The "Depreciation Method" is the simplest but has its drawbacks. This method does not account for maintenance efforts of repair and upgrading infrastructure, which can add value. It does not account for expenses and the effect they have on the useful life of the facility. It only reports past costs.

Depreciation costs are determined by dividing the original cost of your asset by its useful life, and then show the end result as an expense. This determines the annual cost of the asset that can be depreciated each year. This method would be used if the requirements in the modified approach are not met.

The "Modified Valuation Method" presents a clearer picture and offers communities the opportunity to report actual costs incurred each year to maintain and preserve the quality of their assets to include predictive maintenance, repair, restoration, and replacement components. Governments may begin to use this method for reporting as long as at least one complete condition assessment is available and documented.

Three guidelines must be followed to achieve this method:

•Maintain a current inventory of all infrastructure assets.
•Establish a condition rating to "evaluate and report on the current condition of all assets at least every three years. " Maintain the condition of that asset at a preferred rating, then review and rate the condition of that asset. Document the planned versus actual amounts resulting from the three most recent condition assessments to include dates. Compare estimated amounts at the beginning of the fiscal year with the amounts actually expensed for each of the past five reporting periods.
•"Estimate annual costs to maintain and preserve infrastructure assets":   Report the condition of your assets in your financial statement, and indicate how this condition compares with the policy you set forth. You also estimate and report (as an expense) all expenditures made (except for additions and improvements) to maintain the condition of your assets each year. Additions or improvements should be capitalized since they increase the capacity or efficiency of the asset rather than preserve the useful life of the assets. (Depreciation is not reported.)

Note:  A third approach may allow your community to avoid three-year inspection issues and still show stability in maintaining financial results. To report, use the depreciation method and all the requirements of the modified approach information in GASB 34's Required Supplementary Information.