

15 Major general infrastructure assets are assets that (a) meet

the definition of a major asset as described in paragraph

156, (b) are associated with and generally arise from governmental activities, and (c) are long-lived capital assets

that normally are stationary in nature and normally can be

preserved for a significantly greater number of years than most

capital assets, as described in paragraph 19. The transition

period does not apply to proprietary funds and special–

purpose governments engaged in business-type activities.

16 For purposes of this Statement, governments that have the

primary responsibility for managing an infrastructure asset should report the asset. A government should report

an asset even if it has contracted with a third party to maintain the asset.
46 PRIMER: GASB 34

Selected Questions and Answers*

29. Q—Does Statement 34 prescribe a minimum level

for the capitalization of assets?

A—No. However, subparagraph 115e** requires disclosure of the capitalization policy—the dollar value above

which asset acquisitions are added to the capital asset accounts. Different types of assets, subsystems, or networks

may have different capitalization policies. Additionally,

different thresholds may be set for management control

purposes or for compliance with laws and regulations. [p. 8]

53. Q—What is the modified approach for reporting

infrastructure assets?

A—The modified approach is an alternative to depreciation that may be applied for eligible infrastructure capital

assets (see Q54) that meet two requirements. First, the

assets should be managed using an asset management system that meets the criteria in paragraph 23. Second, the

government should document that the assets are being

preserved at or above a condition level established by the

government as required by paragraph 24. Under the modified approach, depreciation expense is not recorded for

these assets. Rather, costs for both maintenance and preservation of these assets should be expensed in the period

incurred. Additions and improvements, on the other hand,

are capitalized. (See Exhibit 14 in Appendix 3 for an illustration of the information required to be presented as RSI

for eligible infrastructure assets reported using the modified approach.) [p. 13]

57. Q—Under the modified approach, costs for both

maintenance and preservation of an asset should

be expensed in the period incurred. Is this

treatment different from traditional depreciation?

A—Yes. Maintenance costs allow an asset to continue to

be used during its originally established useful life. Maintenance costs are expensed in the period incurred, regardless of the method of accounting for the asset. Preservation costs extend the useful life of an asset beyond its

previously established useful life. Preservation costs are

capitalized and depreciated if the asset is accounted for

using traditional depreciation, but are expensed in the period incurred if the asset is accounted for using the modified approach. [p. 14]

Modified

Approach Depreciation

Maintenance costs Expense Expense

Preservation costs

(see Q58)Expense Capitalize

Additions and

improvements Capitalize Capitalize

58. Q—What are “preservation” costs?

A—Although the term is not defined in Statement 34,

“preservation” costs generally are considered to be those

outlays that extend the useful life of an asset beyond its

original estimated useful life, but do not increase the capacity or efficiency of the asset. (See Q57 for discussion of

accounting for preservation costs.) [p. 14]

61. Q—What constitutes a change in capacity or

efficiency?

A—A change in capacity increases the level of service provided by an asset. For example, additional lanes could be

added to a road or the weight capacity could be increased.

A change in efficiency maintains the same service level,

but at a lower cost. For example, an electric generating

plant could be reengineered so that it produces the same

megawatts per day using less fuel. [p. 14]

APPENDIX 2:

SELECTED QUESTIONS AND ANSWERS FROM

GUIDE TO IMPLEMENTATION OF GASB STATEMENT 34 ON BASIC FINANCIAL STATEMENTS—AND MANAGEMENT’S

DISCUSSION AND ANALYSIS—FOR STATE AND LOCAL GOVERNMENTS

*The material in this appendix is excerpted from Guide to Implementation of

GASB Statement 34 on Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, copyright by Governmental Accounting Standards Board, 401 Merritt 7, Norwalk, Connecticut 06856.

Reprinted by permission. All rights reserved. Information on how to order a

copy of the guide is available at www.rutgers.edu/Accounting/raw/gasb/34QA.

html.

**Specific paragraphs mentioned in the questions and answers refer to the Governmental Accounting Standards Series, Statement No. 34, Basic Financial

Statements—and Management’s Discussion and Analysis—for State and Local

Governments, June 1999. (See Appendix 1.)
PRIMER: GASB 34 47

62. Q—When is a government no longer permitted to

use the modified approach for its infrastructure

assets?

A—The determination of whether the modified approach

may be used is made on a network-by-network or subsystem-by-subsystem basis. A government may no longer

use the modified approach for the eligible infrastructure

asset if it fails to meet the requirements of paragraphs 23

and 24 for that asset. Reasons could include failure to perform a replicable condition assessment at least every three

years, failure to document the condition assessment, a condition assessment that demonstrates that the asset was not

maintained approximately at or above the condition level

established by the government, and failure to estimate the

annual amount needed to maintain and preserve the asset.

[p. 15]

63. Q—If a government is not permitted to continue to

use the modified approach because the

infrastructure assets no longer meet the

requirements of paragraphs 23 and 24, in what

year is the change to the traditional depreciation

approach reported? How is the change reported?

A—Depreciation of the infrastructure assets would begin

in the year subsequent to the year that the requirements

to use the modified approach are not met. This change

would be accounted for prospectively as a change in accounting estimate, as provided for in footnote 21 to paragraph 26. Application of the modified approach essentially

equates to the estimation of a useful life of such length

that the amount of annual depreciation is insignificant.

Therefore, a change in the estimated useful life from almost infinite to a shorter, finite life over which depreciation will be recorded should be reported as a change in

estimate. The useful life and residual value of the asset

would be estimated and a depreciation method selected at

the conversion date. The historical cost of the asset would

be depreciated over the period from the cessation of the

modified approach through the end of the remaining life

of the asset. [p. 15]

64. Q—A government performs condition assessments

on a three-year cyclical basis and the condition

assessment from the second year shows that the

condition is significantly below the level

established by the government. Is the government

required to stop reporting based on the modified

approach and begin depreciating the assets?

A—No. The determination of whether the requirements

to use the modified approach have been met is made at the

conclusion of a condition assessment cycle (footnote 19).

[p. 15]

67. Q—An asset management system should include

an up-to-date inventory. Would that require each

road sign, light pole, and traffic signal to be

tagged and inventoried annually?

A—No. The level of detail in the asset management system is determined by the capitalization policies selected

and implemented by the government. (See also Q29 about

capitalization policies.) Capital assets may be recorded at

the class, network, subsystem, or individual asset level. The

following possibilities describe some of the alternatives:

• All of the roads of a government could be capitalized

collectively as the road network.

• A government could record its roads at the subsystem

level by considering interstate highways, state

highways, and rural roads each as separate subsystems.

• Roads could be recorded as subsystems consisting of

different geographic regions.

• Roads could be recorded as subsystems consisting of

the major components of a road—for example,

roadbed, overlay, curbs and gutters, lighting, traffic

signals, signage.

• A government may capitalize one type of infrastructure asset at the network level and capitalize other

infrastructure assets at the subsystem or even the

individual asset level.

• If a government decided that a greater level of detail

was needed for internal management purposes, it

could select a lower capitalization threshold for

management control, which would not be reflected in

the financial statements. [p. 16]

70. Q—Is there a minimum condition level at which a

government should preserve its infrastructure

assets in order to apply the modified approach?

A—Statement 34 does not establish a minimum condition

level. However, this level should be established in a formal, documented manner through appropriate administrative or executive policy, or by legislative action. This

level and any subsequent changes to the established level

should be disclosed annually in the notes to RSI. [p. 17]

71. Q—Who establishes the condition level of an

infrastructure asset?

A—The government reporting the subsystem or network

of infrastructure assets sets the condition level. This decision should be documented by administrative or executive

policy or by legislative action and be disclosed in the notes

to RSI. For example, a capital budget prepared by the executive branch and approved by the legislative branch could

be used to document the established condition level. [p. 17]
48 PRIMER: GASB 34

For further information and additional copies of

this document, contact:

Office of Asset Management

Federal Highway Administration

U.S. Department of Transportation

400 7th Street, S.W., HIAM-1

Washington, DC 20590

Telephone: 202-366-1130

Fax: 202-366-9981
FHWA-IF-00-010