Estimating the Historical Cost of General Property, Plant, and Equipment

Project Objective:

The primary objective for this project is to amendment the standards to provide a cost effective mechanism for attaining initial compliance with SFFAS 6, as amended. There is evidence that estimation techniques used to establish historical cost for G-PP&E acquired prior to the effective date of SFFAS 6 or SFFAS 23 are not always considered acceptable when applied to G-PP&E acquired later. As a result, entities that have not established adequate systems are concurrently expending resources on development of systems and manual generation of historical cost data for G-PP&E acquired after the effective dates of SFFAS 6 or SFFAS 23.  Use of estimates is a more cost effective means of implementing new requirements than reconstructing actual historical amounts based on inadequate or non-existent accounting records. Clarifying that estimation based on adequate techniques is acceptable should promote cost effective implementation of the standards.

This proposal does not alter the financial reporting requirements. The proposal is justified on practical grounds. First, it establishes an implementation period for those federal entities that have not previously reported G-PP&E assets on their entity financial reports and those who have not previously prepared financial reports but who may be required or elect to do so in the future. Because it does not waive the requirement to produce estimates it preserves the comparability between reporting entities and ensures that readers receive complete financial reports. This proposal also expands the use of estimates when valuing existing G-PP&E if obtaining original transaction data historical cost information necessary to comply with the recognition and measurement provisions of SFFAS 6, as amended, is not practical.

The Board views this project as a practical response to the challenges that some agencies, such as the Department of Defense (DoD), continue to address in establishing sound financial systems and controls. In 2003, DoD requested that SFFAS 23 be made effective immediately upon issuance as an incentive to rapid implementation. Immediate implementation was clearly unattainable. Absent a systematic means to capture historical cost, DoD is undertaking the dual task of developing such a system (along with adequate processes and internal controls) and capturing accounting information without the aid of an adequate system. The Board believes that acknowledging the continuing appropriateness of estimates based on non-traditional documentation as provided by SFFAS 23 is prudent under the current circumstances. Absent such an acknowledgement, significant resources likely will be committed to developing precise estimates that remain a poor substitute for adequate systems and controls.

HISTORY OF BOARD DELIBERATIONS (reverse chronology):

October 21-22, 2009 Board Meeting
On October 14, 2009 the FASAB issued as final Statement of Federal Financial Accounting Standards (SFFAS) 35, Estimating the Historical Cost of General Property, Plant, and Equipment — Amending Statements of Federal Financial Accounting Standards 6 and 23. SFFAS 35 amends SFFAS 6 and 23 to clarify that reasonable estimates of original transaction data historical cost may be used to value general property, plant, and equipment.

August 26-27, 2009 Board Meeting
The Board unanimously adopted Statement of Federal Financial Accounting Standards (SFFAS) 35, Estimating the Historical Cost of General Property, Plant, and Equipment – Amending Statements of Federal Financial Accounting Standards 6 and 23 (SFFAS 35). In this Statement, the FASAB amends SFFAS 6 and 23 to clarify that reasonable estimates of original transaction data historical cost may be used to value G-PP&E. The objective of this amendment is to establish a cost effective method to comply with SFFAS 6. The use of reasonable estimates is available to reporting entities that have not previously prepared financial reports but who may be required or elect to do so in the future and do not yet have adequate controls or systems to capture these costs. In addition, these amendments also apply in those cases where entities have decided to use estimates to determine the historical cost values of general property, plant, and equipment (G-PP&E). The Statement has successfully completed its 90-day FASAB Principals review. This proposed standard is also subject to a 45-day Congressional review. Absent an objection from Congress, OMB or GAO, we expect the Statement to be issued during the week of October 12, 2009.

June 17-18, 2009 Board Meeting
The Board unanimously adopted Statement of Federal Financial Accounting Standards (SFFAS) 35, Estimating the Historical Cost of General Property, Plant, and Equipment – Amending Statements of Federal Financial Accounting Standards 6 and 23 (SFFAS 35).  In this Statement, the FASAB amends SFFAS 6 and 23 to clarify that reasonable estimates of original transaction data historical cost may be used to value G-PP&E. The objective of this amendment is to establish a cost effective method to comply with SFFAS 6. The use of reasonable estimates is available to reporting entities that have not previously prepared financial reports but who may be required or elect to do so in the future and do not yet have adequate controls or systems to capture these costs. In addition, these amendments also apply in those cases where entities have decided to use estimates to determine the historical cost values of general property, plant, and equipment (G-PP&E).  The Statement was forwarded to the Principals for their 90-day review period on April 28, 2009.  This proposed standard is also subject to a 45-day Congressional review. Absent an objection from Congress, OMB or GAO, we expect the Statement to be issued sometime during the week of October 12, 2009.

April 22-23, 2009 Board Meeting
At the April 22, 2009 FASAB meeting the Board briefly discussed the ballot draft of Statement of Federal Financial Accounting Standards 35: Estimating the Historical Cost of General Property, Plant, and Equipment – Amending Statements of Federal Financial Accounting Standards 6 and 23 (SFFAS 35). Member ballots were requested by April 17 and those members not responding by April 23 would be considered to have abstained.

The Board discussed a proposed change to SFFAS 35 from one member.  The suggested change related to language in the amendments to SFFAS 23 [Adjustment to Cumulative Results of Operations] section of SFFAS 35.

Current SFFAS Language:
[16.] Application of this standard by an entity previously reporting G-PP&E should be treated as a correction of an error in accordance with SFFAS 21.

Proposed SFFAS Language:
[16.] Changes to previously reported G-PP&E amounts resulting from the application of this standard should be treated as corrections of an error in accordance with SFFAS 21.

The member noted that the rational for the change is to clarify the language to reflect that not just the mere application of SFFAS 35 would trigger a correction of an error, but changes as a result of the application of the standard to previously reported G-PP&E would be treated as corrections of an error.

As of April 23, staff had received ten member ballot votes approving the release of SFFAS 35. There were no objections to the changes noted by the members. The revisions will be reflected in the final statement.

Final issuance of SFFAS 35 is subject to the 90-day Board sponsors’ review as well as a 45-day Congressional review.

Issue Paper for April 2009 (PDF)

February 25-26, 2009 Board Meeting
At the February 26, 2009 meeting the FASAB discussed the Exposure Draft (ED) Statement of Federal Financial Accounting Standards entitled, Estimating the Historical Cost of General Property, Plant, and Equipment – Amending Statements of Federal Financial Accounting Standards 6 and 23. The proposed statement amends SFFAS 6 and 23 to provide for reasonably estimating the historical cost and accumulated depreciation of G-PP&E.

Staff presented to the Board a brief summary of the exposure responses, a compilation of the respondent answers and comments by question, the full text of comment letters, and staff’s analysis of the responses.  As of the meeting date 31 comment letters had been received on the ED.  Staff identified four broad issues based on the ED responses for the Board’s discussion on revising the ED to convert it to a draft final standard.  The identified issues were:

  • The applicability of estimating G-PP&E guidance to internal use software (SFFAS 10);
  • The use of estimates for previously reported G-PP&E;
  • The use of a hierarchical list of acceptable estimation methods; and
  • The inclusion of qualifiers in the standard to identify when the use of estimates is acceptable.

The Board agreed to specifically identify internal use software (SFFAS 10) in the standard as allowing the use of estimates and allowed the use of estimates for previously reported G-PP&E.

The Board directed staff to make the revisions to the draft standard to prepare it for pre-ballot review before the April Board meeting.  The Board did not recommend a public hearing for this proposed standard.

Issue Paper for February 2009 – Tab G

December 17-18, 2008 Board Meeting
Comments on the exposure draft (ED), Estimating the Historical Cost of General Property, Plant, and Equipment — Amending Statements of Federal Financial Accounting Standards 6 and 23, are requested by January 30, 2009.  The ED is posted on the FASAB website at /pdffiles/gppe_ed111408.pdf.

October 22-23, 2008 Board Meeting
At the October 22, 2008 meeting, staff presented a revised draft exposure draft (ED) to the Board, Statement of Federal Financial Accounting Standards entitled, Estimating the Historical Cost of General Property, Plant, and Equipment – Amending Statements of Federal Financial Accounting Standards 6 and 23. This proposed statement amends SFFAS 6 and 23 to provide for reasonably estimating the historical cost and accumulated depreciation of G-PP&E.

The ED includes an alternative view that will be included in the basis for conclusions along with question in the questions to respondents related to the alternative view.  The alternative view disagrees with the open-ended time period allowed for the use of reasonable estimates and the lack of objective basis upon which to compare the estimates made by an agency.

The Board approved the release of the ED. The ED was released for public comment on November 14, 2008 and is available at http://www.fasab.gov/exposure.html. Comments are requested by January 30, 2009.

Issue Paper for October 2008

August 20-21, 2008 Board Meeting
At the August 20, 2008 meeting, staff presented a revised draft exposure draft (ED) to the Board. The ED proposes amendments to SFFAS 6 and 23 to provide guidance for (1) estimating the original transaction data historical cost and accumulated depreciation of G-PP&E upon initial capitalization and (2) estimating the historical cost of existing G-PP&E. The revised draft included the following changes:

  • The phrase “cost effective” should be removed as the parenthetical explanation of “not practical” as it relates to entities using reasonable estimates to valuing the historical cost of G-PP&E. Both “cost effective” and “inadequate documentation” should be better explained in the standard so that the phrases are not subjective.
  • The ED basis for conclusions should include a discussion on the Board’s reasons for including Q3 in the ED. [Q3. Do you believe that allowing the use of reasonable estimates to value existing G-PP&E assets should be open-ended or subject to a definitive end date (date-certain)? Please explain your preference.] One member submitted an alternative view that will be included in the basis for conclusions along with a question in the questions to respondents related to the alternative view. The alternative view disagrees with the open-ended time period allowed for the use of reasonable estimates and the lack of objective basis upon which to compare the estimates made by an agency.

The Board agreed to remove the terms “not practical”, “not cost effective”, or any other qualifiers to define when estimates can be used in place of historical cost transaction data and that a date-certain not be imposed.

Issue Paper for August 2008

June 18-19, 2008 Board Meeting
At the June 18, 2008 meeting, staff presented a draft exposure draft (ED) to the Board. The ED proposes amendments to SFFAS 6 and 23 to provide guidance for (1) estimating the original transaction data historical cost and accumulated depreciation of G-PP&E upon initial capitalization and (2) estimating the historical cost of existing G-PP&E, if obtaining historical cost based on the original transaction data is not practical (i.e., not cost effective or supporting historical cost original transaction data documentation does not exist).

The Board directed staff to make edits to the draft that would better clarify the intent of the Board. Several members agreed that the standard should also allow for the use of estimates when original transaction data has not been maintained in a form that makes the data readily available.  There was also agreement that cost effectiveness can mean that systems and business processes are not in place to collect data for the purpose of ready valuation of the asset and that there needed to be more specific illustrations of “not cost effective” in the standard. Several members agreed that allowing the use of estimation methods should not be viewed as a “give away” because the standard states that the estimates must be reasonable. In addition, agency financials are filled with estimates (i.e., certain liabilities, accounts receivables, etc.) and it is difficult to argue that reasonable estimates would not generally be permissible in this case.  The question that will have to be addressed as agencies implement the standard is – are methods being used that provide for the reasonable estimation of historical costs.

Staff will make the edits agreed to by the Board and present the Board with a revised ED.

Issue Paper for June 2008