Financial Management: Survey of Capitalization Threshold and Other Policies for Property, Plant, and Equipment
Published: 2002-10-15T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: In passing the 1990 Chief Financial Officers Act and a range of other financial management reform legislation, Congress has sought to overcome the historical lack of reliable, useful, and timely information with which to make informed decisions, measure and control costs, manage for results, and ensure financial accountability on an ongoing basis. Reported capitalization threshold levels at the 14 agencies GAO surveyed ranged from zero to $250,000. Despite the sharp increase in the capitalization threshold, all but one of the 14 agencies responded that they maintained property records for the government's general property, plant, and equipment (PP&E) not capitalized on the balance sheet, citing safeguarding of PP&E and supporting agency operations as the key reasons for maintaining such information. Federal capitalization thresholds are significantly higher than those reported by the private sector entities GAO surveyed. In some cases, the federal capitalization thresholds for real property were up to 50 times higher than those noted in the private sector. In contrast to the wide variance between federal agency and private sector capitalization threshold policies, federal agency useful life policies were generally similar to those found in the private sector. Estimated useful life classifications within the federal government ranged from 2 years to 40 years for personal property and 5 years to 100 years for real property. GAO did identify several differences attributable to the variety of assets owned by the entities that participated in its survey, rather than any systematic differences in useful life classifications.

section_title: Letter
paragraphs: In passing the 1990 Chief Financial Officers (CFO) Act and a range of other  financial management reform legislation, the Congress has sought to  overcome the historical lack of reliable, useful, and timely information with  which to make informed decisions, measure and control costs, manage for  results, and ensure financial accountability on an ongoing basis.
The government’s general property, plant, and equipment (PP&E), reported  at almost $307 billion, net of accumulated depreciation, as of September 30,  2001, represents approximately one-third of the reported assets on the  balance sheet of the U.S. government’s consolidated financial statements.   General PP&E is often referred to as fixed assets, and includes land,  buildings, equipment, and improvements acquired by the government to be  used in providing goods and services to citizens.  Capitalization threshold  and useful life policies affect whether and how the costs of acquiring PP&E  or construction of PP&E are capitalized and allocated through depreciation  to the periods benefiting from such assets, and are critical to the fair  presentation of an entity’s financial position and results of operations.   Excessively high capitalization thresholds can have a significant impact on  financial reporting by reducing the amount of federal assets that are  reported on the balance sheet and, most important, by jeopardizing the  matching of costs to the appropriate period of asset utilization so that the  cost of programs and operations are properly measured.
For the past 5 fiscal years, in our audits of the consolidated financial  statements, we have reported that because the government lacked  complete and reliable information to support PP&E holdings, we could not  satisfactorily determine that all assets were included in the financial  statements, verify that certain reported assets actually existed, or  substantiate the amounts at which they were valued.   PP&E reporting was  one of the primary reasons for our disclaiming an opinion on the  consolidated financial statements again in fiscal year 2001. As the  government continues to make progress in addressing major audit issues,  such as PP&E reporting, and the prospect of auditable consolidated  financial statements draws closer, issues such as useful lives and  capitalization thresholds are now in sharper focus.
Under the Statement of Federal Financial Accounting Standard (SFFAS)  No. 6, Accounting for Property, Plant, and Equipment, federal agencies  are to record as property and equipment all items that meet certain  characteristics, such as a useful life of 2 years or more, and are permitted to  establish individual capitalization thresholds and useful life policies due to  their diverse size and uses of PP&E. SFFAS No. 6 was issued in November  1995 and was effective for fiscal years beginning after September 30, 1997.  Previously, the capitalization threshold for federal agencies was $5,000.
We have noted large increases in federal agency capitalization thresholds  over the past 5 years, and our audit work at two major agencies has  highlighted problems in this area.  In prior audit work performed at the  Internal Revenue Service (IRS), we found that Treasury’s $50,000  capitalization threshold contributed to a material understatement in PP&E.    IRS has since revised its capitalization threshold accordingly.  We  previously raised concerns with the Department of Defense (DOD), which  holds the majority of the U.S. government’s reported PP&E, about the basis  for its $100,000 capitalization threshold, in part because of issues  surrounding the quality of the data available to make such a determination.
As an initial step to address this issue governmentwide and as part of a  series of planned work on key audit issues pertaining to the consolidated  financial statement audit, we undertook a survey of PP&E capitalization  threshold and useful life policies at 14 federal agencies that reported  significant amounts of PP&E.  We also surveyed 12 private sector  companies on these same PP&E policies.  Our survey was designed to  determine the federal agencies’ (1) current capitalization threshold  practices for PP&E and how such policies compare to the practices being  applied to PP&E in the private sector and (2) useful life policies and how  they compare to those used in the private sector.  Our survey work was not  designed to conclude on the reasonableness of the capitalization threshold  levels being applied by federal agencies.  Instead, our survey results are  intended to provide useful baseline information to responsible parties in  federal financial reporting.  We plan to review the adequacy of  capitalization threshold levels and useful life policies at selected agencies  in future work.
subsections: section_title: Objectives, Scope, and Methodology
paragraphs: Our work was performed primarily using survey instruments to gather data  on PP&E policies at 14 selected federal agencies and 12 private sector  companies.  Appendix II provides a list of all survey participants. We also  held discussions with certain representatives of the participating federal  agencies and private sector companies in developing the survey and in  gathering follow-up information based upon the survey responses.  We did  not verify the accuracy of the data provided to us by the survey  participants. We conducted our work from May 2001 through February  2002 in accordance with U.S. generally accepted government auditing  standards.  We requested comments on a draft of this report from the  Department of the Treasury, OMB, all 14 federal agencies that participated  in the survey, as well as the 12 private sector council member survey  participants.  Further details on our scope and methodology are included in  appendix I.
section_title: Background
paragraphs: The Secretary of the Treasury, in coordination with the Director of OMB, is  required to submit annually to the President and the Congress audited  consolidated financial statements of the U.S. government beginning with  those for fiscal year 1997.  We are required to audit those statements.   The  principal financial statements required for federal agencies are the Balance  Sheet, the Statement of Net Cost, the Statement of Changes in Net Position,  the Statement of Budgetary Resources, and the Statement of Financing.   These statements are to be prepared in accordance with U.S. generally  accepted accounting principles.  The balance sheet for the federal  government presents the total balances of assets, liabilities, and net  position as of a specific point in time.  The government’s general PP&E,  reported at almost $307 billion, net of accumulated depreciation as of  September 30, 2001, represents approximately one-third of the assets on its  balance sheet.
subsections: section_title: Federal Accounting Standards
paragraphs: Federal accounting standards, which agency CFOs use in preparing  financial statements, are promulgated by the Federal Accounting Standards  Advisory Board (FASAB).  FASAB develops accounting standards after  considering the financial and budgetary information needs of the Congress,  executive agencies, other users of federal financial information, and the  public.  FASAB forwards the standards to the three principals—the  Comptroller General, the Secretary of the Treasury, and the Director of  OMB—for a review period, after which the standards are considered final,  then published on FASAB’s Web site and in print. The American Institute of  Certified Public Accountants recognizes the federal accounting standards  promulgated by FASAB as being generally accepted accounting principles  (GAAP) for the federal government.  Currently, there are 22 SFFAS and  three Statements of Federal Financial Accounting Concepts (SFFAC).   The concepts and standards are the basis for OMB’s guidance to agencies  on the form and content of their financial statements and the government’s  consolidated financial statements.
FASAB significantly relied upon SFFAC No. 1, Objectives of Federal  Financial Reporting, in drafting accounting standards for PP&E.  The two  principle reporting objectives relevant to PP&E are operating performance  and stewardship.  In developing PP&E standards to meet the operating  performance objective, FASAB established the goal of measuring the cost  associated with using PP&E and including that cost in entity operating  results.  In seeking to fulfill the stewardship objective, FASAB developed  the PP&E accounting standards to result in reporting information on  (1) asset condition, (2) changes in the amount and service potential of  PP&E, (3) the cost of PP&E where applicable, and (4) spending for  acquisition of PP&E versus noncapital spending.
section_title: Capitalization Thresholds and Estimated Useful Lives
paragraphs: Although FASAB established the reporting objectives framework in  developing the PP&E accounting standards, it concluded that capitalization  thresholds should be established by the federal entities themselves, based  on their diversity in size and uses of PP&E.  FASAB’s requirements in terms  of establishing appropriate capitalization thresholds are that they be based  on consideration of the entities’ financial and operational conditions,  consistently applied, and disclosed in the financial reports.  Before 1991,  accounting principles, standards, and related requirements for executive  agencies were published in appendix I of Title 2, “Accounting,” of the GAO  Policy and Procedures Manual for Guidance of Federal Agencies, in  accordance with 31 U.S.C. 3511.  The capitalization threshold for federal  agencies included in Title 2 was $5,000.  In addition, under Federal  Acquisition Regulations, government contractors are required to capitalize  all assets costing $5,000 or more.  Capitalization thresholds are tied to  materiality as well, in that they generally are established at a level that  would not omit a significant amount of assets from the balance sheet,  which could materially misstate the financial statements of an entity or its  components.
There is not an authoritative standard issued in the private sector  specifically addressing capitalization threshold levels.  However, the  underlying GAAP state that all normal expenditures of purchasing or  constructing an asset and readying it for use are capitalized, thereby  achieving the matching principle by distributing the costs of such assets to  the periods benefited through depreciation.  Capitalization thresholds are  set at levels that would not approach materiality in any foreseeable  circumstances.
SFFAS No. 6 requires that depreciation expense be recognized on all  general PP&E, except land and land rights of unlimited duration.   Depreciation is the systematic and rational allocation of the costs of  general PP&E to the operating periods benefiting from the asset, also  referred to as the estimated useful life.  FASAB again did not prescribe  specific classifications of estimated useful lives.  Instead, it requires that  the useful life consider economic, environmental, and technological factors  such as physical wear and tear and obsolescence.
In the private sector, GAAP state that depreciation method and rate depend  upon such factors as time, usage, maintenance policies, and asset  obsolescence, and recognize certain prescribed methods for allocating the  cost to the periods benefited.
section_title: Federal PP&E
paragraphs: PP&E consists of tangible assets, including land, that have estimated useful  lives of 2 years or more, are not intended for sale in the ordinary course of  operation, and have been acquired or constructed with the intention of  being used or being available for use by the entity.  SFFAS No. 6,  Accounting for Property, Plant, and Equipment, identifies four categories  of PP&E: (1) general PP&E, (2) national defense PP&E, (3) heritage  assets, and (4) stewardship land.  General PP&E is used to provide general  government services or goods and is reported on the balance sheet for  federal financial reporting.  National defense PP&E, heritage assets, and  stewardship land are collectively referred to as stewardship PP&E and are  reported in Supplementary Stewardship Information for federal financial  reporting and are not included on the balance sheet or any other principal  statement.  FASAB has approved issuing a standard that would eliminate  the category of national defense PP&E, and all items previously considered  national defense PP&E would be classified as general PP&E.    The focus of  this report is on general PP&E, reported on the balance sheet of the U.S.  government, which under current federal accounting standards does not  include national defense PP&E.
General PP&E consists of items that (1) could be used for alternative  purposes but are used by the federal entity to produce goods or services or  to support the mission of the entity, (2) are used in business-type activities,  or (3) are used by entities in activities whose costs can be compared to  other entities.  SFFAS No. 6 requires that all general PP&E be recorded at  cost, which shall include all costs incurred to bring the PP&E to a form and  location suitable for its intended use.  General PP&E includes land  acquired for or in connection with other general PP&E and heritage  assets, whose predominant use is general government operations.
General PP&E is often classified into two main categories, personal and  real property. Personal property includes vehicles, machinery, furniture,  equipment, and software.  Real property is land, buildings, and generally  anything built or constructed on land, growing on land, or attached to the  land.
section_title: Federal Agency Capitalization Thresholds Have Risen Significantly and Are Substantially Higher than Private Sector Capitalization Thresholds
paragraphs: Capitalization threshold levels at federal agencies have risen significantly  over the past 5 years.  Over 60 percent of the agencies surveyed have at  least doubled their capitalization thresholds in the past 5 years.  Further,  federal capitalization threshold levels are significantly higher than those  reported by the 12 private sector entities we surveyed.  The maximum  federal capitalization threshold levels reported for personal and real  property were much higher than those reported by the private sector  companies.  Inappropriate or excessive capitalization thresholds have a  significant impact on financial reporting and related oversight issues and  may not comply with SFFAS No. 6 requirements.
subsections: section_title: Federal Capitalization Thresholds Have Risen Significantly in the Past 5 Years
paragraphs: Nine out of the 14 agencies surveyed reported that they had increased their  capitalization thresholds in the past 5 years by 100 percent or more, for at  least one category of property (excluding software).  Figure 1 displays the  increases by agency.  Six agencies increased the capitalization threshold by  400 percent or more, 2 raising the threshold from $5,000 to $25,000, 2  raising the threshold from $5,000 to $100,000, 1 raising the threshold from  $25,000 to $200,000, and 1 raising the threshold from $5,000 to $250,000.   Appendix III provides detailed lists of the current capitalization level for  both personal and real property by federal agency.
Reasons given by the surveyed federal agencies for changing the  capitalization thresholds included materiality, implementation of federal  accounting standards, management decision, or external auditor  recommendation.
Twelve out of 14 federal agencies surveyed responded that they had  performed some type of formal analyses or studies to develop or validate  the capitalization threshold level.  In some instances, the studies concluded  that the threshold level was too low, prompting agency management to  increase the capitalization threshold.  Many agencies’ approaches to the  capitalization threshold analyses involved applying varying threshold levels  to PP&E balances to identify a capitalization level that resulted in a certain  desired percentage of PP&E being captured on the balance sheet in relation  to total PP&E.  Although our survey asked for a brief description of the  methodology used in the analyses, we did not request copies of the  analyses from the federal agencies or assess the methodology or  conclusions reached.  We did note, however, that 5 of the 12 agencies  solicited outside assistance in performing the analyses, and of those 5, 2  involved their respective offices of the inspector general.
Although DOD was not included in this review, the department holds a  significant portion of federal PP&E.  DOD’s reported general PP&E  holdings for fiscal year 2001 were $113.8 billion, net of accumulated  depreciation, representing approximately 37 percent of the federal  government’s PP&E reported on the U.S. government’s consolidated  balance sheet. DOD’s capitalization threshold has risen from $5,000 in 1994,  to $50,000 in 1995, and to $100,000 in 1996, which remains the current level.   DOD had contractors perform a study to validate its capitalization  thresholds and useful life policies for personal and real property.  We  reviewed the contractors’ work and agreed that certain limitations they  cited in their reports—such as that the databases they analyzed may not  have been appropriate, complete, and accurate—could directly affect the  assessment of the adequacy of the capitalization threshold and useful life  policies.  The contractor recommended that DOD undertake similar  periodic analyses in future years.
Further, federal agency capitalization thresholds varied widely.  They  ranged from $0 to $250,000, excluding computer software, where the  capitalization threshold ranged from $5,000 to $5 million.  The lack of  consistency in capitalization threshold levels among federal agencies could  potentially lead to reporting problems in the U.S. government’s  consolidated financial statements and performance measurement  comparisons.  For example, at some agencies major assets such as motor  vehicles may be capitalized and at others they may not due to the varying  capitalization threshold levels.  As a result, the costs of vehicles used by  certain agencies could be expensed in 1 fiscal year and not allocated to all  the years benefiting from their use.  Further, GAAP require that the  capitalization threshold, including any changes in the threshold during the  reporting period, be disclosed on the financial statements.  Treasury has  not disclosed the capitalization threshold used in the consolidated financial  statements, or the fact that many reporting agencies have different  capitalization thresholds.
Despite the sharp increase in the capitalization threshold, almost all of the  surveyed agencies responded that they maintained property records for  PP&E not capitalized on the balance sheet, for purposes of safeguarding  PP&E, supporting agency operations, or fulfilling external reporting  requirements.  For example, all surveyed agencies indicated that they have  policies and procedures in place, such as bar coding and periodic  inventories, for safeguarding and maintaining accountability over pilferable  and sensitive items.  We did not evaluate the adequacy of the design of the  agency policies and procedures or the effectiveness of the controls or their  implementation.  Even though 13 of the 14 federal agencies in our survey  reported that they maintain property records for PP&E not capitalized on  the balance sheet, most were unable to provide the cumulative value of  PP&E recorded in property records but not capitalized on the balance  sheet as of the end of fiscal year 2000.  Only the National Aeronautics and  Space Administration (NASA) and the Federal Aviation Administration  (FAA) responded with the cumulative value of PP&E not reported on their  balance sheets as of September 30, 2000—approximately $4.9 billion and  $1.6 billion, respectively.  However, we noted that NASA’s auditors for fiscal  year 2001 reported a material weakness related to PP&E, so the amount  NASA reported as being expensed may not be reliable.
section_title: Federal Capitalization Thresholds Differ Significantly from the Private Sector
paragraphs: Federal capitalization thresholds are significantly higher than those  reported by the 12 private sector entities we surveyed. We found that the  agency capitalization thresholds for personal property ranged from $3,000  to $200,000, and in some cases were 40 times higher than the maximum  levels reported by the private sector participants.  Table 1 compares the  ranges of capitalization thresholds noted at the federal agencies surveyed  to those of the private sector participants.  Appendix IV provides the  specific personal property responses for all survey participants by  category.
As shown in table 1, private sector respondents’ threshold levels for  personal property ranged from as low as $250 up to $5,000.  Under these  threshold levels, office equipment costing $20,000 with an estimated useful  life of 5 to 7 years, would not be capitalized at more than half (9 out of 14)  of the federal agencies surveyed, but would be capitalized at all of the  private sector company participants.
Five of the surveyed federal agencies responded as having a separate  capitalization threshold level for bulk purchases.  A bulk purchase policy  generally refers to capitalization guidelines when acquiring significant  asset quantities in bulk at one time, where the individual unit price falls  below the original threshold.  For example, the National Oceanic and  Atmospheric Administration’s (NOAA) policy is to capitalize a bulk  procurement of $1 million or more for personal property with a unit price  from $25,000 to its individual capitalization threshold of $200,000, if the  items are identical.  The Department of Education has a $500,000 bulk  purchase policy, and the Social Security Administration (SSA) has a  $10 million bulk purchase policy for computer hardware and software.   Personal computers acquired individually would not be capitalized at many  surveyed federal agencies under the current capitalization threshold levels,  and bulk purchases of personal computers would have to rise to the  capitalization threshold level, or higher at some agencies, as noted above,  to be capitalized on the balance sheet.  The remaining nine federal agencies  responded that the capitalization threshold levels apply to both single item  and bulk purchases of PP&E, as did the majority of the private sector  companies surveyed.  However, the few private sector respondents with  bulk purchase policies indicate an emphasis on capitalizing assets and  minimizing the impact on net income.  For example, Pfizer responded that  acquisitions of multiple like items would be capitalized if they exceed  $10,000 in the aggregate, even though each item is under its $1,000  threshold level.
Certain federal agencies in our survey, as well as some private sector  companies, reported capitalization thresholds specifically for software,  classified as personal property on the balance sheet.  The agencies’  capitalization thresholds for software ranged from $5,000 to $5 million, or  20 times higher than the maximum level reported by the private sector  participants.  The private sector respondents that reported specific  capitalization threshold levels for software indicated ranges from $1,000 to  $250,000. Figure 2 displays the percentages of surveyed federal agencies  and private sector companies at each capitalization threshold level for  software.   As shown in figure 2, 92 percent of the federal agencies surveyed  have threshold levels greater than $10,000 for software, compared to the  private sector, with 25 percent of respondents in that category.  The  majority of the private sector software capitalization threshold levels were  $10,000 and below. 75% SFFAS No. 10, Accounting for Internal Use Software, effective for  reporting periods after September 30, 2000, was cited by several federal  agencies as the basis for establishing a separate threshold just for software  or increasing their capitalization threshold levels for software.  SFFAS No.  10 requires the capitalization of the full cost (direct and indirect) of internal  use software whether it is commercial-off-the-shelf, contractor developed,  or internally developed.  A specific capitalization threshold for software,  separate from the threshold for all other personal property, may be  warranted at many agencies due to the varying and incremental nature of  the costs that go into software development, such as salaries.  However, the  threshold level for software also varies quite significantly among the  federal agencies surveyed, which could result in the consolidation and  comparison problems discussed previously.  Appendix V provides the  specific software responses for all survey participants.
Capitalization thresholds for real property ranged from zero, or no  threshold, indicating that all such assets are capitalized on the balance  sheet, to $250,000, which is 50 times the highest level reported by the  private sector participants.  Table 2 displays the capitalization threshold  ranges for real property at the federal agencies surveyed compared to those  in the private sector.   Appendix VI provides the specific real property  responses for all survey participants by category.
Private sector respondents’ threshold levels for real property ranged from  $0 to $5,000.   Under these threshold levels, a building costing $95,000 with  an estimated useful life of 30 years would not be capitalized at some federal  agencies surveyed, but would be capitalized at all of the private sector  company participants.  For example, Gillette, a large corporation with over  $10 billion in assets, has a uniform threshold level of $2,500 for both real  and personal property, with the exception of software.
As shown in tables 1 and 2, the threshold levels in the private sector for  most personal property and real property are relatively low, and more  consistent with the $5,000 capitalization threshold level previously  established for federal agencies in Title 2 of the GAO Policy and  Procedures Manual for Guidance of Federal Agencies, in accordance with  31 U.S.C. 3511.  In addition, under Federal Acquisition Regulations,  government contractors are required to capitalize all assets costing $5,000  or more.
section_title: Potential Impact of High Capitalization Thresholds on Financial Reporting
paragraphs: Our survey work was not designed to conclude on the reasonableness of  the capitalization threshold levels being applied at the federal agencies or  the private sector companies.  However, the widely varying threshold levels  among the federal agencies, the sharp increases in recent years, and the  differences from private sector companies of considerable size in terms of  reported PP&E and total assets raise some concerns.  Inappropriate or  excessive capitalization thresholds have a significant impact on financial  reporting and related oversight issues and may not comply with SFFAS No.  6 requirements to capitalize all items that meet certain characteristics, such  as a useful life of 2 years or more.  FASAB believed that not specifying a  threshold level, and allowing agencies broad latitude in establishing  capitalization thresholds suited to their respective financial and  operational conditions, would lead to a more cost-effective application of  the accounting standard.  However, objectives outlined by FASAB in the  SFFAC No. 1, such as (1) stewardship responsibility, (2) capturing the full  cost of operations, and (3) reliable financial reporting, may not be met as a  result of the wide range and significant increase in threshold levels that we  identified in our survey.
Excessively high capitalization thresholds reduce the amount of federal  assets that are reported on the balance sheet, distorting financial reporting  by potentially jeopardizing the matching of costs to the appropriate period  of asset utilization.  For example, in February 2000, we reported that an  inappropriate capitalization threshold contributed to a material  understatement in PP&E of approximately $1 billion, representing about 77  percent of the IRS’s total PP&E balances as of September 30, 1999.   IRS  had been following the Department of the Treasury’s standard $50,000  capitalization criterion, and now capitalizes most property and equipment  regardless of the dollar amount, based upon the capitalization issues raised  as a result of our financial audit of IRS.
Further, six of the agencies surveyed reported that they expensed a total of  almost $2 billion in PP&E for the fiscal year ended September 30, 2000, and  therefore did not report this amount on the U.S. government’s consolidated  balance sheet as assets.  While the $2 billion is a relatively small amount  compared to the total PP&E or total assets reported on the consolidated  financial statements of the U.S. government, this amount is incomplete, as  the remaining eight agencies surveyed could not readily provide the  amount expensed for the same period as a result of the PP&E acquisition  costs not meeting the capitalization threshold.  An assessment of whether  the capitalization threshold has a material effect on financial reporting is  difficult to make if agencies cannot provide the amount of assets that does  not meet the capitalization threshold and is therefore expensed in a given  year.
Interestingly, one of our surveyed federal entities, USPS, which sets its  rates and fees to recover its costs, reported a $3,000 personal property  capitalization threshold and $5,000 real property threshold, which is more  in line with the surveyed private sector companies’ capitalization threshold  levels.  For example, Exxon Mobil Corporation, a global company with net  PP&E of $90 billion as of December 31, 2000, also has a capitalization  threshold of $3,000, excluding software.  In fact, in looking at capitalization  threshold levels for personal property in the private sector excluding  software, all but 2 of the 12 participants had a threshold of $3,000 or less,  and the remaining 2 had a $5,000 threshold.
As reported in our High-Risk Series, some federal entities do not yet have  reliable financial and operational information to measure performance  based on the costs of providing goods and services and therefore appear to  have little incentive to maintain assets on the balance sheet through lower  capitalization thresholds.  For example, we reported in January 2001 that  the Department of Agriculture (USDA) lacked financial accountability over  billions of dollars of assets.  FAA’s financial management was also  designated as high risk because of serious and long-standing accounting  and financial management weaknesses, including property system issues.   Reliable information on the costs of federal programs and activities, of  which PP&E is a major factor, is crucial for effective management of  government operations.
section_title: Federal Agencies’ Estimated Useful Lives for Like Assets Are Similar
paragraphs: Useful lives for personal property ranged from 2 to 40 years among the  surveyed federal agencies, but include a wide array of assets.  Upon  comparing the recovery periods for like assets, the range narrows.  For  example, the useful lives for motor vehicles ranged from 3 to 12 years in the  federal agencies surveyed.  Useful lives for real property at the surveyed  federal agencies ranged from 5 to 100 years, which is a wide range that  encompasses numerous and varying types of real property.  The federal  government’s real property is quite diverse, and includes items such as  office buildings, dams, laboratories, courthouses, postal facilities, and  embassies.  However, when comparing the useful lives for similar buildings  or structures across the federal government, the recovery periods are  similar.  For example, 12 out of the 14 surveyed federal agencies indicated  useful life classifications for buildings of 30 to 40 years.
The useful life policies within the federal government were generally  similar to those found in the private sector.  No significant differences were  noted between the federal government and the private sector survey  respondents in the useful life policies for certain personal property  categories such as equipment, furniture and fixtures, motor vehicles, and  software.  The ranges of useful life classifications for both federal and  private sector company participants are shown in table 3 for personal  property and in table 4 for real property.  Appendixes VII and VIII detail the  useful life ranges for personal and real property for each survey  participant.
As noted above, the useful life ranges by category at the surveyed federal  agencies are similar to those at the surveyed private sector companies.  The  high useful life of 40 years for equipment pertains to certain items at the  Department of Energy (DOE), such as compressors and metal tanks.  If  such equipment were excluded, the maximum useful life classification for  equipment at the surveyed federal agencies would be 25 years—identical to  that in the private sector.
The few differences that we identified between federal agency and private  sector useful lives are due to the different types of assets owned by the  survey participants rather than any systemic differences in the useful life  policies.  For example, the maximum useful life classification for buildings  was reported as 75 years by two surveyed agencies, the Department of the  Interior’s Bureau of Reclamation and USPS.  At the Bureau of Reclamation,  the building useful life range of 30 to 75 years was reported for service  facilities, which consist of houses, buildings, garages, and shops owned by  the bureau and used in electric, irrigation, municipal and industrial, or  multipurpose operations and are not included in the plant accounts of a  specific project.  At USPS, the 75-year building useful life was reported only  for pre-July 1970 monumental (indicating stone or stone ornamentation)  buildings.  Other than these two specific classifications within the buildings  category, the maximum useful life classification for buildings at the  surveyed federal agencies would be 50 years, and identical to that in the  private sector.  Similarly, the 100-year useful life for other structures and  facilities at the surveyed federal agencies was for dams and related  property at the Bureau of Reclamation.  The longest useful life reported by  the private sector respondents is 40 years for other structures and facilities,  but none of the private sector respondents reported an asset similar to a  dam.    We did not receive survey results from any private sector utility  companies for comparison purposes because we were limited to the  Private Sector Council (PSC) members that voluntarily participated in our  survey.
Adequate useful life classifications also serve as a mechanism to achieve  fair presentation of an entity’s financial position and results of operations  in accordance with GAAP.  New additions to PP&E that replace old or  obsolete assets generally occur as the useful lives of the older assets are  reaching completion, and the typical financial statement impact of the  removal of an almost fully depreciated asset or a fully depreciated asset is  minimal to none.  However, if the useful life assigned to an asset or a class  of assets does not reflect its actual service life, then the financial statement  impact could be greater. For example, if an asset is assigned a useful life  that exceeds its actual service life, the preliminary result would be an  overstatement on the agency’s balance sheet and an understatement on its  statement of net cost for a period.  Conversely, if an asset’s designated  useful life were lower than its actual service life, the preliminary result  would be an understatement on the agency’s balance sheet and an  overstatement on its statement of net cost for a period.
section_title: Observations
paragraphs: Our survey results identified widely varying capitalization threshold levels,  sharp increases in recent years, and significant differences from private  sector companies of comparable size.  Because capitalization thresholds  may have a significant effect on the consolidated financial statements of  the U.S. government,  this survey was designed as the first step in providing  baseline information to analyze these significant PP&E policies and assess  their impact on the financial reports of the U.S. government.  In addition,  agency management and auditors also have continuing responsibilities to  ensure that established capitalization threshold levels are appropriate.   These issues are especially critical for agencies that establish user fees  based on actual costs and will become even more important as the  government moves toward matching revenues and costs for performance  measurement purposes.  The information obtained as a result of our survey  can be used as a tool for further analysis and assessment of these issues.
section_title: Comments and Our Evaluation
paragraphs: We provided a draft of this report to 14 federal agencies and 12 private  sector companies that participated in our survey, as well as to the  Department of the Treasury and OMB.  We received comments from  Treasury, OMB, and 4 of the 14 federal agencies surveyed, including USDA,  the Department of the Interior (Bureau of Reclamation), NASA, and the  Department of State (see appendixes XI through XV).  Seven federal  agencies, including the departments of Education, Energy, Justice (Bureau  of Prisons (BOP)), Transportation (FAA), and Veterans Affairs (VA), as well  as the Tennessee Valley Authority (TVA) and USPS, provided primarily  editorial comments, which we have incorporated into the report as  appropriate.  The remaining 3 agencies, which include the Department of  Commerce (NOAA), the General Services Administration (GSA), and SSA,  reviewed a draft of this report and told us they had no comments.  Three  PSC members that participated in the survey, Allstate, McGraw-Hill, and  PPG Industries, also provided primarily editorial comments, which we have  incorporated into the report as appropriate.
The substantive comments we received from the Treasury, OMB, and  federal entities had a common theme, in that they all generally took issue  with comparing the capitalization threshold levels in the federal  government to those in the private sector.   For example, the Department of  the Treasury stated that the private sector has income tax considerations  that affect capitalization thresholds, but these are not an issue at federal  agencies. In this regard, our private sector survey instrument (see appendix  X) recognized this consideration by specifically asking for information  regarding practices for financial reporting, or book purposes, and not for  income tax reporting.  USDA referred to inherent differences between the  government and the private sector in reporting cost and income.  NASA and  the State Department commented that the report did not acknowledge the  private sector’s profit objective, which they viewed as the main force  behind its PP&E policies and practices, as distinctly different from the  financial reporting objectives of the U.S. government.
Our views on asset capitalization are based upon two fundamental  accounting concepts: the matching principle and materiality.  The matching  principle aims to assign costs to the proper period.  In the case of capital  assets, this is done through depreciation to recognize the use of the asset  and can only occur if the asset is capitalized and not totally expensed when  placed in service.  The concept of materiality overlays the matching  principle to provide relief from capitalizing and tracking assets that are  immaterial to an entity’s financial statements.  The establishment of a  capitalization threshold policy must be supported by a detailed analysis,  anchored by these two fundamental principles of matching and materiality.   Furthermore, capitalization thresholds should be periodically reevaluated  to help ensure their continuing relevance.  Our report provides baseline  data that we believe could be useful to federal agencies in analyzing  capitalization thresholds. For example, NASA’s reported total assets as of  September 30, 2000, were $34.5 billion, similar to Pfizer’s reported $33.5 billion at its fiscal year-end of December 31, 2000.  NASA’s  capitalization threshold for both real and personal property is $100,000  compared to Pfizer’s $1,000 threshold.  Further, NOAA’s reported total  assets at September 30, 2000, were $5.5 billion, similar to McGraw-Hill’s  reported $4.9 billion at its fiscal year-end of December 31, 2000.  NOAA’s  capitalization threshold for both real and personal property is $200,000  compared to McGraw-Hill’s $2,000 threshold.
Our survey work was not designed to conclude on the reasonableness of  the capitalization threshold levels being applied at the federal agencies or  the private sector companies nor do we draw any conclusions.  However,  the widely varying threshold levels among the federal agencies, the sharp  increases in recent years, and the large differences from private sector  companies of considerable size in terms of reported PP&E and total assets  are issues that we plan to review further.  Inappropriate or excessive  capitalization thresholds can have a significant impact on financial  reporting by reducing the amount of federal assets that are reported on the  balance sheet and by jeopardizing the matching of costs to the appropriate  period of asset utilization.
While certainly differences exist between federal financial reporting  objectives and those in the private sector, there are similarities as well.   Both federal financial statements and those of private sector companies  seek to provide reliable, useful, and timely information to their users.   Similar to private sector companies’ responsibility to fairly state profits or  net income, federal entities have a responsibility to fairly state the net cost  of operations.  This is also important in determining fees to be charged, in  other efforts to recoup costs through any reimbursement arrangement, and  in the ability to match costs with performance.
OMB’s comments also included similar concerns related to comparing  federal capitalization threshold levels to those in the private sector.  In  addition, OMB noted that a comparison to the capitalization threshold  levels of state and local governments would be informative, and referred to  a recent survey of state comptrollers, done by the National Association of  State Comptrollers (NASC).  The results of the survey were reported in the  July 2002 newsletter of the National Association of State Auditors,  Comptrollers and Treasurers.  While the NASC survey and its reported  results appeared after we had completed our fieldwork, OMB felt strongly  that the survey and its results should be mentioned in our report.  Although  a review of the NASC survey was not within the scope of our work, we  noted that a significant portion of the states participating in the survey  reported a $5,000 threshold, which is also the threshold required by the  federal government for grant recipients’ recovery of costs under OMB  Circular A-87.  These thresholds, particularly those for personal property,  are in line with those used by most of the private sector survey  participants.  Federal Acquisition Regulations also require federal  government contractors to apply a capitalization threshold not to exceed  $5,000.
OMB, Treasury, and the Bureau of Reclamation took issue with our  statement that the lack of consistency in capitalization threshold levels  among federal agencies could potentially lead to reporting problems in the  U.S. government’s consolidated financial statements and performance  measurement comparisons.  As stated in our report, individual  capitalization threshold levels are permissible under federal accounting  standards, and because each federal agency was established with a specific  mission, they may possess unique assets to achieve their respective goals.   At the same time, consistent treatment of like assets is critical to accurate  performance measurement and reliable, relevant consolidated financial  reporting.   Management has a responsibility to ensure that the financial  statements are fairly stated, in all material respects, and the auditor’s role is  to provide an opinion on that basic assertion, based on its work.  As the  auditor of the U.S. government’s financial statements, we must ensure that  the varying capitalization thresholds do not result in or contribute to a  material misstatement at the consolidated level.  The results of our survey  can provide useful baseline data to OMB and Treasury in their respective  roles, and to agencies and their auditors as they continue to periodically  assess the adequacy of the capitalization threshold in terms of material  impact on financial reporting.
We are sending copies of this report to the Chairman and Ranking Minority  Member, Senate Committee on Governmental Affairs; the Chairman and  Ranking Minority Member, House Committee on Government Reform; the  Chairman and Ranking Minority Member, Subcommittee on Government  Efficiency, Financial Management and Intergovernmental Relations, House  Committee on Government Reform; and other interested congressional  committees.  We are also sending copies to the Chief Financial Officers, the  Inspectors General and other interested parties, including the survey  participants, the Private Sector Council, and the Chairman of the Federal  Accounting Standards Advisory Board.  In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.  If you  have any questions on this report, please contact me at (202) 512-9505 or  Mary Arnold Mohiyuddin at (202) 512-3087.
section_title: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to determine (1) what are the federal  government’s current capitalization threshold practices for PP&E and how  such federal government policies compare to those practices being applied  to PP&E in the private sector and (2) what are the useful life policies within  the federal government and how they compare to those used in the private  sector.
To fulfill these objectives, we developed two surveys, one for federal  agencies and one for private sector companies.  The surveys were used to  collect information on capitalization thresholds and useful life policies,  studies or analyses supporting those policies, and other related data that  would assist us in determining the rationale for these PP&E policies as well  as give us an indication of any differences or similarities between federal  practices and private sector practices in the PP&E policy area.
For the federal government, we considered the 24 federal agencies  responsible for annual audited financial statements as required under the  CFO Act as expanded by the Government Management and Reform Act of  1994.  We sent the survey to federal agencies with a reported $4 billion or  more of net PP&E at September 30, 2000, except for DOD.  For four  agencies (Commerce, Interior, Justice, and Transportation), we surveyed a  single component of the entire department due to the significant number of  reporting components or because of the possibility of differing PP&E  accounting policies for the various components.  For each of those four  agencies, we selected the component with the largest percentage of the  total reported PP&E for that department.  In addition, we randomly  selected two federal agencies with net PP&E as of September 30, 2000, well  below $4 billion to participate in the survey.  We received completed  surveys from all 14 federal agencies we contacted.
Although DOD is the largest holder of PP&E in the federal government, we  chose not to include it in this survey.  DOD had a study performed by  contractors to validate its capitalization thresholds and useful life policies  for personal and real property.  We reviewed the contractors’ work and  agreed that certain limitations they cited in their reports pertaining to the  reliability and completeness of the data could directly affect the  assessment of the adequacy of the capitalization threshold and useful life  policies.    Nonetheless, the reported value of net PP&E for federal survey  participants represents over half of the federal government’s reported net  PP&E as of September 30, 2000.  Appendix II lists all agency survey  participants.
We also surveyed member companies of the PSC, a nonprofit, nonpartisan  public service organization committed to helping the federal government  improve its efficiency, management, and productivity through cooperative  sharing of knowledge.  We sent our survey to all member companies,  approximately 40, and received completed surveys from 12 PSC members.   Appendix II contains the complete list of PSC survey participants.
We did not audit or verify the information provided by the federal agency or  private sector survey participants in any way.   We summarized the data  collected from both survey groups, as reported to us by the respondents.  We conducted telephone interviews with personnel at certain agencies and  PSC members for follow-up questions or clarification purposes as needed.
The practical difficulties of conducting any survey may introduce errors,  commonly referred to as nonsampling errors.  For example, difficulties in  how a particular question is interpreted, in the sources of information that  are available to respondents, or in how the data are entered into a database  can introduce unwanted variability into the survey results.  We took steps  in the development of the questionnaires, the data collection, and the data  editing and analysis to minimize the nonsampling errors.  For example, we  pretested the questionnaires with a number of respondents to refine the  survey instruments, we edited the surveys and called respondents to clarify  answers, and we verified a sample of the survey data that was entered into  our database for any keypunch errors.
We reviewed GAAP and concepts that related to PP&E accounting, as well  as federal reporting guidelines issued by Treasury and OMB.  In addition,  we reviewed the financial statements and related notes to the financial  statements of the federal agencies and private sector companies that  participated in the survey.
We performed our work from May 2001 through February 2002 in  accordance with generally accepted government auditing standards.    We  provided a draft of this report to 14 federal agencies and 12 private sector  companies that participated in our survey, as well as to the Department of  the Treasury and OMB.  We received comments from Treasury, OMB, and 4  of the 14 federal agencies surveyed, including USDA, the Department of the  Interior (Bureau of Reclamation), NASA, and the Department of State.   Seven federal agencies, including the departments of Education, Energy,  Justice (BOP), Transportation (FAA), and Veterans Affairs, as well as TVA  and USPS, provided primarily editorial comments, which we have  incorporated into the report as appropriate.  The remaining 3, which  include the Department of Commerce (NOAA), GSA, and SSA reviewed a  draft of this report and told us they had no comments.  Three PSC members  that participated in the survey, Allstate, McGraw-Hill, and PPG Industries,  also provided primarily editorial comments, which we have incorporated  into the report as appropriate.
section_title: Survey Participants
paragraphs: Net PP&E/total assets (percentage)
Bureau of Prisons (DOJ)
Bureau of Reclamation  (DOI)
Energy (except PMA PP&E)
FAA (DOT)
NOAA (Commerce)
Net PP&E/total assets (percentage)
Meredith Corp.
section_title: Capitalization Threshold Increases by Federal Agency
paragraphs: Capitalization threshold prior to current level not reported by agency, therefore no increase calculated.
Capitalization threshold prior to current level not reported by agency, therefore no increase calculated.
section_title: Capitalization Thresholds for Personal Property
paragraphs: TVA was not included in the above because it capitalizes entire projects instead of individual assets.
Meredith Corp.
section_title: Capitalization Thresholds for Software
paragraphs: TVA was not included in the above because it capitalizes entire projects instead of individual assets.     Also, it has no specific software threshold.
Meredith Corp.
section_title: Capitalization Thresholds for Real Property
paragraphs: Federal agency did not report a capitalization threshold for this property category.
Meredith Corp.
section_title: Useful Life Ranges for Personal Property (in Years)
paragraphs: Meredith Corp.
section_title: Useful Life Ranges for Real Property (in Years)
paragraphs: Meredith Corp.
section_title: Federal Agency Survey
section_title: Private Sector Company Survey
section_title: Comments from the Department of Agriculture
section_title: Comments from the Department of the Interior
section_title: Comments from the National Aeronautics and Space Administration
section_title: Comments from the Department of State
section_title: Comments from the Department of the Treasury
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: Staff members making key contributions to this report were Linda J.  Brigham, Amy C. Chang, Francine M. DelVecchio, Cleggett S. Funkhouser,  Stuart M. Kaufman, David C. Merrill, and Lisa M. Warde.
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subsections: section_title: United States General Accounting Office Washington, D.C. 20548-0001