Using Two Capitalization Thresholds for Greater Efficiency

Should governments use two different capitalization thresholds, one for infrastructure and another for all other capital assets?

Asphalt crew

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It is common for governments to use a single capitalization threshold of $5,000 for all capital asset purchases. This threshold encompasses, for example, purchases of equipment and road construction. But does it make sense to capitalize road work costing $22,000 or $34,000 or $38,000? Most small road, bridge, or other infrastructure expenses are better treated as non-capitalizable expenses.

So doesn’t it make sense to create a second capitalization threshold for infrastructure expenses? I think a minimum of $25,000 would work for smaller governments and a much larger amount–say $100,000–would be appropriate for mid-sized governments. Larger governments (such as states) could use an even higher number.

The second higher threshold will yield greater efficiency in recording capital assets. And since infrastructure is less likely to be stolen, it makes sense to implement a second capitalization amount. (Moveable capital assets require greater accountability [since they can be stolen]–so the lower threshold for these assets is advisable.)

Keep in mind the capital asset threshold is an accounting policy. Governmental accounting standards provide no required dollar amounts, so this is a judgment call. If you make a change, consider whether your governing body should approve it.

GFOA Capitalization Guidelines

The Government Finance Officers Association (GFOA) recommends that state and local governments consider the following guidelines in establishing capitalization thresholds:

  • Potentially capitalizable items should only be capitalized only if they have an estimated useful life of at least two years following the date of acquisition;
  • Capitalization thresholds are best applied to individual items rather than to groups of similar items (e.g., desks and tables), unless the effect of doing so would be to eliminate a significant portion of total capital assets (e.g., books of a library district);
  • In no case should a government establish a capitalization threshold of less than $5,000 for any individual item;
  • In establishing capitalization thresholds, governments that are recipients of federal awards should be aware of federal requirements that prevent the use of capitalization thresholds in excess of certain specified maximum amounts for purposes of federal reimbursement; and
  • Governments should exercise control over potentially capitalizable items that fall under the operative capitalization threshold.

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