Capital Assets | Required vs. Modified Approach | Governmental Accounting. CPA EXAM BAR

In this video, I discuss the treatment of capital asset under the required and modified approach for governmental accounting purposes.
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In governmental accounting, the treatment of capital assets can be approached in two primary ways: the modified approach and the required (or traditional) approach.
Modified Approach:
This approach is typically applied to infrastructure assets like roads, bridges, and public utilities.
Under the modified approach, governments are not required to depreciate these assets if two conditions are met:
a. The government manages the assets using an asset management system that includes up-to-date inventory, condition assessments, and summary of estimated costs to maintain and preserve the assets at an established condition level.
b. The government documents that the assets are being preserved at or above the established condition level.
The focus is on maintenance and preservation rather than depreciation.
Governments must still report historical cost or other measures of cost, but depreciation is not recognized.
Required (Traditional) Approach:
This is the more conventional method, applicable to most capital assets other than those eligible for the modified approach.
Under this approach, capital assets are capitalized and depreciated over their useful lives.
The cost of the asset is allocated over its useful life as an expense (depreciation).
This approach provides a systematic and rational allocation of the cost of the asset.
The choice between these two approaches depends on the type of asset and the government's ability to meet the conditions required for the modified approach. The modified approach is more suitable for long-lived infrastructure assets, while the traditional approach is used for other capital assets.
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