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Federal Accounting Standards for Capital Investment

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Staff Paper Prepared for the President's Commission to Study Capital Budgeting

June 17, 1998

FASAB (Federal Accounting Standards Advisory Board) has developed accounting standards for capital investment in two overlapping statements: Statement No. 6, Accounting for Property, Plant, and Equipment (1995), and Statement No. 8, Supplementary Stewardship Reporting (1996). Both standards become effective for the FY 1998 financial statements. FASAB has also issued two exposure drafts that would amend these statements and one exposure draft that would add to stewardship reporting. It plans to recommend an omnibus standard incorporating both present statements and the amendments.

Capital investment is reported in different way depending on the type of the investment. The acquisition cost may be reported as an asset on the balance sheet and subsequently charged to expense over a period of years through depreciation; or the expenditure may be recognized as an expense in the period incurred with additional financial or nonfinancial information provided in the supplementary stewardship report. FASAB devised supplementary stewardship reporting to account for the Federal Government's responsibility for the general welfare of the nation in perpetuity. The supplementary stewardship report includes information not in the basic financial statements that would help to assess how the Government's and the nation's financial condition have changed and may change in the future as a result of the Government's operations and investments. Stewardship property, plant, and equipment (PP&E) is PP&E owned by the Federal Government that does not meet the criteria for inclusion on the balance sheet. Stewardship investments are expenditures to finance state and local government purchases of physical property or to finance certain intangible assets. Stewardship reporting also includes information about the Government's ongoing responsibilities to provide public services and meet obligations as they come due: current services estimates of the budget and, if a recent exposure draft is adopted in the future, information about social insurance.

Property, plant, and equipment (PP&E). PP&E consists of tangible assets that have an estimated life of two years or more, are not intended for sale in the ordinary course of operations, and are intended to be used or available for use by the entity. PP&E is classified as either general PP&E or stewardship PP&E.

General PP&E, such as buildings, dams, and computers, provides general governmental services, and the allocation of its cost among accounting periods is needed to calculate the full cost of Government goods and services produced each period and to assess operating performance. The historical cost is reported on the balance sheet, and (except for associated land) it is depreciated over the asset's estimated useful life so that an annual charge is included in the entity's operating cost. General PP&E is a relatively small part of total PP&E.

Stewardship PP&E -- such as aircraft carriers, the Washington Monument, and national parks -- is PP&E for which the allocation of historical cost to operating expense, by means of depreciation, would not contribute to measuring the cost of outputs produced or assessing the operating performance in any given period. The assets are used in a manner that does not lend itself to a systematic and rational allocation of cost to accounting periods, and the entity does not necessarily have a periodic output to match with its costs. The primary reporting objective is to report the Government's role as a steward of existing assets for the benefit of people in the future. The cost of stewardship PP&E is recognized as an expense in the financial statements when the cost is incurred instead of being reported on the balance sheet and depreciated over a period of years.

Stewardship PP&E is divided among three categories: Federal mission PP&E, which consists primarily of weapons systems but is defined in general terms; heritage assets, such as monuments and historic buildings; and stewardship land, which is all land not held in connection with general PP&E. (Natural resources are distinct from land and are being studied in a separate project.) Because of confusion over the definition of "Federal mission PP&E," FASAB has proposed an amendment in an exposure draft that would replace this category with the PP&E components of Defense Department weapons systems and change its name to "national defense PP&E."

Stewardship reporting for heritage assets and land is in terms of physical units (such as acres of land by major use) rather than monetary values. Stewardship reporting for Federal mission PP&E includes the end-of-year value and the value added and withdrawn during the year. The proposed amendments would replace these values with quantities and would require data on annual acquisition costs incurred for national defense PP&E.

Stewardship investments. Stewardship investments consist of expenditures made by the Federal Government for the long-term benefit of the nation that do not result in the Federal Government acquiring tangible assets. They are in three categories: physical property financed by the Federal Government but owned by state and local governments, education and training programs, and research and development programs. The cost of stewardship investment is recognized as an expense in the financial statements when the cost is incurred. Entities are required to include in their stewardship report the annual investment in the reporting year and each of the four previous years. After an initial period, education, training, research, and development programs may be reported as stewardship investment only if outcome or output data are reported consistent with their being an investment.

Deferred maintenance. Deferred maintenance is maintenance that was not performed when it should have been performed or was scheduled to be performed and, as a result, is delayed until a future period. FASAB believes that deferred maintenance is a cost but that it cannot be measured well enough to be recognized in the basic financial statements. However, estimates must be disclosed in a footnote based on either condition assessment surveys or comparisons between actual maintenance and life-cycle forecasts. They are given prominence by a line item on the statement of net cost with a note reference in lieu of a dollar amount. This standard applies to both general PP&E and stewardship PP&E.

President's Commission to Study Capital Budgeting

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