Infrastructure Reporting—Why Should We All Care?Lisa R. Parker, CPA, CGMASenior Project ManagerGovernmental Accounting Standards Board

The views expressed in this presentation are those of Ms. Parker. Official positions of the GASB on accounting matters are determined only after extensive due process and deliberation.

Why Deteriorating Infrastructure?

Deferred maintenance by the governments who are responsible for these assets

Governments fail to invest the money needed to maintain and preserve their assets after the initial construction investment- Replacement cost due to neglected maintenance is much

more expensive than keeping up with maintenance

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Why is Maintenance Neglected? Often a lack of commitment to fund maintenance efforts at

the level necessary for upkeep and preservation Reasons for the lack of funding include:- Short-term perspectives

Annual cycle when budgeting Election terms and cycles Lack of a long-term strategic outlook Failure to acknowledge future costs of reconstruction – annual

maintenance is less costly

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Why is Maintenance Neglected? Reasons for the lack of funding also include:- Competing priorities

Operating versus capital- Preference for capital funding

Takes it out of the operating budget Capital budget is separate and projects are funded long-term with debt

and grants- Misunderstanding of infrastructure condition

Large range over which condition deteriorates without noticeably affecting performance

May become obsolete before it deteriorates

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Why the Interest In the Condition of Infrastructure?

Reality that reconstruction through capital funding as opposed to ongoing maintenance and preservation spending through the operating budget was an unworkable way to handle infrastructure assets- Condition levels are poor and infrastructure needs to be fixed- Available federal money for capital has been reduced- Most cost effective way to fix is through ongoing maintenance

Asset Management Systems were gaining popularity as an infrastructure maintenance best practice- System of inventory and tracking of the condition level of

infrastructure assets in order to combine management, financial, economic, engineering and other practices applied over the full life cycle of physical assets to provide the required level of service for present and future customers in the most cost-effective way

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Asset Management Systems

Governments using these systems can have the advantage of effectively counteracting the impediments to ongoing maintenance funding- Will keep track of condition levels- Will provide the information necessary to prioritize funding

decisions- Will validate budget requests for maintenance and

replacement- Can be a policy of the government to protect against the

problem of turnover in elected officials

Brief History of Reporting Requirements Prior to 1999—capital assets, including

infrastructure, were left off the balance sheet- Roadblock to informing decision-making and holding

governments accountable- Level to which infrastructure was being maintained

was unclear 1999 GASB issued Statement No. 34, Basic

Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments- Requires governments to report their capital assets,

including infrastructure

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Goals of Statement 34 To establish government-wide reporting on an accrual basis- Would include the inclusion of capital assets, including

infrastructure assets- Although they are not likely to be liquidated to produce inflows

Generally the most valuable assets on a government’s Statement of Net Position

Play a vital role in the provision of services- Their cost is also a significant component of the full cost of

services–the reporting of which is an objective of financial reporting–Statement of Activities

- Infrastructure needs to be maintained and preserved Represents a significant potential claim on resources

Without capital assets, including infrastructure – inaccurate depiction of a government’s financial standing

Capital Asset Reporting Required

Capitalization and measurement of the cost of using capital assets helps users:Determine whether current-year revenues covered the

cost of current-year servicesAssess the service efforts and costs of programsAssess the govt’s financial position and conditionDetermine whether the govt’s financial position improved

or deterioratedAssess the service potential of physical resources having

useful lives extending beyond the current period

Definition of Capital Assets

Tangible or intangible assets used in operations Have initial useful life extending beyond a single reporting

period Include:

- land - vehicles- improvements to land - machinery- easements - equipment- buildings - infrastructure- building improvements- works of art and historical treasures

Definition of Infrastructure Assets

Definition of Infrastructure- Long-lived capital assets- Normally stationary in nature- Normally can be preserved for a significantly greater number of

years than most capital assets- Examples: roads, bridges, tunnels, drainage systems, water

and sewer systems, dams, and lighting systems

Definition of Infrastructure Assets Cont’d

Definition of Infrastructure- Land under roads is not infrastructure- Buildings are not infrastructure

Except those that are an ancillary part of a network of infrastructure assets

When ownership is unclear . . . The government primarily responsible for managing infrastructure should report it.

Valuing Capital Assets

Report at historical cost Cost includes:- Ancillary charges necessary to place asset into its intended

location and condition for use

Donated items reported at estimated fair value at time of acquisition, plus ancillary charges

Depreciation--General Requirements

Report capital assets net of accumulated depreciation Not all are depreciable- Inexhaustible capital assets

land, improvements to land, construction in progress, etc.- Infrastructure assets reported using modified approach

Calculating Depreciation

Systematic and rational allocation of net cost over estimated useful life

May use any established depreciation method

Calculating Depreciation Cont’d

Net Cost- Historic cost of the asset less salvage value

Estimated Useful Life- Governments should periodically reevaluate estimated useful

lives in relation to actual conditions and usage- Any change in useful life is applied prospectively (change in

accounting estimate)

Calculating Depreciation Cont’d

Asset Grouping Options- Depreciation expense may be calculated for:

Individual assets A class of assets (e.g., vehicles, buildings, or computers) A network of assets--all assets providing a particular type of

service, such as a dam, its spillway, and locks A subsystem of a network--all assets that make up a similar

portion or segment of a network, such as interstate highways, state highways, or rural roads

Calculating Depreciation Cont’d

Asset Grouping Options- Composite and group depreciation may be used

Composite depreciation rate may be based on:– weighted average or simple average life of the assets in the group– assessment of the life of the group as a whole– any established depreciation method allowed

Composite depreciation assumes all assets are retired at the end of their useful lives– cost of replaced assets is removed from both the capital asset account

and the accumulated depreciation account (no gains or losses reported)

Modified Approach--Definition

If infrastructure is maintained, using an asset management system, at or above a set condition level- Then not required to depreciate infrastructure- Costs that extend the life of infrastructure (preservation

costs) are immediately expensed rather than capitalized and depreciated

Modified Approach—Definition Cont’d

Modified Approach Traditional Depreciation

Expense Maintenance andPreservation costs

Maintenance

Capitalize Additions andimprovements

Preservation costs,additions, andimprovements

Preservation costs are expenditures that extend the useful life of an asset without increasing its capacity or efficiency

Modified Approach--Requirement to Use

Infrastructure assets that are part of a network or subsystem of a network are eligible infrastructure assets

Eligible infrastructure assets are not required to be depreciated as long as government:- Manages them using an asset management system,

and- Documents that they are being preserved

approximately at or above a condition level established by the government

Asset Management System- An acceptable asset management system must:

Report an up-to-date inventory Perform replicable condition assessments and summarize results

using a measurement scale Estimate each year the annual amount to maintain and preserve the

infrastructure at the condition level established and disclosed by the government

Modified Approach--Requirement to Use Cont’d

Documentation of Preservation- Governments should document that:

Complete condition assessments are performed in a consistent manner at least every 3 years

The results of the 3 most recent complete condition assessments show preservation approximately at or above the established condition level

Modified Approach--Requirement to Use Cont’d

Establishing Condition Levels- Statement 34 does NOT establish a minimum condition

level- The government should establish the target condition level

in a formal, documented manner through: Appropriate administrative or executive policy Legislative action

Modified Approach--Requirement to Use Cont’d

Failure to meet requirements Failure determined network-by-network or subsystem-by-

subsystem Depreciation begins in year subsequent to the year

requirements are not met Change is accounted for prospectively as a change in

accounting estimate

Disallowance of Use of Modified Approach

For infrastructure reported using the modified approach, disclose:

1. The assessed condition - performed at least every 3 years - for at least the 3 most recent complete condition

assessments - indicating the dates of the assessments

2. The estimated annual amount to maintain and preserve at the condition level, compared to the amounts actually expended/expensed for each of the past 5 reporting periods3. Basis for the condition measurement and the measurement scale4. The condition level at which the government intends to preserve its infrastructure assets5. Factors that significantly affect trends in the information reported

RSI for Modified Approach

Transition for Infrastructure Reporting

Transition provisions apply to only major general infrastructure assets (BTAs should already be reporting infrastructure)

Transition Accommodations

Staggered transition dates for old infrastructure Limited time look-back period Look-back limited to major assets Reporting nonmajor assets not required Historical cost may be estimated

Staggered Transition Dates

Staggered Transition Dates

Total revenue--governmental and enterprise fund revenues combined

Extraordinary items and other financing sources are excluded

Revenue calculation should be made in the first fiscal year ending after June 15, 1999

Look-back Period is Limited in Time

Estimated historical cost is required for:- Assets acquired- Significant reconstructions/improvements In fiscal years ending after June 30, 1980

Look-back Limited to Major Assets

Major determined at the network or subsystem level and should be based on these criteria:

a Cost of subsystem is expected to be at least 5% of the total cost of all general capital assets reported in the first fiscal year ending after June 15, 1999, OR

b Cost of network is expected to be at least 10% of the total cost of all general capital assets reported in the first fiscal year ending after June 15, 1999

Nonmajor Networks Reporting Optional

Encouraged, but NOT required

Estimated Historical Cost Allowed

If determining historical cost is not practical because of inadequate records, estimated historical cost may be used

Acceptable estimating methodsa Review of engineering and bond documentsb Expenditures reported in capital project funds or capital outlays in

governmental fundsc Estimated replacement cost, deflatedd Any approach that complies with the intent of Statement 34

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Use of the Modified Approach In 2011 GASB requested proposals to research the extent

to which, and how, governments use the modified approach:- How have county and local governments implemented the

infrastructure accounting and financial reporting requirements of Statement 34?

- Which county and local governments are using the modified approach to infrastructure reporting and for what types of infrastructure assets?

- Why did governments choose to use the modified approach? How do they view the usefulness of the modified approach? What difficulties, if any, have they encountered?

- Who uses the infrastructure information that governments are required to report and for what purposes? How useful is this information for making decisions and assessing government accountability?

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Use of the Modified Approach

Research approach- CAFRs of 620 large and medium city and county governments

were examined 36 (8 cities, 27 counties, and 1 metro government) were

using the modified approach- Interviews of finance and public works department

representatives were conducted with 5 of these governments- Literature review- Research on the asset management systems used by these

governments

A separate research report has revealed that almost half of the states use the modified approach.

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Governments that Use the Modified Approach Since Statement 34 was issued, several assumptions have

been made about governments that would be most likely to use the modified approach:- In general, governments will be more likely to use the depreciation

approach – overwhelmingly true- Larger governments will be more likely to use the modified approach –

looks to be true with 81% being large and 19% medium, using GASB definitions

- Counties will be more likely than cities to use the modified approach – true with 75% of modified approach governments being counties

- Governments will be more likely to use the modified approach for roads than other types of infrastructure assets – overwhelmingly true with 97% of modified approach governments accounting for roads with the method (53% for bridges)

- Governments whose assets have high condition levels will be more likely to use the modified approach – seems to be true but can’t prove

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Why the Use of the Depreciation Approach?

Perception of being simpler Preferred by financial officials Avoids the requirements of the modified approach May portray the government more favorably if infrastructure

conditions are not up to par

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Benefits to the Modified Approach Asset Management System Provides a more accurate valuation of a government’s

infrastructure assets than does depreciation- Depreciation presents that an asset will lose value until the

point that it is value-less or obsolete- Not just a mathematical exercise because it reflects how

infrastructure assets are managed- Matches the philosophy of maintaining and preserving current

roads rather than having to continue the need to build new ones

- Takes into account the costs associated with maintenance and preservation better than the depreciation method Depreciation does not take into account maintenance costs of inflationary

increases that will impact replacement needs

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Benefits to the Modified Approach Cont’d

Results in increased cooperation between government’s departments- Cooperation between public works, engineering, and finance

Results in better financial practices, which may lead to an increased bond rating

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Challenges to the Modified Approach

Too difficult and costly to implement Uncertain revenue streams will impact a government’s

ability to maintain target condition levels, and will then need to revert to depreciation- GASB 34 – if condition levels drop below the established target

without a plan to improve, they must depreciate their infrastructure or lower the specified condition level

- A change to depreciation accounting late in the useful life could result in elevated levels of annual depreciation expense for an extended period as they would be depreciated over the estimated remaining service life

Infrastructure maintenance will be given too much leverage in budget deliberations due to the necessity of maintaining the target condition level

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What’s Next for GASB

Pre-agenda research reexamining Statement 34 and its requirements- Is the statement meeting its objectives?