Project Pages

Nonfinancial Assets

Research Description: The initial objective of this pre-agenda research is to determine what effect the nonfinancial asset classification has had on financial reporting, including how it has been interpreted and applied by governments and whether it is a valuable distinction for users of financial statements. If it is determined that additional guidance on nonfinancial assets is needed, another objective will be to consider how the existing accounting and financial reporting standards could be improved.

Status: Added to Research Agenda: August 2020

Nonfinancial Assets—Project Plan

Background: The origin of the term nonfinancial asset in the GASB literature is found in Concepts Statement No. 1, Objectives of Financial Reporting. Concepts Statement 1 introduces the term nonfinancial resource in paragraph 79 to describe one of the objectives of financial reporting:
      Financial reporting should assist users in assessing the level of services that can be provided by the governmental entity and its ability to meet its obligations as they become due.
  • Financial reporting should provide information about the financial position and condition of a governmental entity. Financial reporting should provide information about resources and obligations, both actual and contingent, current and noncurrent. The major financial resources of most governmental entities are derived from the ability to tax and issue debt. As a result, financial reporting should provide information about tax sources, tax limitations, tax burdens, and debt limitations.
  • Financial reporting should provide information about a governmental entity’s physical and other nonfinancial resources having useful lives that extend beyond the current year, including information that can be used to assess the service potential of those resources. This information should be presented to help users assess long- and short-term capital needs. . . . [Underline added for emphasis.]
Although nonfinancial resources also were mentioned in the Basis for Conclusions of Concepts Statement 1, the term was not defined or further described.

The term nonfinancial asset was introduced in Statement No. 72, Fair Value Measurement and Application, as amended, to address how to approach fair value measurement for assets other than investments. Paragraph 55 of Statement 72 provides an example of nonfinancial assets in the overall discussion of highest and best use:
      If an accounting standard requires the application of fair value to a nonfinancial asset (for example, real property), the fair value measurement takes into account a market participant’s ability to generate resources by using the asset according to its highest and best use. . .
The extensive discussion about highest and best use in Statement 72, as amended, could imply that the category of nonfinancial assets is an asset grouping broader than capital assets.

The term nonfinancial asset was neither defined in the Glossary nor specifically addressed in the Basis for Conclusions of Statement 72; however, financial asset was defined in the Glossary:
      Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following:
  • Receive cash or another financial instrument from a second entity
  • Exchange other financial instruments on potentially favorable terms with the second entity (for example, an option).
The ambiguity between capital assets and what became the nonfinancial assets classification began with Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, as amended. Statement 34 describes capital assets in paragraph 19, as amended:
      …[L]and, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure, and all other tangible or intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period. . . [Underline added for emphasis. Footnotes omitted.]

The reference to intangible assets was added to address capital leases. Specific guidance for intangible assets such as computer software was not provided in GASB literature at that time. The inclusion of intangible assets in the capital assets definition did generate comments during due process because of concerns that the reference would be applied beyond capital leases; however, the Board did not modify the provision, again because of the lack of guidance in GASB literature (that is, there was no specific GASB literature addressing intangibles at that time other than the standards related to leases).

This issue of classification was faced by the Board again in Statement No. 51, Accounting and Financial Reporting for Intangible Assets, as amended. The classification of intangible assets was specifically addressed in paragraph 5 of Statement 51: “All intangible assets subject to the provisions of this Statement should be classified as capital assets.” However, the provisions in paragraph 3 of Statement 51, as amended, made it clear that Statement 51 addresses all intangible assets except for investments (paragraph 3a) and leases (paragraph 3b). (It also excluded goodwill in paragraph 3c; however, it should be noted that this provision was superseded by Statement No. 69, Government Combinations and Disposals of Government Operations.)

The rationale for the classification of intangibles in the scope of Statement 51 as capital assets was not specifically addressed in the Basis for Conclusions of that Statement but rather was based on the capital asset description in Statement 34. Furthermore, paragraph 2 of Statement 51, which describes the characteristics of intangible assets, discusses their nonfinancial nature as follows:
      In the context of this Statement, an asset with a nonfinancial nature is one that is not in a monetary form similar to cash and investments securities, and it represents neither a claim or a right to assets in a monetary form similar to receivables, nor a prepayment for goods or services.

The definition of a lease in Statement No. 87, Leases, also includes a reference to nonfinancial assets. Paragraph 4 of Statement 87 states:
      For purposes of applying this Statement, a lease is defined as a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction. [Footnote omitted.]

Paragraph B7 of the Basis for Conclusions of Statement 87 provides insight into the Board’s intent with regard to the use of the term nonfinancial asset in the definition of a lease, as follows:
      The definition also is expanded to apply to nonfinancial assets rather than only capital assets. The broader definition allows for the possibility of other types of assets to be leased. However, the Board excluded financial assets from the definition so that, for example, securities lending and similar activities would not be subject to this Statement.

As previously mentioned, the Board’s perceived intent was to convey that nonfinancial assets is a broader classification than capital assets.

Major Research Issues: The following issues would be considered:
  • Should intangible assets associated with other intangible assets (for example, software in the scope of Statement No. 96, Subscription-Based Information Technology Arrangements) and intangible assets associated with tangible assets (for example, leases within the scope of Statement 87 and public-private partnerships in the scope of Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements) continue to be classified as capital assets?
  • Should intangible assets addressed in Statement 51 (for example, internally generated software) continue to be classified as capital assets? If so, should the terms include a reference to capital assets in the financial statements (for example, nonfinancial assets, including capital assets)?
  • Should other types of assets (for example, capital assets held for resale, patents, copyrights) be classified as nonfinancial assets versus being classified as capital assets?
  • Does the nonfinancial assets classification communicate information that users need to make decisions or assess accountability? Is it important to users to receive information that distinguishes capital assets from other nonfinancial assets?
Project History:
  • Pre-agenda research proposed: August 2020
  • Consultative group appointed? No
Research Work Plan:
Board meetings Research activities
August 2020: Develop instrument for preparer survey.
August–September 2020: Literature review.
September–October 2020: Administer preparer survey.
October–November 2020: Archival analysis.
November–December 2020: Develop instrument for user survey.
January–February 2021: Administer user survey.
January–March 2021: Analyze research results and prepare research memorandum.
April 2021: Discuss tentative research results with GASAC.
Discuss research memorandum with the Board.