    Financial Management: Survey of Capitalization Threshold and
    Other Policies for Property, Plant, and Equipment (15-OCT-02,
    GAO-03-42).

    In passing the 1990 Chief Financial Officers Act and a range of
    other financial management reform legislation, Congress has
    sought to overcome the historical lack of reliable, useful, and
    timely information with which to make informed decisions, measure
    and control costs, manage for results, and ensure financial
    accountability on an ongoing basis. Reported capitalization
    threshold levels at the 14 agencies GAO surveyed ranged from zero
    to $250,000. Despite the sharp increase in the capitalization
    threshold, all but one of the 14 agencies responded that they
    maintained property records for the government's general
    property, plant, and equipment (PP&E) not capitalized on the
    balance sheet, citing safeguarding of PP&E and supporting agency
    operations as the key reasons for maintaining such information.
    Federal capitalization thresholds are significantly higher than
    those reported by the private sector entities GAO surveyed. In
    some cases, the federal capitalization thresholds for real
    property were up to 50 times higher than those noted in the
    private sector. In contrast to the wide variance between federal
    agency and private sector capitalization threshold policies,
    federal agency useful life policies were generally similar to
    those found in the private sector. Estimated useful life
    classifications within the federal government ranged from 2 years
    to 40 years for personal property and 5 years to 100 years for
    real property. GAO did identify several differences attributable
    to the variety of assets owned by the entities that participated
    in its survey, rather than any systematic differences in useful
    life classifications.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-03-42
        ACCNO:   A05247
      TITLE:     Financial Management: Survey of Capitalization Threshold
    and Other Policies for Property, Plant, and Equipment
         DATE:   10/15/2002
      SUBJECT:   Comparative analysis
    	     Federal agencies
    	     Financial management
    	     Private sector
    	     Reporting requirements

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    GAO-03-42

                                           A

    Report to Agency Officials

    October 2002 FINANCIAL MANAGEMENT Survey of Capitalization Threshold and
    Other Policies for Property, Plant, and Equipment

    GAO- 03- 42

    Letter 1 Results in Brief 3 Objectives, Scope, and Methodology 5
    Background 6 Federal Agency Capitalization Thresholds Have Risen
    Significantly

    and Are Substantially Higher than Private Sector Capitalization Thresholds
    10 Federal Agencies* Estimated Useful Lives for Like Assets Are Similar 19

    Observations 22 Comments and Our Evaluation 22

    Appendixes

    Appendix I: Objectives, Scope, and Methodology 27

    Appendix II: Survey Participants 30

    Appendix III: Capitalization Threshold Increases by Federal Agency 32

    Appendix IV: Capitalization Thresholds for Personal Property 34

    Appendix V: Capitalization Thresholds for Software 36

    Appendix VI: Capitalization Thresholds for Real Property 38

    Appendix VII: Useful Life Ranges for Personal Property (in Years) 40

    Appendix VIII: Useful Life Ranges for Real Property (in Years) 42

    Appendix IX: Federal Agency Survey 44

    Appendix X: Private Sector Company Survey 56

    Appendix XI: Comments from the Department of Agriculture 66

    Appendix XII: Comments from the Department of the Interior 69

    Appendix XIII: Comments from the National Aeronautics and Space
    Administration 71

    Appendix XIV: Comments from the Department of State 72

    Appendix XV: Comments from the Department of the Treasury 76

    Appendix XVI: GAO Contact and Staff Acknowledgments 79 Tables Table 1:
    Capitalization Threshold Ranges for Personal Property 14

    Table 2: Capitalization Threshold Ranges for Real Property 16 Table 3:
    Useful Life Ranges for Personal Property 20

    Table 4: Useful Life Ranges for Real Property 20 Figures Figure 1:
    Increase in Capitalization Threshold Levels at Federal

    Agencies 11 Figure 2: Percentage of Federal Agencies and Private Sector

    Companies at Various Software Capitalization Threshold Levels 15

    Abbreviations

    BOP Bureau of Prisons DOC Department of Commerce DOE Department of Energy
    DOI- Rec Department of the Interior- Bureau of Reclamation DOJ Department
    of Justice DOT Department of Transportation FAA Federal Aviation
    Administration FASAB Federal Accounting Standards Advisory Board GAAP
    generally accepted accounting principles GSA General Services
    Administration NASA National Aeronautics and Space Administration NOAA
    National Oceanic and Atmospheric Administration OMB Office of Management
    and Budget PMA Power Marketing Administration PP& E property, plant, and
    equipment PSC Private Sector Council SFFAC Statements of Federal Financial
    Accounting Concepts SFFAS Statements of Federal Financial Accounting
    Standards SSA Social Security Administration TVA Tennessee Valley
    Authority USPS United States Postal Service USDA Department of Agriculture
    VA Department of Veterans Affairs

    Lett er

    October 15, 2002 The Honorable Mark W. Everson Deputy Director for
    Management Office of Management and Budget

    Mr. Donald V. Hammond Fiscal Assistant Secretary Department of the
    Treasury

    In passing the 1990 Chief Financial Officers (CFO) Act and a range of
    other financial management reform legislation, the Congress has sought to
    overcome the historical lack of reliable, useful, and timely information
    with

    which to make informed decisions, measure and control costs, manage for
    results, and ensure financial accountability on an ongoing basis.

    The government*s general property, plant, and equipment (PP& E), reported
    at almost $307 billion, net of accumulated depreciation, as of September
    30, 2001, represents approximately one- third of the reported assets on
    the balance sheet of the U. S. government*s consolidated financial
    statements. General PP& E is often referred to as fixed assets, and
    includes land,

    buildings, equipment, and improvements acquired by the government to be
    used in providing goods and services to citizens. 1 Capitalization
    threshold and useful life policies affect whether and how the costs of
    acquiring PP& E or construction of PP& E are capitalized and allocated
    through depreciation to the periods benefiting from such assets, and are
    critical to the fair presentation of an entity*s financial position and
    results of operations.

    Excessively high capitalization thresholds can have a significant impact
    on financial reporting by reducing the amount of federal assets that are
    reported on the balance sheet and, most important, by jeopardizing the

    matching of costs to the appropriate period of asset utilization so that
    the cost of programs and operations are properly measured. 1 General PP& E
    does not presently include national defense PP& E, which is the PP& E

    components of weapons systems and support PP& E owned by the Department of
    Defense or its component entities for use in the performance of military
    missions, as well as vessels held in a preservation status by the Maritime
    Administration*s National Defense Reserve Fleet. Existing U. S. generally
    accepted accounting principles requiring that national defense PP& E be
    disclosed separately in financial reports are undergoing change, pending
    final publishing of the Statements of Federal Financial Accounting
    Standards No. 23, Eliminating the Category National Defense Property,
    Plant, and Equipment, which was approved for issuance by the Federal
    Accounting Standards Advisory Board in June of 2002.

    For the past 5 fiscal years, in our audits of the consolidated financial
    statements, we have reported 2 that because the government lacked complete
    and reliable information to support PP& E holdings, we could not
    satisfactorily determine that all assets were included in the financial
    statements, verify that certain reported assets actually existed, or
    substantiate the amounts at which they were valued. PP& E reporting was
    one of the primary reasons for our disclaiming an opinion on the
    consolidated financial statements again in fiscal year 2001. 3 As the
    government continues to make progress in addressing major audit issues,
    such as PP& E reporting, and the prospect of auditable consolidated
    financial statements draws closer, issues such as useful lives and

    capitalization thresholds are now in sharper focus. Under the Statement of
    Federal Financial Accounting Standard (SFFAS) No. 6, Accounting for
    Property, Plant, and Equipment, federal agencies are to record as property
    and equipment all items that meet certain characteristics, such as a
    useful life of 2 years or more, and are permitted to

    establish individual capitalization thresholds and useful life policies
    due to their diverse size and uses of PP& E. SFFAS No. 6 was issued in
    November 1995 and was effective for fiscal years beginning after September
    30, 1997. Previously, the capitalization threshold for federal agencies
    was $5, 000. 4 We have noted large increases in federal agency
    capitalization thresholds over the past 5 years, and our audit work at two
    major agencies has

    highlighted problems in this area. In prior audit work performed at the
    Internal Revenue Service (IRS), we found that Treasury*s $50,000
    capitalization threshold contributed to a material understatement in PP&
    E. IRS has since revised its capitalization threshold accordingly. We
    previously raised concerns with the Department of Defense (DOD), which 2
    The Secretary of the Treasury, in coordination with the Director of the
    Office of Management and Budget, is required to annually submit financial
    statements of the U. S.

    government to the President and the Congress. We are required to audit
    these statements. The Government Management Reform Act of 1994 has
    required such reporting, covering the executive branch of government,
    beginning with financial statements prepared for fiscal year 1997. 31 U.
    S. C. 331 (e). The government has elected to include certain financial
    information on the legislative and judicial branches in the consolidated
    financial statements as well. 3 U. S. General Accounting Office, U. S.
    Government Financial Statements: FY 2001 Results Highlight the Continuing
    Need to Accelerate Federal Financial Management Reform,

    GAO- 02- 599T (Washington, D. C.: Apr. 9, 2002). 4 Title 2 of the GAO
    Policy and Procedures Manual for Guidance of Federal Agencies.

    holds the majority of the U. S. government*s reported PP& E, about the
    basis for its $100, 000 capitalization threshold, in part because of
    issues surrounding the quality of the data available to make such a
    determination. As an initial step to address this issue governmentwide and
    as part of a

    series of planned work on key audit issues pertaining to the consolidated
    financial statement audit, we undertook a survey of PP& E capitalization
    threshold and useful life policies at 14 federal agencies that reported
    significant amounts of PP& E. We also surveyed 12 private sector companies
    on these same PP& E policies. Our survey was designed to determine the
    federal agencies* (1) current capitalization threshold practices for PP& E
    and how such policies compare to the practices being applied to PP& E in
    the private sector and (2) useful life policies and how they compare to
    those used in the private sector. Our survey work was not

    designed to conclude on the reasonableness of the capitalization threshold
    levels being applied by federal agencies. Instead, our survey results are
    intended to provide useful baseline information to responsible parties in
    federal financial reporting. We plan to review the adequacy of
    capitalization threshold levels and useful life policies at selected
    agencies

    in future work. Results in Brief Reported capitalization threshold levels
    at the 14 agencies we surveyed

    ranged from zero 5 to $250, 000. 6 Federal capitalization threshold levels
    have risen significantly over the past 5 years. Nine out of the 14
    agencies surveyed reported that they had at least doubled their
    capitalization thresholds in the past 5 years, for at least one category
    of property. Furthermore, 6 of these 9 agencies* capitalization thresholds
    were at least 5

    times higher, with 2 raising the threshold from $5,000 to $100,000, a 20-
    fold increase. Two of the agencies cited materiality 7 as a factor that
    caused the

    5 All PP& E additions would be capitalized. 6 This capitalization
    threshold range does not include software. Some participants responded
    that they have a separate capitalization threshold for software, which
    ranged from $5, 000 to $5, 000, 000.

    7 Materiality is defined in the GAO/ PCIE Financial Audit Manual as the
    magnitude of an item*s omission or misstatement in a financial statement
    that, in light of surrounding circumstances, makes it probable that the
    judgment of a reasonable person relying on the information would have been
    changed or influenced by the inclusion or correction of the item.

    increase, while 4 identified the implementation of SFFAS No. 6. 8 Other
    reasons cited included that the threshold represented a management
    decision or that it was based on the external auditor*s recommendation.
    The vast majority (12 out of 14) of the federal agencies surveyed
    responded that they had performed some type of formal analyses or studies
    to develop or validate the capitalization threshold level. Despite the
    sharp increase in the capitalization threshold, all but 1 of the 14
    agencies responded that they maintained property records for PP& E not
    capitalized on the balance sheet, citing safeguarding of PP& E and
    supporting agency operations as the key reasons for maintaining such
    information. Federal capitalization thresholds are significantly higher
    than those

    reported by the private sector entities we surveyed. In some cases, the
    federal capitalization thresholds for real property were up to 50 times
    higher than those noted in the private sector. Interestingly, one of our
    surveyed federal entities, the United States Postal Service (USPS), 9
    which sets its rates and fees to recover its costs, reported
    capitalization thresholds 10 that are in line with the surveyed private
    sector companies* capitalization threshold levels. Of the 14 agencies
    surveyed, capitalization

    thresholds for equipment were as high as $200,000 in the federal
    government, compared to a maximum of $5, 000 in the 12 private sector
    companies. In contrast to the wide variance between federal agency and
    private sector

    capitalization threshold policies, federal agency useful life policies
    were generally similar to those found in the private sector. Estimated
    useful life classifications within the federal government ranged from 2
    years to 40 years for personal property and 5 years to 100 years for real
    property. For example, the estimated useful life classifications for
    computer software were within a range of 2 to 10 years for the federal
    agencies surveyed and 3

    to 10 years for the private sector participants. The estimated useful life
    classifications for motor vehicles were within a range of 3 to 12 years
    for the federal agencies surveyed and 2 to 10 years for the private sector
    8 Prior to the issuance of SFFAS No. 6, the capitalization threshold for
    all federal agencies was limited to $5, 000, in accordance with Title 2,
    of the GAO Policy and Procedures Manual for Guidance of Federal Agencies.

    9 USPS is an independent establishment of the executive branch, with a
    goal to operate on a break- even basis and cover its expenses almost
    entirely through postal revenues. 10 The USPS capitalization threshold is
    $3, 000 for personal property and $5, 000 for real property.

    companies. We did identify several differences attributable to the variety
    of assets owned by the entities that participated in our survey, rather
    than any systemic differences in useful life classifications. For example,
    several federal agencies in our survey owned assets such as dams, canals,
    and reactors for which they reported useful lives of 50 years or more.
    However, our private sector participants did not include a utility company
    with similar assets for like comparisons. Given the relatively recent

    introduction of consolidated financial reporting in the federal
    government, the appropriate and consistent useful life classification is
    an area that also needs to be periodically reevaluated for impact on
    financial reporting, performance measurement data, and the financial
    statement audits.

    We received comments on a draft of this report from the Department of the
    Treasury, the Office of Management and Budget (OMB), and 4 of the 14
    federal agencies that took part in our survey. We also received primarily
    editorial comments from 7 federal agency survey participants and 3 private

    sector survey participants. The 3 remaining federal agencies told us they
    had no comments on a draft of this report. In general, the 6 federal
    entities that commented on the draft took issue with any comparison of
    capitalization threshold levels in the federal government to those in the

    private sector and/ or our discussion of the wide range of capitalization
    thresholds at the various federal agencies surveyed. Certain operating
    differences and different financial incentives between the federal
    government and the private sector and between various federal agencies
    could account for different threshold levels. At the same time, given the
    wide variance in capitalization thresholds, the sharp increases in recent
    years, and the significant differences from private sector companies of
    comparable size, across government, this issue may have a significant
    effect on the government*s consolidated financial statements. This survey
    was designed to be the first step in analyzing these significant PP& E

    policies and their impact on the financial reports of the U. S. government
    and is being provided as a baseline tool as agencies, Treasury, and OMB
    consider these issues and their impact on financial reporting.

    Objectives, Scope, and Our work was performed primarily using survey
    instruments to gather data Methodology

    on PP& E policies at 14 selected federal agencies and 12 private sector
    companies. Appendix II provides a list of all survey participants. We also
    held discussions with certain representatives of the participating federal
    agencies and private sector companies in developing the survey and in
    gathering follow- up information based upon the survey responses. We did

    not verify the accuracy of the data provided to us by the survey
    participants. We conducted our work from May 2001 through February 2002 in
    accordance with U. S. generally accepted government auditing standards. We
    requested comments on a draft of this report from the Department of the
    Treasury, OMB, all 14 federal agencies that participated

    in the survey, as well as the 12 private sector council member survey
    participants. Further details on our scope and methodology are included in
    appendix I. Background The Secretary of the Treasury, in coordination with
    the Director of OMB, is required to submit annually to the President and
    the Congress audited

    consolidated financial statements of the U. S. government beginning with
    those for fiscal year 1997. We are required to audit those statements. The
    principal financial statements required for federal agencies are the
    Balance Sheet, the Statement of Net Cost, the Statement of Changes in Net
    Position, the Statement of Budgetary Resources, and the Statement of
    Financing. These statements are to be prepared in accordance with U. S.
    generally

    accepted accounting principles. The balance sheet for the federal
    government presents the total balances of assets, liabilities, and net
    position as of a specific point in time. The government*s general PP& E,
    reported at almost $307 billion, net of accumulated depreciation as of
    September 30, 2001, represents approximately one- third of the assets on
    its balance sheet.

    Federal Accounting Federal accounting standards, which agency CFOs use in
    preparing

    Standards financial statements, are promulgated by the Federal Accounting
    Standards Advisory Board (FASAB). 11 FASAB develops accounting standards
    after

    considering the financial and budgetary information needs of the Congress,
    executive agencies, other users of federal financial information, and the
    public. FASAB forwards the standards to the three principals* the
    Comptroller General, the Secretary of the Treasury, and the Director of

    OMB* for a review period, after which the standards are considered final,
    then published on FASAB*s Web site and in print. The American Institute of
    Certified Public Accountants recognizes the federal accounting standards
    promulgated by FASAB as being generally accepted accounting principles
    (GAAP) for the federal government. Currently, there are 22 SFFAS and three
    Statements of Federal Financial Accounting Concepts (SFFAC). 12 The
    concepts and standards are the basis for OMB*s guidance to agencies on the
    form and content of their financial statements and the government*s

    consolidated financial statements. FASAB significantly relied upon SFFAC
    No. 1, Objectives of Federal Financial Reporting, in drafting accounting
    standards for PP& E. The two principle reporting objectives relevant to
    PP& E are operating performance and stewardship. In developing PP& E
    standards to meet the operating performance objective, FASAB established
    the goal of measuring the cost associated with using PP& E and including
    that cost in entity operating

    results. In seeking to fulfill the stewardship objective, FASAB developed
    the PP& E accounting standards to result in reporting information on (1)
    asset condition, (2) changes in the amount and service potential of

    PP& E, (3) the cost of PP& E where applicable, and (4) spending for
    acquisition of PP& E versus noncapital spending. Capitalization Thresholds
    Although FASAB established the reporting objectives framework in and
    Estimated Useful Lives

    developing the PP& E accounting standards, it concluded that
    capitalization thresholds should be established by the federal entities
    themselves, based

    11 In October 1990, the Secretary of the Treasury, the Director of OMB,
    and the Comptroller General established FASAB to develop a set of
    generally accepted accounting standards for the federal government.

    12 Accounting standards are authoritative statements of how particular
    types of transactions and other events should be reflected in financial
    statements. Accounting concepts explain the objectives and ideas upon
    which FASAB develops the standards.

    on their diversity in size and uses of PP& E. FASAB*s requirements in
    terms of establishing appropriate capitalization thresholds are that they
    be based on consideration of the entities* financial and operational
    conditions, consistently applied, and disclosed in the financial reports.
    Before 1991, accounting principles, standards, and related requirements
    for executive agencies were published in appendix I of Title 2,
    *Accounting,* of the GAO Policy and Procedures Manual for Guidance of
    Federal Agencies, in

    accordance with 31 U. S. C. 3511. The capitalization threshold for federal
    agencies included in Title 2 was $5, 000. In addition, under Federal
    Acquisition Regulations, government contractors are required to capitalize
    all assets costing $5,000 or more. Capitalization thresholds are tied to
    materiality as well, in that they generally are established at a level
    that would not omit a significant amount of assets from the balance sheet,
    which could materially misstate the financial statements of an entity or
    its components.

    There is not an authoritative standard issued in the private sector
    specifically addressing capitalization threshold levels. However, the
    underlying GAAP state that all normal expenditures of purchasing or
    constructing an asset and readying it for use are capitalized, thereby
    achieving the matching principle by distributing the costs of such assets
    to the periods benefited through depreciation. Capitalization thresholds
    are

    set at levels that would not approach materiality in any foreseeable
    circumstances. SFFAS No. 6 requires that depreciation expense be
    recognized on all general PP& E, except land and land rights of unlimited
    duration. Depreciation is the systematic and rational allocation of the
    costs of general PP& E to the operating periods benefiting from the asset,
    also

    referred to as the estimated useful life. FASAB again did not prescribe
    specific classifications of estimated useful lives. Instead, it requires
    that the useful life consider economic, environmental, and technological
    factors

    such as physical wear and tear and obsolescence. In the private sector,
    GAAP state that depreciation method and rate depend upon such factors as
    time, usage, maintenance policies, and asset obsolescence, and recognize
    certain prescribed methods for allocating the cost to the periods
    benefited.

    Federal PP& E PP& E consists of tangible assets, including land, that have
    estimated useful lives of 2 years or more, are not intended for sale in
    the ordinary course of operation, and have been acquired or constructed
    with the intention of being used or being available for use by the entity.
    SFFAS No. 6, Accounting for Property, Plant, and Equipment, identifies
    four categories

    of PP& E: (1) general PP& E, (2) national defense PP& E, 13 (3) heritage
    assets, and (4) stewardship land. General PP& E is used to provide general
    government services or goods and is reported on the balance sheet for

    federal financial reporting. National defense PP& E, heritage assets, and
    stewardship land are collectively referred to as stewardship PP& E and are
    reported in Supplementary Stewardship Information for federal financial
    reporting and are not included on the balance sheet or any other principal
    statement. FASAB has approved issuing a standard 14 that would eliminate
    the category of national defense PP& E, and all items previously
    considered national defense PP& E would be classified as general PP& E.
    The focus of this report is on general PP& E, reported on the balance
    sheet of the U. S. government, which under current federal accounting
    standards does not include national defense PP& E.

    General PP& E consists of items that (1) could be used for alternative
    purposes but are used by the federal entity to produce goods or services
    or to support the mission of the entity, (2) are used in business- type
    activities, or (3) are used by entities in activities whose costs can be
    compared to other entities. SFFAS No. 6 requires that all general PP& E be
    recorded at cost, which shall include all costs incurred to bring the PP&
    E to a form and location suitable for its intended use. General PP& E
    includes land acquired for or in connection with other general PP& E and
    heritage assets, 15 whose predominant use is general government
    operations.

    13 National defense PP& E is a term established by SFFAS No. 11 to replace
    the term federal mission PP& E used in SFFAS No. 6 and SFFAS No. 8.
    National defense PP& E consists of (1) PP& E weapons systems and support
    PP& E owned by the Department of Defense or its component entities for use
    in the performance of military missions and (2) the vessels held in a
    preservation status by the Maritime Administration*s National Defense
    Reserve Fleet.

    14 In June of 2002, FASAB approved issuing SFFAS No. 23, Eliminating the
    Category National Defense Property, Plant, and Equipment. The standard was
    submitted to the Congress and the three sponsors of the FASAB. If no
    member of the Congress and none of the sponsors object, FASAB will publish
    the standard. 15 SFFAS No. 16 describes reporting standards for heritage
    assets that serve dual purposes, in that they have heritage
    characteristics and are used in general government operations. These
    assets were referred to as multi- use heritage assets in SFFAS No. 6 and
    SFFAS No. 8.

    General PP& E is often classified into two main categories, personal and
    real property. Personal property includes vehicles, machinery, furniture,
    equipment, and software. Real property is land, buildings, and generally
    anything built or constructed on land, growing on land, or attached to the
    land.

    Federal Agency Capitalization threshold levels at federal agencies have
    risen significantly

    Capitalization over the past 5 years. Over 60 percent of the agencies
    surveyed have at least doubled their capitalization thresholds in the past
    5 years. Further,

    Thresholds Have Risen federal capitalization threshold levels are
    significantly higher than those

    Significantly and Are reported by the 12 private sector entities we
    surveyed. The maximum Substantially Higher

    federal capitalization threshold levels reported for personal and real
    property were much higher than those reported by the private sector than
    Private Sector companies. Inappropriate or excessive capitalization
    thresholds have a Capitalization

    significant impact on financial reporting and related oversight issues and
    may not comply with SFFAS No. 6 requirements. Thresholds

    Federal Capitalization Nine out of the 14 agencies surveyed reported that
    they had increased their

    Thresholds Have Risen capitalization thresholds in the past 5 years by 100
    percent or more, for at Significantly in the Past 5

    least one category of property (excluding software). Figure 1 displays the
    Years

    increases by agency. Six agencies increased the capitalization threshold
    by 400 percent or more, 2 raising the threshold from $5, 000 to $25,000, 2
    raising the threshold from $5,000 to $100,000, 1 raising the threshold
    from $25,000 to $200,000, and 1 raising the threshold from $5,000 to
    $250,000. Appendix III provides detailed lists of the current
    capitalization level for both personal and real property by federal
    agency.

    Figure 1: Increase in Capitalization Threshold Levels at Federal Agencies
    250 Capitalization threshold levels (dollars in thousands)

    250

    200

    200

    150 100

    100 100

    100

    50

    50 50

    25 25

    25 25 25 25

    25 15 10 5 5

    N/ A 5 5

    5 5 5 5 2 3 5

    0 DOC DOI DOJ

    DOT Education c DOE GSA d NASA SSA e State b TVA b USDA USPS a VA

    NOAA Rec a BOP b FAA

    Federal government agencies

    Prior to October 1997 Current thresholds

    Note: Unless noted below, these are maximum reported capitalization
    threshold levels for real and personal property (excluding software) at 14
    surveyed federal agencies. a The numbers represent maximum reported
    capitalization threshold levels for personal property.

    b The numbers represent maximum reported capitalization threshold levels
    for real property. c Education did not have a consistent capitalization
    threshold policy prior to October 1997. d GSA established a capitalization
    threshold of $5, 000 in August 1998. Information prior to August 1998 was
    unavailable. The numbers represent maximum reported capitalization
    threshold levels for personal property.

    e SSA increased its capitalization threshold to $100,000 in April 1996.
    Prior to April 1996, its threshold was $5,000. The numbers represent
    maximum reported capitalization threshold levels for personal property.

    Source: GAO analysis of survey data. Reasons given by the surveyed federal
    agencies for changing the capitalization thresholds included materiality,
    implementation of federal accounting standards, management decision, or
    external auditor recommendation.

    Twelve out of 14 federal agencies surveyed responded that they had
    performed some type of formal analyses or studies to develop or validate
    the capitalization threshold level. In some instances, the studies
    concluded

    that the threshold level was too low, prompting agency management to
    increase the capitalization threshold. Many agencies* approaches to the
    capitalization threshold analyses involved applying varying threshold
    levels to PP& E balances to identify a capitalization level that resulted
    in a certain desired percentage of PP& E being captured on the balance
    sheet in relation

    to total PP& E. Although our survey asked for a brief description of the
    methodology used in the analyses, we did not request copies of the
    analyses from the federal agencies or assess the methodology or
    conclusions reached. We did note, however, that 5 of the 12 agencies

    solicited outside assistance in performing the analyses, and of those 5, 2
    involved their respective offices of the inspector general.

    Although DOD was not included in this review, the department holds a
    significant portion of federal PP& E. DOD*s reported general PP& E
    holdings for fiscal year 2001 were $113. 8 billion, net of accumulated

    depreciation, representing approximately 37 percent of the federal
    government*s PP& E reported on the U. S. government*s consolidated balance
    sheet. DOD*s capitalization threshold has risen from $5,000 in 1994, to
    $50,000 in 1995, and to $100,000 in 1996, which remains the current level.

    DOD had contractors perform a study to validate its capitalization
    thresholds and useful life policies for personal and real property. We
    reviewed the contractors* work and agreed that certain limitations they
    cited in their reports* such as that the databases they analyzed may not
    have been appropriate, complete, and accurate* could directly affect the

    assessment of the adequacy of the capitalization threshold and useful life
    policies. The contractor recommended that DOD undertake similar periodic
    analyses in future years.

    Further, federal agency capitalization thresholds varied widely. They
    ranged from $0 to $250, 000, excluding computer software, where the
    capitalization threshold ranged from $5,000 to $5 million. The lack of
    consistency in capitalization threshold levels among federal agencies
    could

    potentially lead to reporting problems in the U. S. government*s
    consolidated financial statements and performance measurement comparisons.
    For example, at some agencies major assets such as motor vehicles may be
    capitalized and at others they may not due to the varying capitalization
    threshold levels. As a result, the costs of vehicles used by

    certain agencies could be expensed in 1 fiscal year and not allocated to
    all the years benefiting from their use. Further, GAAP require that the

    capitalization threshold, including any changes in the threshold during
    the reporting period, be disclosed on the financial statements. Treasury
    has not disclosed the capitalization threshold used in the consolidated
    financial

    statements, or the fact that many reporting agencies have different
    capitalization thresholds. Despite the sharp increase in the
    capitalization threshold, almost all of the surveyed agencies responded
    that they maintained property records for PP& E not capitalized on the
    balance sheet, for purposes of safeguarding PP& E, supporting agency
    operations, or fulfilling external reporting requirements. For example,
    all surveyed agencies indicated that they have policies and procedures in
    place, such as bar coding and periodic

    inventories, for safeguarding and maintaining accountability over
    pilferable and sensitive items. We did not evaluate the adequacy of the
    design of the agency policies and procedures or the effectiveness of the
    controls or their implementation. Even though 13 of the 14 federal
    agencies in our survey reported that they maintain property records for
    PP& E not capitalized on

    the balance sheet, most were unable to provide the cumulative value of PP&
    E recorded in property records but not capitalized on the balance sheet as
    of the end of fiscal year 2000. Only the National Aeronautics and Space
    Administration (NASA) and the Federal Aviation Administration (FAA)
    responded with the cumulative value of PP& E not reported on their balance
    sheets as of September 30, 2000* approximately $4.9 billion and $1. 6
    billion, respectively. However, we noted that NASA*s auditors for fiscal
    year 2001 reported a material weakness related to PP& E, so the amount

    NASA reported as being expensed may not be reliable. Federal
    Capitalization

    Federal capitalization thresholds are significantly higher than those
    Thresholds Differ reported by the 12 private sector entities we surveyed.
    We found that the Significantly from the

    agency capitalization thresholds for personal property ranged from $3,000
    Private Sector

    to $200,000, and in some cases were 40 times higher than the maximum
    levels reported by the private sector participants. Table 1 compares the
    ranges of capitalization thresholds noted at the federal agencies surveyed
    to those of the private sector participants. Appendix IV provides the
    specific personal property responses for all survey participants by
    category.

    Table 1: Capitalization Threshold Ranges for Personal Property Range of
    threshold Levels at federal

    Levels at private sector Personal property category agencies companies

    Equipment $3,000 - $200,000 $250 - $5, 000 Furniture and fixtures 3,000 -
    100,000 250 - 5, 000 Motor vehicles 0 - 200, 000 250 - 5,000 Source: GAO
    analysis of survey data.

    As shown in table 1, private sector respondents* threshold levels for
    personal property ranged from as low as $250 up to $5, 000. Under these
    threshold levels, office equipment costing $20, 000 with an estimated
    useful life of 5 to 7 years, would not be capitalized at more than half (9
    out of 14)

    of the federal agencies surveyed, but would be capitalized at all of the
    private sector company participants.

    Five of the surveyed federal agencies responded as having a separate
    capitalization threshold level for bulk purchases. A bulk purchase policy
    generally refers to capitalization guidelines when acquiring significant
    asset quantities in bulk at one time, where the individual unit price
    falls below the original threshold. For example, the National Oceanic and
    Atmospheric Administration*s (NOAA) policy is to capitalize a bulk

    procurement of $1 million or more for personal property with a unit price
    from $25, 000 to its individual capitalization threshold of $200,000, if
    the items are identical. The Department of Education has a $500,000 bulk
    purchase policy, and the Social Security Administration (SSA) has a $10
    million bulk purchase policy for computer hardware and software. Personal
    computers acquired individually would not be capitalized at many

    surveyed federal agencies under the current capitalization threshold
    levels, and bulk purchases of personal computers would have to rise to the
    capitalization threshold level, or higher at some agencies, as noted
    above, to be capitalized on the balance sheet. The remaining nine federal
    agencies responded that the capitalization threshold levels apply to both
    single item and bulk purchases of PP& E, as did the majority of the
    private sector companies surveyed. However, the few private sector
    respondents with bulk purchase policies indicate an emphasis on
    capitalizing assets and minimizing the impact on net income. For example,
    Pfizer responded that acquisitions of multiple like items would be
    capitalized if they exceed

    $10,000 in the aggregate, even though each item is under its $1,000
    threshold level.

    Certain federal agencies in our survey, as well as some private sector
    companies, reported capitalization thresholds specifically for software,
    classified as personal property on the balance sheet. The agencies*
    capitalization thresholds for software ranged from $5, 000 to $5 million,
    or 20 times higher than the maximum level reported by the private sector
    participants. The private sector respondents that reported specific

    capitalization threshold levels for software indicated ranges from $1, 000
    to $250,000. Figure 2 displays the percentages of surveyed federal
    agencies and private sector companies at each capitalization threshold
    level for software. As shown in figure 2, 92 percent of the federal
    agencies surveyed have threshold levels greater than $10,000 for software,
    compared to the private sector, with 25 percent of respondents in that
    category. The majority of the private sector software capitalization
    threshold levels were $10,000 and below.

    Figure 2: Percentage of Federal Agencies and Private Sector Companies at
    Various Software Capitalization Threshold Levels Surveyed federal agencies
    Surveyed private sector entities

    8% 17% 23%

    8% 23% 46%

    75%

    Software capitalization threshold levels

    $10,000 and below $10,001- 100,000 $100,001- 500,000 $500,001- 5,000,000

    Source: GAO analysis of survey data.

    SFFAS No. 10, Accounting for Internal Use Software, effective for
    reporting periods after September 30, 2000, was cited by several federal
    agencies as the basis for establishing a separate threshold just for
    software or increasing their capitalization threshold levels for software.
    SFFAS No.

    10 requires the capitalization of the full cost (direct and indirect) of
    internal use software whether it is commercial- off- the- shelf,
    contractor developed, or internally developed. A specific capitalization
    threshold for software, separate from the threshold for all other personal
    property, may be warranted at many agencies due to the varying and
    incremental nature of the costs that go into software development, such as
    salaries. However, the

    threshold level for software also varies quite significantly among the
    federal agencies surveyed, which could result in the consolidation and
    comparison problems discussed previously. Appendix V provides the specific
    software responses for all survey participants.

    Capitalization thresholds for real property ranged from zero, or no
    threshold, indicating that all such assets are capitalized on the balance
    sheet, to $250,000, which is 50 times the highest level reported by the
    private sector participants. Table 2 displays the capitalization threshold
    ranges for real property at the federal agencies surveyed compared to
    those in the private sector. Appendix VI provides the specific real
    property responses for all survey participants by category.

    Table 2: Capitalization Threshold Ranges for Real Property Range of
    threshold Levels at federal

    Levels at private sector Real property category agencies companies

    Buildings $0 - $200,000 $0 - $5, 000 Building improvements 0 - 250,000 500
    - 5, 000 Other structures and facilities 0 - 200,000 0 - 5, 000 Leasehold
    improvements 0 - 250,000 500 - 5, 000 Source: GAO analysis of survey data.

    Private sector respondents* threshold levels for real property ranged from
    $0 to $5,000. Under these threshold levels, a building costing $95,000
    with an estimated useful life of 30 years would not be capitalized at some
    federal agencies surveyed, but would be capitalized at all of the private
    sector

    company participants. For example, Gillette, a large corporation with over

    $10 billion in assets, has a uniform threshold level of $2, 500 for both
    real and personal property, with the exception of software. As shown in
    tables 1 and 2, the threshold levels in the private sector for most
    personal property and real property are relatively low, and more
    consistent with the $5, 000 capitalization threshold level previously
    established for federal agencies in Title 2 of the GAO Policy and
    Procedures Manual for Guidance of Federal Agencies, in accordance with 31
    U. S. C. 3511. In addition, under Federal Acquisition Regulations, 16
    government contractors are required to capitalize all assets costing
    $5,000

    or more. Potential Impact of High

    Our survey work was not designed to conclude on the reasonableness of
    Capitalization Thresholds the capitalization threshold levels being
    applied at the federal agencies or on Financial Reporting the private
    sector companies. However, the widely varying threshold levels among the
    federal agencies, the sharp increases in recent years, and the differences
    from private sector companies of considerable size in terms of reported
    PP& E and total assets raise some concerns. Inappropriate or

    excessive capitalization thresholds have a significant impact on financial
    reporting and related oversight issues and may not comply with SFFAS No. 6
    requirements to capitalize all items that meet certain characteristics,
    such as a useful life of 2 years or more. FASAB believed that not
    specifying a threshold level, and allowing agencies broad latitude in
    establishing capitalization thresholds suited to their respective
    financial and operational conditions, would lead to a more cost- effective
    application of the accounting standard. 17 However, objectives outlined by
    FASAB in the SFFAC No. 1, such as (1) stewardship responsibility, (2)
    capturing the full cost of operations, and (3) reliable financial
    reporting, may not be met as a

    result of the wide range and significant increase in threshold levels that
    we identified in our survey.

    Excessively high capitalization thresholds reduce the amount of federal
    assets that are reported on the balance sheet, distorting financial
    reporting by potentially jeopardizing the matching of costs to the
    appropriate period of asset utilization. For example, in February 2000, we
    reported that an 16 Title 48, U. S. Code of Federal Regulations, Section
    9904. 404- 40.

    17 SFFAS No. 6, Accounting for Property, Plant, and Equipment, Appendix A,
    Basis for Conclusions.

    inappropriate capitalization threshold contributed to a material
    understatement in PP& E of approximately $1 billion, representing about 77
    percent of the IRS*s total PP& E balances as of September 30, 1999. IRS
    had been following the Department of the Treasury*s standard $50,000
    capitalization criterion, and now capitalizes most property and equipment
    regardless of the dollar amount, based upon the capitalization issues
    raised as a result of our financial audit of IRS.

    Further, six of the agencies surveyed reported that they expensed a total
    of almost $2 billion in PP& E for the fiscal year ended September 30,
    2000, and therefore did not report this amount on the U. S. government*s
    consolidated balance sheet as assets. While the $2 billion is a relatively
    small amount compared to the total PP& E or total assets reported on the
    consolidated

    financial statements of the U. S. government, this amount is incomplete,
    as the remaining eight agencies surveyed could not readily provide the
    amount expensed for the same period as a result of the PP& E acquisition
    costs not meeting the capitalization threshold. An assessment of whether
    the capitalization threshold has a material effect on financial reporting
    is difficult to make if agencies cannot provide the amount of assets that
    does

    not meet the capitalization threshold and is therefore expensed in a given
    year.

    Interestingly, one of our surveyed federal entities, USPS, which sets its
    rates and fees to recover its costs, reported a $3, 000 personal property
    capitalization threshold and $5,000 real property threshold, which is more
    in line with the surveyed private sector companies* capitalization
    threshold

    levels. For example, Exxon Mobil Corporation, a global company with net
    PP& E of $90 billion as of December 31, 2000, also has a capitalization
    threshold of $3,000, excluding software. In fact, in looking at
    capitalization threshold levels for personal property in the private
    sector excluding software, all but 2 of the 12 participants had a
    threshold of $3, 000 or less, and the remaining 2 had a $5,000 threshold.

    As reported in our High- Risk Series, 18 some federal entities do not yet
    have reliable financial and operational information to measure performance
    based on the costs of providing goods and services and therefore appear to
    have little incentive to maintain assets on the balance sheet through
    lower capitalization thresholds. For example, we reported 19 in January
    2001 that the Department of Agriculture (USDA) lacked financial
    accountability over billions of dollars of assets. FAA*s financial
    management was also designated as high risk because of serious and long-
    standing accounting

    and financial management weaknesses, including property system issues.
    Reliable information on the costs of federal programs and activities, of
    which PP& E is a major factor, is crucial for effective management of
    government operations.

    Federal Agencies* Useful lives for personal property ranged from 2 to 40
    years among the Estimated Useful Lives

    surveyed federal agencies, but include a wide array of assets. Upon
    comparing the recovery periods for like assets, the range narrows. For for
    Like Assets Are example, the useful lives for motor vehicles ranged from 3
    to 12 years in the Similar

    federal agencies surveyed. Useful lives for real property at the surveyed
    federal agencies ranged from 5 to 100 years, which is a wide range that
    encompasses numerous and varying types of real property. The federal

    government*s real property is quite diverse, and includes items such as
    office buildings, dams, laboratories, courthouses, postal facilities, and
    embassies. However, when comparing the useful lives for similar buildings
    or structures across the federal government, the recovery periods are
    similar. For example, 12 out of the 14 surveyed federal agencies indicated
    useful life classifications for buildings of 30 to 40 years.

    The useful life policies within the federal government were generally
    similar to those found in the private sector. No significant differences
    were noted between the federal government and the private sector survey
    respondents in the useful life policies for certain personal property
    categories such as equipment, furniture and fixtures, motor vehicles, and

    software. The ranges of useful life classifications for both federal and
    private sector company participants are shown in table 3 for personal
    property and in table 4 for real property. Appendixes VII and VIII detail
    the

    18 GAO- 01- 263 and GAO- 01- 241 through GAO- 01- 262. 19 U. S. General
    Accounting Office, Major Management Challenges and Program Risks:
    Department of Agriculture, GAO- 01- 242 (Washington, D. C.: January 2001).

    useful life ranges for personal and real property for each survey
    participant.

    Table 3: Useful Life Ranges for Personal Property Useful life ranges (in
    years) Personal property category Federal agencies Private sector
    companies

    Equipment 2 - 40 2 - 25 Furniture and fixtures 4 - 20 3 - 20 Motor
    vehicles 3 - 12 2 - 10 Software 2 - 10 3 - 10 Source: GAO analysis of
    survey data.

    As noted above, the useful life ranges by category at the surveyed federal
    agencies are similar to those at the surveyed private sector companies.
    The high useful life of 40 years for equipment pertains to certain items
    at the Department of Energy (DOE), such as compressors and metal tanks. If
    such equipment were excluded, the maximum useful life classification for
    equipment at the surveyed federal agencies would be 25 years* identical to
    that in the private sector.

    Table 4: Useful Life Ranges for Real Property Useful life ranges (in
    years) Real property category Federal agencies Private sector companies

    Buildings 5 - 75 10 - 50 Other structures and facilities 5 - 100 10 - 40
    Other 5 - 75 5 - 50 Source: GAO analysis of survey data.

    The few differences that we identified between federal agency and private
    sector useful lives are due to the different types of assets owned by the
    survey participants rather than any systemic differences in the useful
    life policies. For example, the maximum useful life classification for
    buildings was reported as 75 years by two surveyed agencies, the
    Department of the

    Interior*s Bureau of Reclamation and USPS. At the Bureau of Reclamation,
    the building useful life range of 30 to 75 years was reported for service

    facilities, which consist of houses, buildings, garages, and shops owned
    by the bureau and used in electric, irrigation, municipal and industrial,
    or multipurpose operations and are not included in the plant accounts of a
    specific project. At USPS, the 75- year building useful life was reported
    only for pre- July 1970 monumental (indicating stone or stone
    ornamentation)

    buildings. Other than these two specific classifications within the
    buildings category, the maximum useful life classification for buildings
    at the surveyed federal agencies would be 50 years, and identical to that
    in the private sector. Similarly, the 100- year useful life for other
    structures and facilities at the surveyed federal agencies was for dams
    and related property at the Bureau of Reclamation. The longest useful life
    reported by

    the private sector respondents is 40 years for other structures and
    facilities, but none of the private sector respondents reported an asset
    similar to a dam. We did not receive survey results from any private
    sector utility companies for comparison purposes because we were limited
    to the Private Sector Council (PSC) members that voluntarily participated
    in our survey. Adequate useful life classifications also serve as a
    mechanism to achieve fair presentation of an entity*s financial position
    and results of operations in accordance with GAAP. New additions to PP& E
    that replace old or

    obsolete assets generally occur as the useful lives of the older assets
    are reaching completion, and the typical financial statement impact of the
    removal of an almost fully depreciated asset or a fully depreciated asset
    is minimal to none. However, if the useful life assigned to an asset or a
    class

    of assets does not reflect its actual service life, then the financial
    statement impact could be greater. For example, if an asset is assigned a
    useful life that exceeds its actual service life, the preliminary result
    would be an overstatement on the agency*s balance sheet and an
    understatement on its

    statement of net cost for a period. 20 Conversely, if an asset*s
    designated useful life were lower than its actual service life, the
    preliminary result would be an understatement on the agency*s balance
    sheet and an overstatement on its statement of net cost for a period. 21
    20 The period would be equivalent to the difference between the assigned
    useful life and the

    actual service life. 21 See footnote 19.

    Observations Our survey results identified widely varying capitalization
    threshold levels, sharp increases in recent years, and significant
    differences from private

    sector companies of comparable size. Because capitalization thresholds may
    have a significant effect on the consolidated financial statements of the
    U. S. government, this survey was designed as the first step in providing

    baseline information to analyze these significant PP& E policies and
    assess their impact on the financial reports of the U. S. government. In
    addition, agency management and auditors also have continuing
    responsibilities to ensure that established capitalization threshold
    levels are appropriate. These issues are especially critical for agencies
    that establish user fees based on actual costs and will become even more
    important as the government moves toward matching revenues and costs for
    performance measurement purposes. The information obtained as a result of
    our survey can be used as a tool for further analysis and assessment of
    these issues.

    Comments and Our We provided a draft of this report to 14 federal agencies
    and 12 private

    Evaluation sector companies that participated in our survey, as well as to
    the

    Department of the Treasury and OMB. We received comments from Treasury,
    OMB, and 4 of the 14 federal agencies surveyed, including USDA, the
    Department of the Interior (Bureau of Reclamation), NASA, and the
    Department of State (see appendixes XI through XV). Seven federal
    agencies, including the departments of Education, Energy, Justice (Bureau

    of Prisons (BOP)), Transportation (FAA), and Veterans Affairs (VA), as
    well as the Tennessee Valley Authority (TVA) and USPS, provided primarily
    editorial comments, which we have incorporated into the report as
    appropriate. The remaining 3 agencies, which include the Department of
    Commerce (NOAA), the General Services Administration (GSA), and SSA,

    reviewed a draft of this report and told us they had no comments. Three
    PSC members that participated in the survey, Allstate, McGraw- Hill, and
    PPG Industries, also provided primarily editorial comments, which we have
    incorporated into the report as appropriate.

    The substantive comments we received from the Treasury, OMB, and federal
    entities had a common theme, in that they all generally took issue with
    comparing the capitalization threshold levels in the federal

    government to those in the private sector. For example, the Department of
    the Treasury stated that the private sector has income tax considerations
    that affect capitalization thresholds, but these are not an issue at
    federal agencies. In this regard, our private sector survey instrument
    (see appendix X) recognized this consideration by specifically asking for
    information

    regarding practices for financial reporting, or book purposes, and not for
    income tax reporting. USDA referred to inherent differences between the
    government and the private sector in reporting cost and income. NASA and
    the State Department commented that the report did not acknowledge the
    private sector*s profit objective, which they viewed as the main force
    behind its PP& E policies and practices, as distinctly different from the
    financial reporting objectives of the U. S. government.

    Our views on asset capitalization are based upon two fundamental
    accounting concepts: the matching principle and materiality. The matching
    principle aims to assign costs to the proper period. In the case of
    capital assets, this is done through depreciation to recognize the use of
    the asset and can only occur if the asset is capitalized and not totally
    expensed when placed in service. The concept of materiality overlays the
    matching

    principle to provide relief from capitalizing and tracking assets that are
    immaterial to an entity*s financial statements. The establishment of a
    capitalization threshold policy must be supported by a detailed analysis,
    anchored by these two fundamental principles of matching and materiality.
    Furthermore, capitalization thresholds should be periodically reevaluated

    to help ensure their continuing relevance. Our report provides baseline
    data that we believe could be useful to federal agencies in analyzing
    capitalization thresholds. For example, NASA*s reported total assets as of
    September 30, 2000, were $34.5 billion, similar to Pfizer*s reported

    $33.5 billion at its fiscal year- end of December 31, 2000. NASA*s
    capitalization threshold for both real and personal property is $100, 000
    compared to Pfizer*s $1, 000 threshold. Further, NOAA*s reported total
    assets at September 30, 2000, were $5. 5 billion, similar to McGraw-
    Hill*s reported $4. 9 billion at its fiscal year- end of December 31,
    2000. NOAA*s capitalization threshold for both real and personal property
    is $200, 000 compared to McGraw- Hill*s $2,000 threshold.

    Our survey work was not designed to conclude on the reasonableness of the
    capitalization threshold levels being applied at the federal agencies or
    the private sector companies nor do we draw any conclusions. However, the
    widely varying threshold levels among the federal agencies, the sharp
    increases in recent years, and the large differences from private sector
    companies of considerable size in terms of reported PP& E and total assets
    are issues that we plan to review further. Inappropriate or excessive
    capitalization thresholds can have a significant impact on financial
    reporting by reducing the amount of federal assets that are reported on
    the balance sheet and by jeopardizing the matching of costs to the
    appropriate period of asset utilization.

    While certainly differences exist between federal financial reporting
    objectives and those in the private sector, there are similarities as
    well. Both federal financial statements and those of private sector
    companies seek to provide reliable, useful, and timely information to
    their users.

    Similar to private sector companies* responsibility to fairly state
    profits or net income, federal entities have a responsibility to fairly
    state the net cost of operations. This is also important in determining
    fees to be charged, in other efforts to recoup costs through any
    reimbursement arrangement, and in the ability to match costs with
    performance. OMB*s comments also included similar concerns related to
    comparing federal capitalization threshold levels to those in the private
    sector. In addition, OMB noted that a comparison to the capitalization
    threshold

    levels of state and local governments would be informative, and referred
    to a recent survey of state comptrollers, done by the National Association
    of State Comptrollers (NASC). The results of the survey were reported in
    the July 2002 newsletter of the National Association of State Auditors,
    Comptrollers and Treasurers. While the NASC survey and its reported
    results appeared after we had completed our fieldwork, OMB felt strongly
    that the survey and its results should be mentioned in our report.
    Although

    a review of the NASC survey was not within the scope of our work, we noted
    that a significant 22 portion of the states participating in the survey
    reported a $5,000 threshold, which is also the threshold required by the
    federal government for grant recipients* recovery of costs under OMB

    Circular A- 87. 23 These thresholds, particularly those for personal
    property, are in line with those used by most of the private sector survey
    participants. Federal Acquisition Regulations 24 also require federal
    government contractors to apply a capitalization threshold not to exceed
    $5, 000.

    OMB, Treasury, and the Bureau of Reclamation took issue with our statement
    that the lack of consistency in capitalization threshold levels 22 Of the
    34 states that participated in NASC*s survey, 70 percent use a $5, 000
    capitalization threshold level for personal property, and 30 percent use a
    $5, 000 capitalization threshold level for real property. 23 OMB Circular
    A- 87 establishes principles and standards for determining costs for
    federal awards carried out through grants, cost reimbursement contracts,
    and other agreements with state and local governments and federally
    recognized Indian tribal governments (governmental units). 24 Title 48, U.
    S. Code of Federal Regulations, Section 9904. 404- 40.

    among federal agencies could potentially lead to reporting problems in the
    U. S. government*s consolidated financial statements and performance
    measurement comparisons. As stated in our report, individual
    capitalization threshold levels are permissible under federal accounting
    standards, and because each federal agency was established with a specific

    mission, they may possess unique assets to achieve their respective goals.
    At the same time, consistent treatment of like assets is critical to
    accurate performance measurement and reliable, relevant consolidated
    financial reporting. Management has a responsibility to ensure that the
    financial statements are fairly stated, in all material respects, and the
    auditor*s role is to provide an opinion on that basic assertion, based on
    its work. As the

    auditor of the U. S. government*s financial statements, we must ensure
    that the varying capitalization thresholds do not result in or contribute
    to a material misstatement at the consolidated level. The results of our
    survey can provide useful baseline data to OMB and Treasury in their
    respective roles, and to agencies and their auditors as they continue to
    periodically assess the adequacy of the capitalization threshold in terms
    of material impact on financial reporting.

    We are sending copies of this report to the Chairman and Ranking Minority
    Member, Senate Committee on Governmental Affairs; the Chairman and Ranking
    Minority Member, House Committee on Government Reform; the Chairman and
    Ranking Minority Member, Subcommittee on Government

    Efficiency, Financial Management and Intergovernmental Relations, House
    Committee on Government Reform; and other interested congressional
    committees. We are also sending copies to the Chief Financial Officers,
    the Inspectors General and other interested parties, including the survey
    participants, the Private Sector Council, and the Chairman of the Federal
    Accounting Standards Advisory Board. In addition, the report will be

    available at no charge on the GAO Web site at http:// www. gao. gov. If
    you

    have any questions on this report, please contact me at (202) 512- 9505 or
    Mary Arnold Mohiyuddin at (202) 512- 3087.

    Gregory D. Kutz Director Financial Management and Assurance

    Appendi Appendi xes x I

    Objectives, Scope, and Methodology The objectives of this report were to
    determine (1) what are the federal government*s current capitalization
    threshold practices for PP& E and how such federal government policies
    compare to those practices being applied to PP& E in the private sector
    and (2) what are the useful life policies within the federal government
    and how they compare to those used in the private

    sector. To fulfill these objectives, we developed two surveys, one for
    federal agencies and one for private sector companies. The surveys were
    used to collect information on capitalization thresholds and useful life
    policies, studies or analyses supporting those policies, and other related
    data that would assist us in determining the rationale for these PP& E
    policies as well as give us an indication of any differences or
    similarities between federal practices and private sector practices in the
    PP& E policy area.

    For the federal government, we considered the 24 federal agencies
    responsible for annual audited financial statements as required under the
    CFO Act as expanded by the Government Management and Reform Act of 1994.
    We sent the survey to federal agencies with a reported $4 billion or more
    of net PP& E at September 30, 2000, except for DOD. For four

    agencies (Commerce, Interior, Justice, and Transportation), we surveyed a
    single component of the entire department due to the significant number of
    reporting components or because of the possibility of differing PP& E
    accounting policies for the various components. For each of those four
    agencies, we selected the component with the largest percentage of the

    total reported PP& E for that department. In addition, we randomly
    selected two federal agencies with net PP& E as of September 30, 2000,
    well below $4 billion to participate in the survey. We received completed
    surveys from all 14 federal agencies we contacted. Although DOD is the
    largest holder of PP& E in the federal government, we chose not to include
    it in this survey. DOD had a study performed by contractors to validate
    its capitalization thresholds and useful life policies for personal and
    real property. We reviewed the contractors* work and

    agreed that certain limitations they cited in their reports pertaining to
    the reliability and completeness of the data could directly affect the
    assessment of the adequacy of the capitalization threshold and useful life
    policies. Nonetheless, the reported value of net PP& E for federal survey
    participants represents over half of the federal government*s reported net
    PP& E as of September 30, 2000. Appendix II lists all agency survey
    participants.

    We also surveyed member companies of the PSC, a nonprofit, nonpartisan
    public service organization committed to helping the federal government
    improve its efficiency, management, and productivity through cooperative
    sharing of knowledge. We sent our survey to all member companies,

    approximately 40, and received completed surveys from 12 PSC members.
    Appendix II contains the complete list of PSC survey participants. We did
    not audit or verify the information provided by the federal agency or
    private sector survey participants in any way. We summarized the data
    collected from both survey groups, as reported to us by the respondents.

    We conducted telephone interviews with personnel at certain agencies and
    PSC members for follow- up questions or clarification purposes as needed.
    The practical difficulties of conducting any survey may introduce errors,

    commonly referred to as nonsampling errors. For example, difficulties in
    how a particular question is interpreted, in the sources of information
    that are available to respondents, or in how the data are entered into a
    database can introduce unwanted variability into the survey results. We
    took steps in the development of the questionnaires, the data collection,
    and the data editing and analysis to minimize the nonsampling errors. For
    example, we pretested the questionnaires with a number of respondents to
    refine the survey instruments, we edited the surveys and called
    respondents to clarify answers, and we verified a sample of the survey
    data that was entered into our database for any keypunch errors.

    We reviewed GAAP and concepts that related to PP& E accounting, as well as
    federal reporting guidelines issued by Treasury and OMB. In addition, we
    reviewed the financial statements and related notes to the financial
    statements of the federal agencies and private sector companies that
    participated in the survey. We performed our work from May 2001 through
    February 2002 in

    accordance with generally accepted government auditing standards. We
    provided a draft of this report to 14 federal agencies and 12 private
    sector companies that participated in our survey, as well as to the
    Department of the Treasury and OMB. We received comments from Treasury,
    OMB, and 4 of the 14 federal agencies surveyed, including USDA, the
    Department of the Interior (Bureau of Reclamation), NASA, and the
    Department of State. Seven federal agencies, including the departments of
    Education, Energy, Justice (BOP), Transportation (FAA), and Veterans
    Affairs, as well as TVA

    and USPS, provided primarily editorial comments, which we have
    incorporated into the report as appropriate. The remaining 3, which

    include the Department of Commerce (NOAA), GSA, and SSA reviewed a draft
    of this report and told us they had no comments. Three PSC members that
    participated in the survey, Allstate, McGraw- Hill, and PPG Industries,

    also provided primarily editorial comments, which we have incorporated
    into the report as appropriate.

    Appendi x II

    Survey Participants Net PP& E Total assets

    Net PP& E/ total assets Federal agencies at 9/ 30/ 00 at 9/ 30/ 00
    (percentage)

    Agriculture $ 5.4 $ 124.4 4. 3 Bureau of Prisons (DOJ) 4. 6 6.7 68. 7
    Bureau of Reclamation (DOI) 13.2 20.1 65. 7

    Education 1. 3 million 119. 0 0. 0 Energy (except PMA PP& E) 13.5 81.4 16.
    6 FAA (DOT) 11.5 27.2 42. 3 GSA 15.7 22.2 70. 7 NASA 25.5 34.5 73. 9 NOAA
    (Commerce) 3.6 5. 5 65. 5 SSA 0.3 1, 029. 2 0. 0 State 4. 7 23. 0 20. 4
    TVA 29.1 34.0 85. 6 USPS 24.1 58.3 41. 3 VA 11.6 44.0 26. 4

    Total $162.8 $1, 629.5 10. 0

    Note: All figures in billions, except where otherwise noted. Source: GAO
    analysis of agency fiscal year 2000 accountability reports.

    Net PP& E at Total assets at

    Net PP& E/ total fiscal year- end

    fiscal year- end in assets

    Private sector companies in 2000

    2000 (percentage)

    Allstate $1.0 $104.8 1. 0 Boeing 8.8 42.0 21. 0 ExxonMobil 89.8 149. 0 60.
    3 Fluor 0.8 3. 7 21. 6 Gillette 3.6 10.4 34. 6 Kaiser Permanente 7. 6 14.
    2 53. 5 McGraw- Hill 0.4 4. 9 8. 2 Meredith Corp. 0. 2 1.4 14. 3 Pfizer
    9.4 33.5 28. 1 PPG Industries 2. 9 9.1 31. 9 SBC Communications 47.2 98.7
    47. 8 Xerox 2. 5 29. 5 8.5

    Total $174.2 $501.2 34. 8

    Note: All figures in billions, except where otherwise noted. Source: GAO
    analysis of financial statements in private sector company annual reports.

    Capitalization Threshold Increases by Federal

    Appendi x I II

    Agency Maximum personal property thresholds Percentage Federal agencies
    Previous Increase Current increase

    Agriculture $5,000 $0 $5, 000 0 Bureau of Prisons 5, 000 0 5, 000 0 Bureau
    of Reclamation 5, 000 10, 000 15, 000 200 Education a a 50, 000 - Energy
    25, 000 0 25,000 0 FAA 5, 000 20, 000 25, 000 400 GSA 5, 000 5,000 10,000
    100 NASA 5,000 95, 000 100, 000 1900 NOAA 25, 000 175, 000 200, 000 700
    SSA 5,000 95, 000 100, 000 1900 State 25,000 0 25, 000 0 TVA 25,000 0 25,
    000 0 USPS 2,000 1, 000 3, 000 50 VA 5,000 20, 000 25, 000 400 a
    Capitalization threshold prior to current level not reported by agency,
    therefore no increase calculated.

    Source: GAO analysis of survey data.

    Maximum real property thresholds Percentage Federal agencies Previous
    Increase Current increase

    Agriculture $5,000 $0 $5, 000 0 Bureau of Prisons 50,000 50, 000 100, 000
    100 Bureau of Reclamation 0 0 0 0 Education a a 50, 000 - Energy 25,000 0
    25, 000 0 FAA 5, 000 20, 000 25, 000 400 GSA 10,000 0 10, 000 0 NASA 5,000
    95, 000 100, 000 1900 NOAA 25,000 175, 000 200, 000 700 SSA 25,000 0 25,
    000 0 State 5, 000 245, 000 250, 000 4900 TVA 25,000 0 25, 000 0 USPS
    5,000 0 5, 000 0 VA 5,000 20, 000 25, 000 400 a Capitalization threshold
    prior to current level not reported by agency, therefore no increase
    calculated. Source: GAO analysis of survey data.

    Capitalization Thresholds for Personal

    Appendi x V I Property Furniture and Motor Federal agencies Equipment
    fixtures vehicles

    Agriculture $5, 000 $5,000 $5, 000 Bureau of Prisons 5, 000 a 5,000 Bureau
    of Reclamation 15, 000 a 15, 000 Education 50, 000 50,000 a Energy 25, 000
    25, 000 25, 000 FAA 25,000 25, 000 25,000 GSA 10,000 10, 000 10,000 NASA
    100, 000 100,000 100, 000 NOAA 200, 000 a 200, 000 SSA 100, 000 100,000 a
    State 25,000 25, 000 0 TVA b b b USPS 3, 000 3,000 3, 000 VA 25, 000 25,
    000 25, 000 Minimum federal 3, 000 3, 000 0 Maximum federal 200, 000
    100,000 200, 000 a Federal agency did not report a capitalization
    threshold for this property category. b TVA was not included in the above
    because it capitalizes entire projects instead of individual assets.

    Source: GAO analysis of survey data.

    Furniture and Motor

    Private sector companies Equipment fixtures vehicles

    Allstate $250 $250 $250 Boeing 5, 000 5, 000 5, 000 ExxonMobil 3, 000
    3,000 3, 000 Fluor 1, 500 1, 500 1, 500 Gillette 2, 500 2, 500 2, 500
    Kaiser Permanente 1, 000 1, 000 1, 000 McGraw- Hill 2, 000 2, 000 2, 000
    Meredith Corp. 5, 000 2,000 5, 000 PPG Industries 3, 000 3,000 3, 000
    Pfizer 1,000 1, 000 1,000 SBC Communications 2, 000 2, 000 2, 000 Xerox 3,
    000 3, 000 3, 000 Minimum private 250 250 250 Maximum private 5, 000 5,000
    5, 000 Source: GAO analysis of survey data.

    Appendi x V

    Capitalization Thresholds for Software Federal agencies Maximum

    Agriculture $100, 000 Bureau of Prisons 5, 000 Bureau of Reclamation 100,
    000 Education 50, 000 Energy 750, 000 FAA 200, 000 GSA 1,000, 000 NASA
    100, 000 NOAA 200, 000 SSA 100, 000 State 500, 000 TVA a USPS 5,000, 000
    VA 25, 000 Minimum federal 5, 000 Maximum federal 5, 000, 000 a TVA was
    not included in the above because it capitalizes entire projects instead
    of individual assets. Also, it has no specific software threshold.

    Source: GAO analysis of survey data.

    Private sector companies Maximum

    Allstate $250, 000 Boeing 5,000 ExxonMobil 5,000 Fluor 10, 000 Gillette
    5,000 Kaiser Permanente 100, 000 McGraw- Hill 250, 000 Meredith Corp. 2,
    000 PPG Industries 3, 000 Pfizer 1,000 SBC Communications 2, 000 Xerox
    3,000 Minimum private 1, 000 Maximum private 250, 000 Source: GAO analysis
    of survey data.

    Appendi x VI

    Capitalization Thresholds for Real Property Building Other structures

    Leasehold Federal agencies Buildings improvements and facilities
    improvements

    Agriculture $5,000 $5,000 $5,000 $5, 000 Bureau of Prisons 100,000 100,
    000 100,000 100, 000 Bureau of Reclamation 0 0 0 0

    Education a aa 50, 000 Energy 25,000 25,000 25,000 25, 000 FAA 25,000
    25,000 25,000 25, 000 GSA 0 10, 000 10, 000 10, 000 NASA 100,000 100, 000
    100,000 100, 000 NOAA 200,000 a 200,000 200, 000 SSA 0 a a 25, 000 State 0
    250,000 a 250, 000 TVA 25,000 25,000 25,000 25, 000 USPS 0 5, 000 a 5,000
    VA 25,000 25,000 25,000 25, 000 Minimum federal 0 0 0 0 Maximum federal
    200,000 250, 000 200,000 250, 000 a Federal agency did not report a
    capitalization threshold for this property category.

    Source: GAO analysis of survey data.

    Private sector Building Other structures

    Leasehold companies Buildings improvements and facilities improvements

    Allstate $0 $500 $0 $500 Boeing 5,000 5, 000 5, 000 5,000 ExxonMobil 3,
    000 3,000 3, 000 3, 000 Fluor 1, 500 1,500 1, 500 1, 500 Gillette 2, 500
    2,500 2, 500 2, 500 Kaiser Permanente 0 5,000 5, 000 5, 000 McGraw- Hill
    2,000 2, 000 2, 000 2,000 Meredith Corp. 5, 000 5,000 5, 000 5, 000 PPG
    Industries 3, 000 3,000 3, 000 3, 000 Pfizer 1,000 1, 000 1, 000 1,000 SBC
    Communications 2, 000 2,000 2, 000 2, 000

    Xerox 3, 000 3,000 3, 000 3, 000 Minimum private 0 500 0 500 Maximum
    private 5, 000 5,000 5, 000 5, 000 Source: GAO analysis of survey data.

    Useful Life Ranges for Personal Property (in

    Appendi x VII

    Years) Furniture Motor Federal agencies Equipment and fixtures vehicles

    Agriculture 5 8 6 Bureau of Prisons 10 N/ R 10 Bureau of Reclamation 2 -
    25 10 - 20 6 - 10 Education 3 5 N/ R Energy 5 - 40 varies 5 - 8 FAA 7 7 5
    GSA 5 5 varies NASA 5 - 15 10 10 NOAA 8 - 20 N/ R 6 SSA 7 10 N/ R State 5
    - 8 4 - 12 3 - 6 TVA 5 - 20 5 - 10 6 - 12 USPS 3 - 10 5 - 10 6 - 12 VA 3 -
    15 10 - 15 5 - 10 Range 2 - 40 4 - 20 3 - 12 Note: N/ R indicates that
    survey participant either did not respond to a useful life classification
    for this particular category of personal property or the category did not
    apply to the participant.

    Source: GAO analysis of survey data.

    Furniture Motor

    Private sector companies Equipment and fixtures vehicles

    Allstate 3 - 10 10 3 Boeing 3 - 11 10 N/ R ExxonMobil 3 - 5 15 5 - 10
    Fluor 5 - 7 10 5 Gillette 5 - 20 3 - 15 3 - 7 Kaiser Permanente 3 - 20 5 -
    20 4 McGraw- Hill 2 - 10 10 3 Meredith Corp. 3 - 10 5 - 10 3 - 10 PPG
    Industries 5 - 25 3 - 20 6 - 10 Pfizer 3 - 5 13 4 SBC Communications 10 15
    8 Xerox 3 - 12 15 4 - 5 Range 2 - 25 3 - 20 3 - 10 Note: N/ R indicates
    that survey participant either did not respond to a useful life
    classification for this particular category of personal property or the
    category did not apply to the participant.

    Source: GAO analysis of survey data.

    Useful Life Ranges for Real Property (in

    Appendi x VI II

    Years) Other structures Federal agencies Buildings and facilities Other a

    Agriculture 30 20 - 50 10 - 50 Bureau of Prisons 30 20 20 Bureau of
    Reclamation 30 - 75 25 - 100 30 - 75 Education N/ R N/ R N/ R Energy 25 -
    50 25 - 50 varies FAA 40 10 - 20 10 GSA 30 30 5 - 20 NASA 40 15 15 NOAA 10
    - 40 N/ R varies SSA 50 N/ R 6 State 30 N/ R 10 TVA 20 - 40 20 - 40 20
    USPS 30 - 75 10 N/ R VA 5 - 40 5 - 40 5 - 40 Range 5 - 75 5 - 100 5 - 75
    Note: N/ R indicates that survey participant either did not respond to a
    useful life classification for this particular category of real property
    or the category did not apply to the participant. a Other includes any
    real property that is not a building, structure, or facility. Source: GAO
    analysis of survey data.

    Other structures Private sector companies Buildings and facilities Other a

    Allstate 40 N/ R N/ R Boeing 45 N/ R 10 - 25 ExxonMobil 20 - 50 20 - 30 20
    - 30 Fluor 20 - 30 N/ R 20 - 30 Gillette 10 - 40 40 14 - 20 Kaiser
    Permanente 20 - 40 10 - 40 5 - 25 McGraw- Hill 50 N/ R 50 Meredith Corp.
    10 - 45 20 10 - 20 PPG Industries 20 - 50 N/ R 20 - 30 Pfizer 33 N/ R 33
    SBC Communications 44 N/ R N/ R Xerox 25 - 50 N/ R 20 Range 10 - 50 10 -
    40 10 - 50 Note: N/ R indicates that survey participant either did not
    respond to a useful life classification for this particular category of
    real property or the category did not apply to the participant. a Other
    includes any real property that is not a building, structure, or facility.

    Source: GAO analysis of survey data.

    Appendi x IX Federal Agency Survey

    Appendi x X Private Sector Company Survey

    Comments from the Department of

    Appendi x XI

    Agriculture Now on p. 11. Now on p. 30. Now on p. 38.

    Now on p. 4. Now on p. 4.

    Comments from the Department of the

    Appendi x XII

    Interior Now on p. 13.

    Comments from the National Aeronautics and

    Appendi x XI II

    Space Administration Now on p. 5. Now on p. 18.

    Appendi x XI V Comments from the Department of State

    Now on p. 10.

    Comments from the Department of the

    Appendi x XV Treasury

    Now on p. 10. Now on p. 22.

    Now on pp. 18- 19.

    Now on p. 12. Now on pp. 17- 18.

    Appendi x XVI

    GAO Contact and Staff Acknowledgments GAO Contact Mary Arnold Mohiyuddin,
    (202) 512- 3087 Acknowledgments Staff members making key contributions to
    this report were Linda J. Brigham, Amy C. Chang, Francine M. DelVecchio,
    Cleggett S. Funkhouser,

    Stuart M. Kaufman, David C. Merrill, and Lisa M. Warde.

    (192021)

    Table 1: Capitalization Threshold Ranges for Personal Property 14 Table 2:
    Capitalization Threshold Ranges for Real Property 16 Table 3: Useful Life
    Ranges for Personal Property 20 Table 4: Useful Life Ranges for Real
    Property 20

    a

    GAO United States General Accounting Office

    Page i GAO- 03- 42 PP& E Policy Survey

    Contents

    Contents

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    Appendix I

    Appendix I Objectives, Scope, and Methodology

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    Appendix I Objectives, Scope, and Methodology

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    Appendix II

    Appendix II Survey Participants

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    Appendix III

    Appendix III Capitalization Threshold Increases by Federal Agency

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    Appendix IV

    Appendix IV Capitalization Thresholds for Personal Property

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    Appendix V

    Appendix V Capitalization Thresholds for Software

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    Appendix VI

    Appendix VI Capitalization Thresholds for Real Property

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    Appendix VII

    Appendix VII Useful Life Ranges for Personal Property (in Years)

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    Appendix VIII

    Appendix VIII Useful Life Ranges for Real Property (in Years)

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    Appendix IX

    Appendix IX Federal Agency Survey

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    Appendix IX Federal Agency Survey

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    Appendix IX Federal Agency Survey

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    Appendix IX Federal Agency Survey

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    Appendix IX Federal Agency Survey

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    Appendix IX Federal Agency Survey

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    Appendix IX Federal Agency Survey

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    Appendix IX Federal Agency Survey

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    Appendix IX Federal Agency Survey

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    Appendix IX Federal Agency Survey

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    Appendix IX Federal Agency Survey

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    Appendix X

    Appendix X Private Sector Company Survey

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    Appendix X Private Sector Company Survey

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    Appendix X Private Sector Company Survey

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    Appendix X Private Sector Company Survey

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    Appendix X Private Sector Company Survey

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    Appendix X Private Sector Company Survey

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    Appendix X Private Sector Company Survey

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    Appendix X Private Sector Company Survey

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    Appendix X Private Sector Company Survey

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    Appendix XI

    Appendix XI Comments from the Department of Agriculture

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    Appendix XI Comments from the Department of Agriculture

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    Appendix XII

    Appendix XII Comments from the Department of the Interior

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    Appendix XIII

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    Appendix XIV

    Appendix XIV Comments from the Department of State

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    Appendix XIV Comments from the Department of State

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    Appendix XIV Comments from the Department of State

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    Appendix XV

    Appendix XV Comments from the Department of the Treasury

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    Appendix XV Comments from the Department of the Treasury

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    Page 79 GAO- 03- 42 PP& E Policy Survey

    Appendix XVI

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    Page 2 GAO- 03- 42 Financial Management

    Page 1 GAO- 03- 42 Financial Management

    Contents Figure 1: Increase in Capitalization Threshold Levels at Federal

    Agencies 11 Figure 2: Percentage of Federal Agencies and Private Sector

    Companies at Various Software Capitalization Threshold Levels 15
    *** End of document. ***