Maintaining Control over Items that Are Not Capitalized

Type: 
Best Practice
Approved by GFOA's Executive Board: 
October 2005
Background: 

Accountants use the term capital assets to describe “tangible or intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period.”1 As a practical matter, not all items that technically meet this definition should be capitalized for financial reporting purposes.2 When potentially capitalizable items are not, in fact, capitalized, care must be taken to ensure that adequate control is maintained over any such items that fall within the following categories:

  • Items that require special attention to ensure legal compliance. Legal or contractual provisions may require a higher than ordinary level of accountability over certain capital-type items (e.g., items acquired through grant contracts);
  • Items that require special attention to protect public safety and avoid potential liability. Some capital-type items by their very nature pose a risk to public safety and could be the source of potential liability (e.g., police weapons);
  • Items that require special attention to compensate for a heightened risk of theft (“walk away” items). Some capital-type items are both easily transportable and readily marketable or easily diverted to personal use (e.g., sound equipment).

Noncapitalized items that require special attention because they are sensitive for one or more of these reasons might be described as controlled capital-type items.

Recommendation: 

GFOA recommends that every government undertake a systematic effort to identify all of its controlled capital-type items.

Control normally should occur at the departmental level. Departments typically would be expected to concern themselves with controlled capital-type items as an integral part of the process they use to achieve their operational goals. Therefore, individual departments, rather than a centralized finance function (or other designated finance function), normally should be the focus of control efforts.

Control responsibility should be assigned within each department. Control cannot be divorced from accountability. Consequently, departments should assign responsibility for different groups of controlled capital-type items to one or more specific individuals. That assignment should be documented within the department and communicated to the centralized accounting function (or other designated finance function). Likewise, changes in assignments should be documented and communicated.

Individuals responsible for controlled capital-type items should prepare and maintain a complete list of those items each year within the department. At the close of each fiscal year, every individual assigned responsibility for controlled capital-type items should prepare a report (to be maintained within the department) that provides a complete list of those items, along with an explanation of changes from the previous year.

Departments should certify each year to the central accounting function (or other designated finance function) that updated lists of controlled capital-type items are on file and available for inspection. Each department should designate an individual to be responsible for verifying that lists of all controlled capital-type items have been filed each year, as required. The responsible manager in the department should then certify to the central accounting function (or other designated finance function) that those lists are 1) on file and available for inspection and 2) reliable and complete, A sound framework of internal control is necessary to afford a reasonable basis for this certification.3

The central accounting function (or other designated finance function) should periodically verify the data on controlled capital-type items on file in each department. No less than once every five years on a rotating basis (more frequently for particularly sensitive items), the central accounting function (or other designated finance function) should ensure that procedures are performed to verify the reliability and completeness of the data on file in each department concerning controlled capital-type items.

Committee: 
Accounting, Auditing, and Financial Reporting
Notes: 

1 See GASB Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, paragraph 19.
2 See GFOA’s best practice on “Establishing Capitalization Thresholds for Capital Assets” (2001).
3 See GFOA’s best practice on “Getting Management Involved with Internal Control” (2004).