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, entities typically use capitalization thresholds for reporting capital assets in their respective financial statements.2 Consequently, entities must ensure adequate controls are in place for items that are not capitalized and 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); and
- 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 and portable computers).
Items which are not capitalized, but require special attention because they are sensitive for one or more of these reasons, might be described as controlled capital-type items.
GFOA recommends that every government undertake a systematic effort to identify and implement internal controls over all of its controlled capital-type items.
Control normally should occur at the departmental level. Departments typically are expected to be responsible for 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 are the focus of the control efforts.
Control responsibility should be assigned within each department. Control cannot be divorced from accountability. Consequently, departments should assign responsibility for 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, individuals that are 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 the controlled capital-type item lists 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 lists on file in each department concerning controlled capital-type items.
1 Governmental Accounting Standards Board (GASB) Codification 1400.103 (GASB Statement No. 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments, paragraph 19)
2 GFOA best practice on Capitalization Thresholds for Capital Assets (2006)
3 GFOA best practice on Internal Control and Management Involvement (2008)
This best practice was previously titled Maintaining Control over Items that Are Not Capitalized.
- Accounting for Capital Assets, A Guide for State and Local Governments, Stephen J. Gauthier, GFOA, 2008.