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. 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. 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. 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. 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. 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. 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.