Accounting and Reporting Infrastructure Assets--Cities and Villages

Michigan Committee on Governmental Accounting and Auditing Statement No. 12

Issued by
State Treasurer
State of Michigan
December 2001

ACCOUNTING AND REPORTING INFRASTRUCTURE ASSETS
CITIES AND VILLAGES

GASB 34

STREET AND OTHER RELATED INFRASTRUCTURE REPORTING ISSUES

INTRODUCTION

Capital assets are defined by GASB 34 as land and improvements, easements, buildings and improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure, and all other tangible or intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period.

Infrastructure assets are long-lived capital assets that normally are stationary in nature and can normally be preserved for a significantly greater number of years than most capital assets. Examples of infrastructure assets include streets, bridges, tunnels, drainage systems, water and sewer systems, dams and lighting systems. Infrastructure assets do not include buildings, drives, parking lots or any other examples given above that are incidental to property or access to property

The purpose of this statement is to address issues surrounding reporting of street infrastructure assets (including sidewalks, traffic signals, and bridges) by cities and villages in the State of Michigan. This statement does not apply to private streets. Issues related to infrastructure reporting for drains, water and sewer systems in the State of Michigan are addressed in MCGAA Statement No. 10 entitled, "Accounting and Reporting Infrastructure Assets--Local Water and Sewer Systems and County Drains."

Effective Dates

All governmental entities must adopt the financial statement reporting model and prospective reporting of infrastructure for periods beginning after June 15 of either year 2001, 2002, or 2003 depending upon the size of their annual revenues for the base year, with the larger entities adopting first (2001). Revenues include all revenues (not other financing sources) of the primary government’s governmental and enterprise funds, except for extraordinary items. If a primary government chooses early implementation, all of its component units also should implement this standard early to provide the financial information required for the government wide financial statements. (Please refer to MCGAA Statement No. 7 entitled, "Basic Financial Statements for Counties and Local Governments in Michigan," which was issued in February 2000 to define the required extent of implementation of GASB 34 financial reporting requirements for Michigan counties and local governments.)

Units of government with annual revenues under $10 million have the option of adopting retroactive capitalization of major general infrastructure dating to 1980. All government entities are required to capitalize newly acquired or constructed infrastructure beginning with their GASB 34 implementation date.

Major networks and major subsystems of infrastructure assets acquired, donated, constructed, or substantially rehabilitated since fiscal years ending after June 30, 1980 must be inventoried and capitalized by the fourth anniversary of the mandated date of adoption of the other provisions of GASB Statement No. 34. This requirement applies to all government entities with $10 million or more in revenues during their base year, which is the first fiscal year ending after June 15, 1999.

Retroactive Capitalization

Retroactive capitalization means that major infrastructure assets on hand at the date of implementation of GASB Statement No. 34 must be inventoried, recorded as capital assets in the accounts, and reported in the statement of net assets. Prospective capitalization of general infrastructure assets means that from the GASB Statement No. 34 implementation date forward, all such assets must be capitalized in the accounts and reported in the statement of net assets.

INFRASTRUCTURE ASSET REPORTING

GASB 34 allows two approaches for infrastructure asset reporting, the "depreciation method" and the "modified approach." GASB 34 requires the use of depreciation reporting for infrastructure assets where the modified approach can not be used in reporting infrastructure assets.

Infrastructure assets that are part of a network or subsystem of a network are not required to be depreciated as long as the following two requirements are met:

1. The unit of government must manage the eligible infrastructure assets using an asset management system that has the following characteristics:

1. Have an up-to-date inventory of eligible infrastructure assets;
2. Perform condition assessments of eligible infrastructure assets and summarize the results using a measurement scale; and
3. Estimate each year the annual amount to maintain and preserve the eligible infrastructure assets at the condition level established and disclosed by the government.

2. The unit of government must document that the assets are being preserved at or above a condition level established and disclosed by the unit of government.

Cities and villages in the State of Michigan must meet both criteria noted above to use the modified approach. Cities and villages that do not meet the criteria for the modified approach must use the depreciation method for infrastructure assets with the following guidelines. Please note that these are guidelines that may vary depending on the region of the State, the weather, or other factors. It may also not include all capital assets that apply to your city or village in all circumstances.

Life in years for depreciation: (straight line-depreciation)

Initial installation of guardrails and traffic signs will be included with the project cost – all other guardrail and traffic sign work will be included in Routine Maintenance.

Purchase of land for roadway or right-of-way will be set up in a separate fixed asset account, by year, which will not be depreciated. This information MUST be included from 1980 to present. Any purchase of land or right-of-way, prior to 1980, for which cities and villages have documentation of purchase price should be included.

Generally, land improvements (including excavation, ditching, grading, tree removal, and subgrade preparation) are to be recorded as fixed assets, by year, and will not be depreciated.

Cities and villages should use 1999 or 2000 project data to arrive at a percentage of projects normally included as land improvements and apply this percentage to all years prior to current year. Use actual data from date of implementation forward.

All Bridges MUST be included in the fixed asset schedule.

All Traffic Signals MUST be included in the fixed asset schedule or in the aggregate.

All streets under the jurisdiction of cities and villages constructed by a developer or under special assessment must have the cost included in the fixed asset group and the offsetting revenue account will be "Other Contributions." These streets are to be split the same as streets constructed by cities and villages separating land/right-of-way purchase, land improvements, and depreciable street costs. This process is to commence with 1980 streets.

Shared Street Improvements (Intangible Asset)

All payments for streets that will be owned by others should be evaluated for inclusion on the balance sheet. For instance, a city may pay a portion of a county road or a state trunkline because the street goes through its jurisdiction and benefits its residents. Or, a township may fund a portion of a street improvement in its jurisdiction. If such costs are not significant in amount, or represent maintenance (e.g., chlorination or patching), then the costs should be expensed in the current year. However, if the costs are significant and represent a benefit to the community for years into the future, then the costs should be capitalized and amortized over the future periods expected to be benefited. This is an intangible asset, and should be reported as "shared street (and/or road) improvements." (Note the same accounting treatment would apply in the case of shared improvements on bridges.)

CLARIFICATION OF DEFINITIONS TO BE USED IN INFRASTRUCTURE REPORTING

1. Land/Right-of-Way Purchase (Capitalized)

a) Actual cash expenditure for acquisition of land or right-of-way for street (and/or road) purposes.

b) Actual cost of work-in-kind exchange for acquisition of land or right-of-way for street (and/or road) purposes.

2. Land Improvements (construction and/or reconstruction projects) (Capitalized)

a) Excavation, ditching, grading (lane widened portion and/or elevation change only), tree removal, subgrade preparation of land in preparation for street or roadway.

3. Construction (Use the definition from the Act 51 Report as the determining factor) (Capitalized)

a) The building of a totally new street (and/or road) where no street (and/or road) previously existed.

b) Addition of lanes to an existing street (and/or roadway) (only additional lanes are considered construction--all other project work would be classed as reconstruction).

c) The building of bridges or grade separations, and the repair of such structures by strengthening, widening, and the replacement of piers and abutments.

d) It is the initial signing of newly constructed roads and streets; major resigning of projects; and the installation, replacement, and improvement of traffic signals.

1) All items normally included in a construction contract for a new road or street, including removal of old roadbed, structures, detour expense, and replacement of any sidewalks damaged by construction operation, or made necessary by change of grade.
2) Rebuilding short sections of roadways to super-elevate curves, to improve grades, to lengthen horizontal curves, and to improve sight distances.
3) Resurfacing or reconstruction operation, which changes the roadway or surface type.
4) Curb, or curb and gutter, construction in block lengths.

4. Reconstruction (Capitalized)

a) Change the vertical or horizontal curve of a street, including the new surface of the changed street. Any construction where the street is totally reconstructed by reditching, new subgrade, subbase, and surface at the same location.

5. Maintenance (Expensed)

a) Routine work and materials required to keep the road or street roadbed, surface, and drainage in good repair; prevent damage by water or wind; repair and paint bridges and guardrails; provide for safe and convenient travel by keeping signs, signals, and pavement markings in good condition; and by snow and ice removal and cleaning the road or street surface. All roadwork which does not fit the category of Construction or Reconstruction is considered maintenance.

1) Placing new aggregate on existing gravel or stone surface to replace original material worn out.
2) Reconditioning of bituminous surfaces of any length.
3) Patching and repairing roadway surface of bituminous, concrete, or brick.
4) Cleaning of ditches and drainage structures, and maintenance of storm drains.
5) Dust layers, sprinkling and flushing.
6) Brushing and tree trimming.
7) Retracing pavement markings.
8) Replacement in-kind, or repair of traffic signs, delineators, or traffic signals.
9) Guardrail or right-of-way fence repair, or replacement and new installations of less than 500 feet on old roadways.

6. Timber Bridge (Capitalized)

a) Bridges constructed from timber with a 20’ or more clear span length crossing a drain, stream, or dry gully.

7. Metal Structure Bridge (Capitalized)

a) Metal culvert or multi-plate arch structure with a 20’ or more clear span length allowing for water to cross a drain, stream, or dry gully.

8. Concrete Bridge (Capitalized)

a) Concrete constructed structure with a 20’ or more clear span length crossing a drain, stream, or dry gully. This includes concrete I-beam with concrete deck, steel I-beam with concrete deck, Jack arch (steel I-beam with metal arches and concrete deck), concrete slab on metal sheeting, precase concrete arch, concrete box beam with concrete deck, and concrete box beam with bituminous deck.

9. Movable Bridge (Capitalized)

a) Bascule, lift, or rotating structure with a 20’ or more clear span length crossing a drain, stream, or dry gully.

FIXED ASSET ACCOUNT

All depreciated street fixed assets are to be removed from fixed assets at the time the individually recorded fixed asset item has been fully depreciated. For example a 1980, Seal Coat street fixed asset would be removed from fixed assets accounts along with the accumulated depreciation account in 1986, as it would be fully depreciated. However, all remaining 1980 recorded infrastructure assets would remain because they would not be fully depreciated. Depreciated bridges and traffic signals are to be removed from the fixed asset group only when they have been replaced or removed from the street system.

IMPLEMENTATION

1. Cities and villages should look up all recorded deeds for purchase of land and/or right-of-way to record as fixed asset expense.
2. Calculate land improvement cost percentage from 1999 or 2000 projects using actual data. Apply this percentage to construction expenditures listed in 1980 to present Act 51 Financial Report data and record as fixed assets by year. From the current year forward, use actual expenditures for land improvements on construction projects.
3. Street construction expenditures (less land improvement costs), as taken from the Act 51 Financial Reports, should be recorded as fixed assets by year. This number is to be split into categories, by percentage, using actual miles for each year or using actual data, if available. Once the fixed asset by year and subaccount has been determined, the depreciation factor must be applied up to the implementation date.
4. Traffic signals are to be recorded at original placement cost, by signal, and the depreciation factor is to be applied up to the implementation date. Signals are to remain as fixed assets until they are removed or replaced. If they are removed or replaced prior to being fully depreciated, they are to be considered as equipment fixed assets recording gain or loss on disposal.
5. Bridges are to be taken from the bridge inventory in your Engineering Department and recorded individually by bridge and subaccounts. Original costs for construction and year of construction can be obtained from the bridge inventory data. These are to be recorded at their original cost and depreciated up to current year. Bridges are to remain as fixed assets until they are removed or replaced. If they are removed or replaced prior to being fully depreciated, they are to be considered as equipment fixed assets recording gain or loss on disposal.

This statement was adopted in December 2001 by the members of the Michigan Committee on Governmental Accounting and Auditing.

Richard L. Baldermann, Chairperson
Larry J. Allen
James C. Baker
Robert C. Bendzinski
John A. Bengel
Donald R. Breadon
James G. Buckley
Patsy K. Cantrell
John Cubba
Robert J. Daddow
Ann Dennis
Gerald J. Desloover
George M. Elworth
Rana M. Emmons
Michael J. Frawley
Michael T. Gaffney
Bridget Gransden
Joseph C. Heffernan
Susan G. Hendricks
Ernest L. Hodgers
Peggy Haw Jury
Karen Lawrence-Webster
Janet L. Lazar
John H. Murphy
Patrick L. Mutchler
John H. Ogden
Thomas W. Ott
Kenneth D. Parrish
Rick J. Sanborn
Susan D. Sanford
Robert J. Skrobola
John Sobleski
Aaron M. Stevens
Michael Styczenski
Cary Vaughn
Ross J. Wilson
Patricia E. Wysong