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This is the original Standard file; please check for the most recent update in the FASAB Handbook at www.fasab.gov/pdffiles/handbook_sffas_6.pdf. Accounting for property, plant, and equipment Federal Financial Accounting Standards no. 6 ************************************************** Federal Accounting Standards Advisory Board (FASAB) ACCOUNTING FOR PROPERTY, PLANT, AND EQUIPMENT Statement of Federal Financial Accounting Standards No. 6 JUNE 1996 GPO # 041-001-00462-9 ($6.50) ************************************************** [NOTE 1: THE FOOTNOTES INCLUDED IN THIS DOCUMENT ARE OFTEN CRITICAL TO UNDERSTANDING THE STANDARDS. DUE TO THE LIMITATIONS ON TEXT PRESENTATION THE FOOTNOTES ARE PRESENTED AS ENDNOTES. PLEASE BE SURE TO REFER TO THESE ENDNOTES AS YOU REVIEW THE STANDARDS.] ************************************************** EXECUTIVE SUMMARY a This statement contains accounting standards for Federally owned property, plant, and equipment (PP&E); deferred maintenance on PP&E; and cleanup costs. Each standard is summarized below. PROPERTY, PLANT, AND EQUIPMENT b The Federal Government's investment in PP&E exceeds $1 trillion [SEE NOTE 1] PP&E used for many different purposes. "PP&E" is defined as follows: Tangible assets that (1) have an estimated useful life of 2 or more years, (2) are not intended for sale in the ordinary course of business, and (3) are intended to be used or available for use by the entity. This is the original Standard file; please check for the most recent update in the FASAB Handbook at www.fasab.gov/pdffiles/handbook_sffas_6.pdf. c The diversity among Federal PP&E creates a need for meaningful categories of PP&E with different accounting standards for each category. The Board identifies four categories of PP&E. The categories are: - general PP&E are PP&E used to provide general government services or goods; - Federal mission PP&E are PP&E exhibiting specific characteristics set by the Board; - heritage assets are those assets possessing significant educational, cultural, or natural characteristics; and - stewardship land [SEE NOTE 2] (i.e., land other than that included in general PP&E). d Complete accounting standards for general PP&E are included in this document. e Federal mission PP&E, heritage assets, and stewardship land are the subject of a project on "Supplementary Stewardship Reporting." An exposure draft (ED) on this topic was issued in August 1995. The Supplementary Stewardship Reporting ED proposes accounting standards for these assets after their acquisition. The accounting standards in this document address (1) classification of PP&E in the categories, (2) accounting for the acquisition cost of PP&E falling into one of these three categories, and (3) implementation of these standards where it affects the basic financial statements. Because Federal mission PP&E, heritage assets, and stewardship land would be subject to supplementary stewardship reporting, they are referred to collectively as stewardship PP&E. This term is used for convenience only since each category has its own definition. GENERAL PP&E f The general PP&E category consists of items This is the original Standard file; please check for the most recent update in the FASAB Handbook at www.fasab.gov/pdffiles/handbook_sffas_6.pdf. that: - could be used for alternative purposes (e.g., by other Federal programs, state or local governments, or non-governmental entities) but are used by the Federal entity to produce goods or services, or to support the mission of the entity; or - are used in business-type activities; [SEE NOTE 3] or - are used by entities in activities whose costs can be compared to other entities (e.g., Federal hospitals compared with other hospitals). g General PP&E includes land acquired for or in connection with other general PP&E. [SEE NOTE 4] h General PP&E shall be reported in the basic financial statements: the balance sheet, [SEE NOTE 5] and the statement of net cost. [SEE NOTE 6] The acquisition cost of general PP&E shall be recognized [SEE NOTE 7] as an asset. Subsequently, except for land which is a nondepreciable asset, that acquisition cost shall be charged to expense through depreciation. [SEE NOTE 8] The depreciation expense shall be accumulated in a contra asset account--accumulated depreciation. i The standards provide that certain costs of internally-developed software [SEE NOTE 9] can be capitalized and amortized over a period not to exceed five years. The costs to be capitalized are limited to direct costs incurred after technological feasibility has been established. j In addition, the standard addresses donations, transfers, and retirements of general PP&E as well as disclosure [SEE NOTE 10] requirements. STEWARDSHIP PP&E This is the original Standard file; please check for the most recent update in the FASAB Handbook at www.fasab.gov/pdffiles/handbook_sffas_6.pdf. k The following paragraphs describe Federal mission PP&E, heritage assets, and stewardship land, the categories for which supplementary stewardship reporting is being proposed. These standards are limited to accounting requirements for the basic financial statements--they do not address the information to be reported through supplementary stewardship reporting. The accounting standards provide guidance on: - identifying stewardship PP&E, and - elements associated with stewardship PP&E that are to be recognized on the basic financial statements (e.g., information shown on the statement of net costs). Federal Mission PP&E l Federal mission PP&E are specific types of PP&E identified by the Board (i.e., weapons systems and space exploration equipment) or exhibiting the characteristics established by the Board. [SEE NOTE 11] The Board specifically identified weapons systems and space exploration equipment as Federal mission PP&E because it does not believe applying depreciation accounting would contribute to measuring the cost of outputs produced, or to assessing operating performance, in any given accounting period. The Board believes that these assets are developed, used, and retired in a manner that does not lend itself to a "systematic and rational" assignment of costs to accounting periods (i.e., depreciation accounting) and, ultimately, to outputs. m The Board did not find any other categories of PP&E that it believed should be explicitly included in the Federal mission category at this time. However, there are other types of PP&E, or PP&E may be developed in the future, that are similar to these two items, so the This is the original Standard file; please check for the most recent update in the FASAB Handbook at www.fasab.gov/pdffiles/handbook_sffas_6.pdf. Board has articulated characteristics of Federal mission PP&E. PP&E other than weapons systems and space exploration equipment clearly exhibiting these characteristics should be categorized as Federal mission PP&E. For example, based on comments from respondents and information provided by the Department of Energy, nuclear weapons production facilities do exhibit these characteristics and should be categorized as Federal mission PP&E. n There are two types of characteristics. The first relates to the use of the PP&E. The second relates to expectations about, and risks associated with, its useful life. To be categorized as Federal mission PP&E, an item should have at least one characteristic from each of the two types of characteristics discussed below. o Characteristics related to the use of Federal mission PP&E are that the PP&E: - has no expected nongovernmental alternative uses; or - is held for use in the event of emergency, war, or natural disaster; or - is specifically designed for use in a program for which there is no other program or entity (Federal or non-Federal, governmental or nongovernmental) using similar PP&E with which to compare costs. p Characteristics related to the useful life are that the PP&E: - has an indeterminate or unpredictable useful life [SEE NOTE 12] due to the manner in which it is used, improved, retired, modified, or maintained; or - is at a very high risk of being destroyed during use or of premature obsolescence. q Annual expenditures to acquire, replace or improve Federal mission PP&E shall be shown This is the original Standard file; please check for the most recent update in the FASAB Handbook at www.fasab.gov/pdffiles/handbook_sffas_6.pdf. as a cost in the period incurred. Separating these costs from other period expenses would facilitate analysis of the operating expense and prevent distortion due to large infrequent expenditures. Heritage Assets r Heritage assets include PP&E that have historical or natural significance; cultural, educational, or artistic importance; or significant architectural characteristics. Expenditures to acquire, construct, reconstruct, or improve heritage assets shall be reported as a cost in the period incurred. Separating these costs from other period expenses would facilitate analysis of the operating expense and prevent distortion due to large infrequent expenditures. Multi-use Heritage Assets s Not all heritage assets are used solely for heritage purposes--some serve two purposes by providing reminders of our heritage and by being used in day-to-day government operations unrelated to the assets themselves. For example, the government has constructed "monumental" style office space, such as the Old Executive Office Building and the Pentagon. Such assets contribute to the day-to-day operations of programs but the cost of these assets can not be easily assigned to heritage and operating purposes. t The cost of renovating, improving, or reconstructing operating components of heritage assets used in government operations shall be included in general PP&E. Following initial construction, any renovation, improvement or reconstruction costs to facilitate government operations (e.g., installation of communications wiring or redesign of office space) would be capitalized and depreciated over its expected This is the original Standard file; please check for the most recent update in the FASAB Handbook at www.fasab.gov/pdffiles/handbook_sffas_6.pdf. useful life. The cost should not be depreciated over an unrealistically long life. u Costs of renovating or reconstructing the heritage asset that can not be directly associated with operations shall be considered heritage asset costs. For example, installing a new roof should be considered a heritage asset cost. Stewardship Land v The Federal Government has vast holdings of land and puts land to various uses. If land is acquired for or in connection with an item of general PP&E, it shall be categorized as general PP&E. Other land (e.g., land in the public domain and national park or national forest land) shall be excluded from general PP&E and referred to as 4stewardship land. w The acquisition cost of stewardship land shall be reported as a cost in the period incurred. Separating the cost of land acquisitions from other period expenses would facilitate analysis of the operating expense and prevent distortion due to large infrequent purchases. DEFERRED MAINTENANCE x The deferred maintenance standard requires disclosures related to the condition and the estimated cost to remedy deferred maintenance of PP&E. These disclosures are made as a note to a line item on the statement of net costs-no dollar amount shall be recognized on the statement. y The standards recognize that there are many variables in estimating deferred maintenance amounts. The standards acknowledge that condition rating is a management function This is the original Standard file; please check for the most recent update in the FASAB Handbook at www.fasab.gov/pdffiles/handbook_sffas_6.pdf. since different conditions might be considered acceptable by different entities as well as for different items of PP&E held by the same entity. In addition, management may use condition assessment surveys or life cycle cost plans to estimate the amount of deferred maintenance. z The deferred maintenance standard applies to all PP&E whether reported on the balance sheet or through supplementary stewardship reporting. CLEANUP COSTS aa Cleanup costs are the costs associated with hazardous waste removal, containment, or disposal. In some instances, the Federal Government incurs liabilities [SEE NOTE 13] for cleaning up hazardous waste at sites or facilities it operates or has operated. Generally, cleanup cannot be, or is not, done until permanent or temporary closure or shutdown of sites or facilities. The Board has completed recommended accounting standards for liabilities which address liabilities for environmental cleanup resulting from an accident, natural disaster, or other one-time occurrence. Those liability standards do not address inter-period cost allocation when cleanup relates to operations that span many periods. ab Therefore, the Board chose to provide additional guidance relative to cleanup costs in this standard. The additional standards in this statement provide for the timing of recognition of the liability and related operating expense. ac For cleanup costs associated with general PP&E, probable [SEE NOTE 14] and measurable cleanup costs shall be allocated to operating periods benefiting from operations of the general PP&E. This This is the original Standard file; please check for the most recent update in the FASAB Handbook at www.fasab.gov/pdffiles/handbook_sffas_6.pdf. allocation shall be based on a systematic and rational method. For example, the estimated cost could be allocated to operating periods based on the expected physical capacity of the PP&E and the amount of capacity used each period. In addition, disclosure of the total estimated cost is required. ad For cleanup costs associated with stewardship PP&E, probable and measurable liabilities shall be recognized when the stewardship PP&E is placed in service. Simultaneous to recognizing the liability, the related expense for cleanup cost shall be recognized. ********************************************** TABLE OF CONTENTS SECTION PARAGRAPH EXECUTIVE SUMMARY a..ad CHAPTER 1: INTRODUCTION PURPOSE SCOPE REPORTING OBJECTIVES CAPITALIZATION THRESHOLDS APPLICABILITY MATERIALITY EFFECTIVE DATE 1..7 8 9..12 13 14 15 16 CHAPTER 2: ACCOUNTING STANDARD - PROPERTY, PLANT, AND EQUIPMENT DEFINITIONS 17..20 CATEGORIES, RECOGNITION AND MEASUREMENT, AND DISCLOSURE REQUIREMENTS: 21..22 General PP&E 23..45 Federal Mission PP&E 46..56 Heritage Assets 57..65 Stewardship Land 66..76 CHAPTER 3: ACCOUNTING STANDARD - DEFERRED MAINTENANCE This is the original Standard file; please check for the most recent update in the FASAB Handbook at www.fasab.gov/pdffiles/handbook_sffas_6.pdf. DEFINITION RECOGNITION DISCLOSURE REQUIREMENTS 77..78 79 80..84 CHAPTER 4: ACCOUNTING STANDARD - CLEANUP COSTS DEFINITION SCOPE RECOGNITION AND MEASUREMENT IMPLEMENTATION GUIDANCE DISCLOSURE REQUIREMENTS 85..87 88..93 94..103 104..106 107..111 APPENDIX A: BASIS FOR CONCLUSIONS 112..113 PROPERTY, PLANT, AND EQUIPMENT DEFERRED MAINTENANCE CLEANUP COSTS 114..170 171..181 182..199 APPENDIX B: ILLUSTRATIONS OF CATEGORIES 200..201 FEDERAL MISSION PROPERTY, PLANT, AND EQUIPMENT 202..213 HERITAGE ASSETS 214..225 LAND 226..232 APPENDIX C: DEFERRED MAINTENANCE ILLUSTRATION 233 APPENDIX D: CLEANUP COSTS ILLUSTRATION 234..240 APPENDIX E: GLOSSARY ENDNOTES 1 THROUGH 92 ************************************************** INTRODUCTION PURPOSE 1 The purpose of this statement is to provide accounting standards for Federally owned