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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Page 1 GAO- 03- 42 PP& E Policy Survey United States General Accounting
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Washington, D. C. 20548 Page 1 GAO- 03- 42 PP& E Policy Survey

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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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Appendix XVI

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Postage & Fees Paid GAO Permit No. GI00

Page 1 GAO- 03- 42 Financial Management

Contents

Contents

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. ***