IS IT AN ASSET OR A LIABILITY?

During the long evolution of government accounting, many scholars have discussed its unique features. In the August 1989 issue of the Journal of Accountancy, R.K. Mautz described the reporting needs of governments and not-for-profit organizations (such as charities) in "Not-For-Profit Financial Reporting: Another View."

As an illustration of their accounting challenges, Mautz examined the method by which a city should record a newly constructed high school building. Conventional busi- ness wisdom would say that such a property represents an asset of the government. Thus, the cost should be capitalized and then depreciated over an estimated useful life. How- ever, in paragraph 26 of FASB Concepts Statement No. 6, an essential characteristic of an asset is "a probable future benefit . . . to contribute directly or indirectly to future net cash inflows."

Mautz reasoned that the school building cannot be considered an asset because it pro- vides no net contribution to cash inflows. In truth, a high school requires the government to make significant cash outflows for maintenance, repairs, utilities, salaries, and the like. Public educational facilities (as well as many of the other properties of a government such as a fire station or municipal building) are acquired with the understanding that net cash outflows will result for years to come.

Consequently, Mautz considered whether the construction of a high school is not actually the incurrence of a liability because the government is taking on an obligation that will necessitate future cash payments. This idea also is rejected, once again based on the guidance of Concepts Statement No. 6 (para. 36), because a probable future transfer or use of assets is not required at a "specified or determinable date, on occurrence of a specified event, or on demand."

Is a high school building an asset or is it a liability? If it is neither, how should the cost be recorded? How is the high school reported in fund financial statements? How is the high school reported in government-wide financial statements? Which of these two approaches best portrays the decision to acquire or construct this building? Can a govern- ment possibly be accounted for in the same manner as a for-profit enterprise?