What Is the Modified Approach for Infrastructure Assets?

The modified approach for infrastructure assets is an alternative accounting method under GASB Statement No. 34 that lets a state or local government skip depreciation on eligible infrastructure networks, such as roads, bridges, and drainage systems, and instead expense what it actually spends each year to preserve them. In exchange, the government has to prove through regular condition assessments and detailed reporting that it is genuinely keeping the network at or above a minimum condition level it publicly commits to maintain.¹

The premise is that ongoing maintenance keeps the asset’s service potential intact indefinitely, so an artificial cost allocation schedule adds no information a reader can use. Whether that premise holds for a given government is exactly what the reporting and disclosure requirements are designed to test.

How It Changes What Appears on the Financial Statements

Under traditional depreciation, a government capitalizes an infrastructure asset at cost and spreads that cost evenly across an estimated useful life. Each year an annual depreciation charge hits the statement of activities, and the statement of net position shows the asset at historical cost minus accumulated depreciation. The reported book value declines steadily whether the asset is crumbling or pristine.

The modified approach flips this. The asset stays on the statement of net position at its full historical cost with no accumulated depreciation offset. There is no depreciation expense. Instead, the actual cost of preservation work is expensed in the year it is incurred. Reported expenses in a heavy maintenance year can be higher than under depreciation, and the net book value of the network stays higher, but only because the government is committed to backing that figure with real spending.

The election is made at the network or subsystem level, not asset by asset. A city can use the modified approach for its street network while depreciating its water distribution system the traditional way.

Which Assets Qualify

The modified approach is limited to infrastructure assets that are part of a network or a subsystem of a network. A network is a group of similar assets that function together, like all the paved roads within a jurisdiction. A subsystem is a component of a larger network, such as all interstate highways managed by a state department of transportation or all bridges above a certain span length.¹

Standalone assets do not qualify. A single government building, a lone communications tower, or an individual vehicle cannot be reported under the modified approach regardless of how well it is maintained. The asset has to belong to an interconnected group whose condition can be meaningfully assessed as a whole.

What a Government Must Have in Place to Elect It

Before adopting the modified approach, a government needs an asset management system that meets three requirements:

An up-to-date inventory of every eligible infrastructure asset in the defined network or subsystem.
Condition assessments of those assets performed and summarized using a measurement scale.
Annual estimates of the amount needed to maintain and preserve the assets at the condition level the government has established and disclosed.¹

The government also has to formally establish and disclose the minimum condition level it pledges to maintain for the network. A governing body typically approves the defined network, the measurement scale, and the minimum condition level as part of the adoption process. The system must be capable of distinguishing preservation spending from capital improvements, because the two are treated differently under the modified approach.

Condition Assessments and Measurement Scales

The modified approach lives or dies on condition assessments. Complete assessments must be documented as performed in a consistent manner at least every three years. Three years is the maximum cycle length regardless of whether the government assesses all assets in a single year or spreads the work across the full window.¹

Statistical sampling is allowed. A government does not need to inspect every road segment or bridge individually; it can assess a representative sample and extrapolate. The sampling methodology has to be replicable and applied consistently from cycle to cycle, and any change must be documented and disclosed.

Governments choose a numerical scale that suits the asset type. For pavement, the most common is the Pavement Condition Index, a 0-to-100 scale codified in ASTM D6433. Bridge inventories often use a 1-to-5 or 1-to-9 rating. What matters is that the scale is defined, applied consistently, and disclosed in the financial statements along with the basis for the measurement.

The minimum condition level is a policy choice. A road network on PCI might be set at an average of 65; a bridge system on a 1-to-9 scale might be set at 5. Whatever the number, the results of the three most recent complete condition assessments must give reasonable assurance that the network is being preserved at or above it.¹

Preservation Costs Versus Additions and Improvements

All spending on eligible infrastructure reported under the modified approach is expensed in the period incurred, with one exception: additions and improvements are capitalized.¹

The dividing line is whether the spending increases the asset’s capacity or efficiency. Resurfacing an existing two-lane road to maintain its ride quality is preservation and gets expensed immediately. Widening that same road to four lanes adds capacity and must be capitalized. Crack sealing, joint repair, and routine bridge deck work are preservation. A new interchange or an extension of a road into a previously unserved area is an addition.

What Happens If the Network Falls Below the Minimum

A government loses eligibility for the modified approach when a condition assessment shows the network was not maintained at or above the established level, when it fails to perform a replicable assessment at least every three years, or when it fails to estimate the annual preservation amount.¹

Reversion to depreciation means reporting the infrastructure at historical cost less accumulated depreciation. That accumulated depreciation has to be calculated as if depreciation had applied all along, which can produce a large one-time reduction in reported net position. Because debt covenants and credit ratings often reference net position, the impact reaches beyond the financial statements themselves.

The rule creates a strong incentive to keep funding maintenance. A government that defers preservation to balance its operating budget may find the resulting condition decline forces a switch back to depreciation, leaving the balance sheet worse off than if it had depreciated from the start.

Required Disclosures and RSI Schedules

The modified approach carries reporting obligations that go well beyond what depreciation requires. Two schedules must appear in the Required Supplementary Information section:

The assessed condition of the eligible infrastructure assets for at least the three most recent complete condition assessments, including the dates they were performed.
The estimated annual amount needed to maintain the assets at the established condition level compared with the amounts actually expensed, covering each of the past five reporting periods.¹

The cost comparison schedule is where readers can see whether the government is putting its money where its commitment is. A gap between the estimated need and the actual expenditure invites questions from auditors, bond analysts, and rating agencies.

The notes to the RSI must disclose the basis for the condition measurement, the measurement scale, and the condition level the government intends to preserve. Any change in the minimum condition level triggers disclosure of the change and an estimate of the effect on annual preservation cost. Changes to the measurement scale, assessment methodology, or basis for measurement during the periods covered by the schedules must also be disclosed.¹

Management’s Discussion and Analysis must also address these assets: significant changes in assessed condition from prior assessments, how current condition compares to the established level, and any significant differences between estimated and actual preservation spending for the current period.

Proposed Changes in GASB’s 2024 Preliminary Views

GASB issued a Preliminary Views document in September 2024 (Project No. 3-43P) proposing changes to the framework. These are not yet final standards.²

The most notable proposal would eliminate the formal requirement for an asset management system. A government would instead need processes in place to maintain an inventory, perform condition assessments, and estimate annual preservation costs. GASB reasoned that some governments handle these functions through manual processes rather than automated software, and the formal-system requirement creates an unnecessary barrier. The three-year assessment cycle and the requirement that the three most recent assessments demonstrate adequate preservation would remain. The preliminary views also propose that a government losing eligibility should report the affected infrastructure at historical cost net of accumulated depreciation going forward. An exposure draft would be the next step before any final standard.

Is It Worth Electing

The modified approach sounds appealing on paper: no depreciation expense, a higher net position, and financial statements that reflect actual stewardship rather than an arbitrary allocation schedule. In practice, relatively few governments use it. The condition assessment and documentation requirements are expensive and labor-intensive, and the consequences of falling below the minimum condition level are severe enough that many finance directors prefer the predictability of straight-line depreciation.

A government considering the election should weigh the cost of regular condition assessments, whether performed in-house or by engineering consultants, which can be substantial for large networks. The asset management system, or the processes that would replace it under the proposed changes, has to produce data rigorous enough to withstand audit scrutiny. Auditors look hard at the statistical validity of sampling methods and the consistency of assessment techniques across cycles. Getting the initial documentation package right is the single biggest factor in whether the election survives its first audit.

Once a government publicly commits to a minimum condition level and reports against it every year, deferred maintenance becomes visible in a way it never is under depreciation. For governments with strong maintenance programs and the institutional capacity to sustain rigorous monitoring, the modified approach offers a more honest picture of infrastructure value. For everyone else, depreciation remains the safer choice.

1
Governmental Accounting Standards Board. GASB Statement No. 34 – Basic Financial Statements and Managements Discussion and Analysis for State and Local Governments
2
Governmental Accounting Standards Board. Preliminary Views – Infrastructure Assets