With the main focus having been on GASB 87 (Leases) and now implementing GASB 96 (Subscription Based Information Technology Arrangements), this new capitalization threshold policy should not be ignored. Early application is even encouraged.
Although this may not be recent news, the Government Accounting Standards Board (GASB) has amended the existing standards regarding capitalization thresholds for assets.
The Governmental Accounting Standards Board periodically produces guides that address questions about implementing GASB pronouncements.
Original Guidance
The original guidance for the capitalization threshold comes from GASB Implementation Guide 2015-1, Question 7.98.
Q – Should a government’s capitalization policy be applied only to individual assets or can it be applied to a group of assets acquired together? Consider a government that has established a capitalization threshold of $5,000 for equipment. If the government purchases 100 computers costing $1,500 each, should the computers be capitalization?
A – Authoritative pronouncements do not address the manner in which a capitalization policy should be established and applied. Capitalization policies adopted by governments include many considerations such as finding an appropriate balance between ensuring that all significant capital assets, collectively, are capitalized and minimizing the cost of record keeping for capital assets. It may be appropriate for a government to establish a capitalization policy that would require capitalization of certain types of assets whose individual acquisition costs are less than the threshold for an individual asset. Computers, classroom furniture, and library books are assets that may not meet the capitalization policy on an individual basis, yet might be considered material collectively.
Updated Guidance
The amended guidance for the capitalization threshold comes from GASB Implementation Guide 2021-1, Question 5.1. Note that the question remains the same, but the answer has varied.
A – Capitalization policies adopted by governments include many considerations such as finding an appropriate balance between ensuring that all significant capital assets, collectively, are capitalized and minimizing the cost of recordkeeping for capital assets. A government should capitalize
assets whose individual acquisition costs are less than the threshold for an individual asset if those assets in the aggregate are significant. Computers, classroom furniture, and library books are examples of asset types that may not meet a capitalization policy on an individual basis, yet could be significantly collectively. In this example, if the $150,000 aggregate amount (100 computers costing $1,500 each) is significant, the government should capitalize the computers.
Main Takeaways
The original guidance made it sound as if it was an option to capitalize these like-assets that aggregated over the adopted threshold. However, the verbiage in the amended answer is distinct and indicates that governments are now required to capitalize these individual assets that are under the threshold individually but are significant in the aggregate.
The amended guidance on capitalization is effective for reporting periods beginning after June 15, 2023, which will be here before we know it for school districts with either a June 30th or August 31st fiscal year end. In addition, the guidance says that amendments are to be applied retroactively by restating all prior periods presented, if practical. The cumulative effect on the prior periods should be adjusted by restating the beginning net position/fund balance as applicable.
Before going back and capitalizing all small capital expenditures previously made, Districts should consider what would actually be significant. Although GASB uses the term significant in their pronouncements, the actual amount will vary per District. In result, this may provide some flexibility on implementing retroactively and in the future. Keep in mind that if your District deems similar capital type assets as insignificant, an explanation should be available for their independent auditor and other outside agencies.
Next Steps
With the main focus having been on GASB 87 (Leases) and now implementing GASB 96 (Subscription Based Information Technology Arrangements), this new capitalization threshold policy should not be ignored. Early application is even encouraged.
Some suggested actions include the following:
- Keep up with any additional guidance that may be issued by GASB in the upcoming year. We anticipate more clear and specific guidance in the future.
- Attend trainings/seminars regarding this matter.
- Hold discussions with your finance team and management to determine what classifies as significant for your District.
- Update your capital asset policy to reflect this updated guidance and to further define the examples of assets it applies to (i.e., computers, books, equipment, etc.).
- Start tracking similar capital items purchased near the same time with a single objective.
Lastly, do not hesitate to reach out to us for any additional questions or assistance.
