What does GFOA suggest as an essential feature for capitalizing an asset?

The suggestion from the Government Finance Officers Association (GFOA) regarding capitalizing an asset emphasizes both the useful life and cost criteria. Specifically, the criteria that an asset should have a useful life of at least two years and a cost threshold of at least $5,000 for a single item align well with generally accepted accounting principles.

Capitalizing an asset means that its cost will be spread over its useful life rather than being expensed in the year it was purchased. This approach is crucial for accurately reflecting the financial position and performance of a governmental entity. By establishing a minimum useful life of two years, the GFOA ensures that only assets that will provide economic benefits over an extended period are capitalized. Additionally, the cost threshold of $5,000 helps to filter out smaller purchases that might be better suited for immediate expensing, which would simplify accounting processes.

This combination of criteria provides a clear standard for distinguishing between capital assets and other expenditures, ensuring that governmental financial statements accurately represent the condition of the entity's assets. The focus on the cost and useful life provides a consistent framework for financial reporting.