A city owns $400 million in roads, bridges, water mains, and traffic signals. A new finance director asks: "Are we depreciating all of this?" The answer depends on whether the government elected the modified approach for infrastructure, and the exam expects you to know when depreciation applies, when it does not, and how to calculate net capital assets either way.
AICPA Representative Tasks (verbatim). "Identify capital assets reported in the government-wide financial statements of state and local governments." "Calculate the net capital assets balance (e.g., including land, buildings and improvements, machinery and equipment, leases) for state and local governments and prepare journal entries (initial measurement and subsequent depreciation and amortization)."
HIGH-FREQUENCY: GASB 34 defines capital assets as tangible or intangible assets used in operations with an initial useful life extending beyond a single reporting period. The classification framework mirrors private-sector categories but adds infrastructure.
KEY: Capital assets appear only in the government-wide financial statements (Statement of Net Position). Governmental fund financial statements report capital outlays as expenditures when paid, no asset appears on the fund...
Common mistakes
- Depreciating land or construction in progress. Land has an indefinite useful life and is never depreciated. Construction in progress is not yet in service. Depreciation begins only when the asset is placed in service. The exam will test whether you catch these exclusions.
- Capitalizing interest during construction for governmental activities. Unlike FASB guidance for private entities, GASB does not permit capitalization of interest on governmental capital assets. Interest is expensed as incurred. Watch for trap answers that add interest to the building cost.
- Confusing the modified approach with zero asset value. Under the modified approach, infrastructure is still reported at historical cost, only depreciation is eliminated. Preservation costs are expensed, but the asset itself remains on the Statement of Net Position at cost. An answer stating "no asset is reported" is wrong.
Bottom line
- Capital assets include land, buildings, improvements, machinery, equipment, infrastructure, construction in progress, and right-of-use lease assets, reported at historical cost less accumulated depreciation/amortization in government-wide statements
- Infrastructure assets (roads, bridges, water systems, lighting) may use the modified approach (no depreciation if condition is maintained at or above an established level) or standard depreciation
- Under the modified approach, preservation costs are expensed and no depreciation is recorded, but additions and capacity improvements are still capitalized
- Land and construction in progress are never depreciated; all other capital assets depreciate over estimated useful life unless the modified approach applies
Exam shortcut
When a question asks about infrastructure and mentions "condition assessment" or "preservation," it is testing the modified approach. Map the key words: condition target met → no depreciation, expense preservation; condition target missed → switch to depreciation prospectively. When a question asks for the journal entry in the government-wide statements, always debit an asset account (Buildings, Equipment, Infrastructure) and credit Cash. Never debit Expenditures. That is fund accounting, not government-wide.
The full lesson (about 2,644 words, 18 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.C3
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