In recent years, governmental entities have observed a steady rise in annual capital asset additions. At first glance, this might seem like a positive signal to financial statement users—an indication of governments enhancing their infrastructure and operational environment. However, beneath the surface, this growth presents a challenge. Tracking and managing an expanding pool of capital assets can strain resources, consuming time and effort that could be better spent on core government priorities. To address this, governments are encouraged to reassess their capitalization thresholds, simplifying processes and freeing up capacity for more critical operations.

Understanding Capitalization Thresholds

A capitalization threshold sets the minimum value at which an asset—whether a building, vehicle, piece of equipment, infrastructure, or right-to-use asset—is recorded as a capital asset and depreciated over its useful life, rather than expensed immediately. This mechanism helps governments focus on significant investments while avoiding the burden of tracking minor items. Depreciation expense begins when the asset is placed into service and continues annually, gradually reducing the asset’s net book value. While this impacts the government’s reported net position each year, the full cost is eventually recognized over time.

Maintaining accurate records of these assets can be daunting, particularly without sophisticated software. Low thresholds often force governments to catalog countless small items, inflating administrative workloads. Recent trends only amplify this issue: since 2020, the United States has faced persistent inflation, driving up asset prices and pushing more purchases above existing thresholds. As a result, governments are capitalizing more assets than ever, prompting a need for adjustment.

How Much Should Thresholds Increase?

Determining the right increase requires a methodical approach tailored to each government’s circumstances. Several factors should guide this decision:

1. Analyze Historical Trends
   Review capital asset additions from recent years. Identify which asset classes (e.g., equipment, infrastructure) show the most growth and examine the nature of those additions. Are they driven by rising costs or new investments?

2. Benchmark Against Peers
   Study the capitalization policies of similar-sized governments. This provides a practical reference point for setting realistic thresholds.

3. Align with State and Federal Standards
   Research the capitalization policies of the state where the government operates, as well as federal guidelines. This ensures consistency and compliance with broader regulations.

Benefits of Raising Thresholds

Increasing capitalization thresholds, paired with investments in asset-tracking software, offers tangible advantages. By excluding low-value items from detailed recordkeeping, governments can reduce administrative costs and simplify accounting and reporting. This shift allows staff to focus on safeguarding high-value assets, improving overall control and operational efficiency. Robust software further streamlines tracking, ensuring accuracy without excessive manual effort.

Importantly, raising thresholds doesn’t compromise accountability. Governments remain committed to responsible stewardship of all assets, regardless of how they’re classified, while staying compliant with external regulations and internal policies.

A Path Forward

Reevaluating capitalization thresholds isn’t just a reaction to inflation—it’s a strategic move to optimize resource allocation. By adopting a data-driven approach and leveraging technology, governments can lighten the load of asset management, enhance financial reporting, and prioritize what truly matters: serving their communities effectively.

Our team has extensive expertise in municipal finance and is here to help. Contact us at (305) 662-7272 or email us at info@cflgcpa.comfor tailored solutions that address the unique needs of your municipality.