GASB 34 modified v. depreciation infrastructure accounting

Jonathan Helton

GASB 34 allowed states to account for infrastructure assets using either the depreciation approach or the modified approach. I am under the impression that the modified approach would give a better picture of localities' actual infrastructure liabilities. At the same time, I believe one condition of the modified approach is that state/local governments must conduct studies on their roads, etc. every so often, which is an additional cost. 

Can someone tell me if I'm understanding this correctly? I don't have a background in public finance, but I work in public policy and I'm doing research into this topic. 


1 comment

  • Comment author
    Charles Marohn

    You summarize this correctly, in my estimation. Here's an answer from GASB. Excerpt here, but I've got some thoughts afterwards.

    In general, governments are required to report capital assets at their historical cost and to depreciate that historical cost in a systematic and rational manner over the estimated useful lives of the assets. Capital assets are reported at their historical cost net of accumulated depreciation in financial statements using the economic resources measurement focus and the accrual basis of accounting. The primary exceptions to the depreciation requirement are land (which is considered inexhaustible), construction in progress, and infrastructure assets reported using the modified approach.

    The modified approach is an optional reporting method available to governments that meet certain criteria demonstrating that the qualifying infrastructure assets are being maintained over time at a consistent physical condition level determined in advance by the government. Instead of depreciation, governments employing the modified approach report annual expenses for the cost of maintaining and preserving the assets at the predetermined condition level. Those governments are required to present required supplementary information (RSI) that includes (1) assessed physical condition for the past three condition assessments, (2) a comparison of needed maintenance and preservation spending with actual spending for the past five fiscal years, and (3) notes to RSI describing the system of condition assessment used, the condition level at which the government intends to preserve its infrastructure, and changes in the system and other factors affecting the reported trends.

    The concern that we've always had isn't that these assets are correctly or incorrectly depreciated, but that counting them as assets is incorrect to begin with.

    An asset is "property owned by a person or company (in this case a municipal corporation), regarded as having value and available to meet debts, commitments, or legacies."

    A road, pipe, drain, or other piece of municipal infrastructure is not available to meet "debts, commitments, or legacies." You can't dig up a pipe and sell it or shut down a road.

    To the contrary, a road or pipe IS a commitment. It is an ongoing commitment to provide service and maintenance by a local government. The proper way to account for this commitment is to list it as a growing liability, instead of a depreciating asset. 






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