Government Capital Assets – Internal Controls to Have in Place

​Capital assets are defined as all tangible and intangible assets used in operations that have useful lives greater than one year. Capital assets are the largest asset on most governments’ statements of net position. Although large in dollar amount, the accounting and internal controls related to capital assets have not historically received the same level of attention in the government sector as in private industry.
This is mostly due to two reasons:
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1. Infrastructure is by far the largest category of government capital assets. Infrastructure has frequently not been viewed as an “asset” by governments because it is not usually able to be sold. In fact, infrastructure has frequently been viewed as a liability because of the requirement for governments to use future resources to maintain. I have been involved in negotiations between governments that have shared construction costs in the building of a new asset. Each argued against taking the asset onto their books, so they didn’t take responsibility for maintenance and ultimate replacement.
2. Prior to Governmental Accounting Standards Board Statement No. 34, governmental capital assets were recorded in a “General Fixed Assets Account Group,” but not in any consolidated or fund financial statement. Auditors did not place much attention on capital assets during annual audits because they determined that even huge variations in the amount of assets recorded in this account group would not greatly impact users’ judgment about the financial position of the government.  

Accordingly, governments did not historically put substantial effort into tracking capital assets. Physical inventories of capital assets were seldom done. 

Now that capital assets are recorded in the entity-wide financial statements, governments and auditors are giving capital assets more attention. 

Particularly, auditors are delivering audit findings such as:
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• There is no formal effort to cleanse the database of out-of-service assets
• Written policies and procedures for capital assets are inadequate
• There is no comprehensive plan to perform a physical inventory of capital assets

Following is a list of the primary internal controls that a government should have in place to properly account for its capital assets:

1. Responsibilities for initiating/approving capital expenditures (including leases and repair/maintenance projects) should be segregated from responsibilities for accounting for those transactions (project accounting, property records, and general ledger functions).
2. Approvals by appropriate levels of management and/or elected officials should be required for capital asset transactions. Individuals authorized to initiate capital asset transactions should be identified and the limits of their authority defined. 
3. Responsibilities for the project accounting and property records functions should be segregated from the general ledger function.
4. Responsibilities for the project accounting and property records functions should be segregated from the custodial function.
5. Responsibilities for the periodic physical inventories of capital assets should be assigned to individuals who have no custodial or record keeping responsibilities.
6. A separate capital projects budget should be prepared.
7. A subsidiary ledger should be maintained for all capital assets, including those that are self-constructed, donated, purchased, or leased.
8. Physical safeguards over assets should exist.
9. Detailed property records should be periodically compared to existing assets. Periodic inventory of documents evidencing property rights (e.g., deeds, leases, and the like) should be performed. Differences between records and physical observations should be investigated and the accounting records adjusted accordingly.
10. Capital assets should be adequately insured.
11. Equipment should be identified by pre-numbered tags or other means of positive identification.
12. Written procedures and policies should exist to:

• Distinguish between capital expenditures and repairs/maintenance expenditures
• Identify operating budget expenditures to be capitalized
• Identify Accounting vs departments’ responsibilities
• Describe whether/how to track non-cap assets
• Describe disposal procedures – approvals, notify Accounting, sell, donate, advertise, scrap, replacement assets
• Describe capitalization thresholds, depreciation methods, level of detail to capitalize (e.g., whether a building will be capitalized as a single asset or each component)
• Describe procedures to inventory, tag and reconcile assets to the accounting records

If you’d like a handy list of these controls, please download them here in Word-format.
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By incorporating these internal controls into your government’s processes, you can ensure that capital assets are more properly accounted for.
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Please also visit our Resources page for a collection of all of our attachments and templates, as well as a link to a recent presentation for inventorying capital assets.

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If you have more questions related to government capital assets, feel free to reach out to Kevin directly:

Kevin Harper, CPA
kharper@kevinharpercpa.com
(510) 593-503

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