Effective Date: December 8, 2009
Last Reviewed: December 8, 2009
The purpose of this policy is to provide guidance in the area of accounting for expenditures associated with the acquisition, construction, and renovation of property, plant and equipment (fixed assets).
Property, plant and equipment, whether acquired or constructed, must be accounted for at historical cost as an asset on the balance sheet (i.e., ‘capitalized’) and depreciated over their expected useful lives. The historical cost of acquiring or constructing an asset includes all costs necessary to prepare the asset for its intended use (such as delivery costs and installation costs for purchased assets and building permits and architectural fees for newly constructed or renovated facilities).
Certain expenditures associated with property, plant and equipment after its initial acquisition or construction must also be capitalized and depreciated while other expenditures must be recorded as an operating expense on the statement of activities (i.e., ‘expensed’). This policy will provide guidance in these areas.
Items that shall be capitalized
In general, the following items shall be capitalized. For specific examples, see the appendix of this policy.
• All new construction projects and all purchases of assets having a unit cost of $5,000 or more and a useful life of two or more years shall be capitalized at cost.
• Renovation and improvement projects having a cost of $5,000 or more and that either change/improve the functional use of the space being renovated, cause the facility or equipment to be more efficient/productive, or extend the facility’s originally estimated useful life shall be capitalized at cost.
• Component items that individually cost less than $5,000 but together form a system that has a combined cost exceeding $5,000 and that were purchased during the same time frame shall be capitalized at cost. Similarly, comprehensive furniture replacement programs in residence halls shall be capitalized even if the cost of individual pieces does not exceed $5,000.
• Donated non-cash assets with a value of $5,000 or more and a useful life of two or more years and which the College intends to use in the normal course of business shall be capitalized as property, plant and equipment at the assets’ fair value at the time of donation.
• Interest costs associated with new construction or renovation projects shall be capitalized in accordance with the College’s Capitalization of Interest policy.
• Leases meeting the criteria established for capital leases shall be capitalized at the lower of the present value of the minimum lease payments or the leased property’s fair market value (see the section entitled Leases).
Items that shall not be capitalized
In general, the following items shall not be capitalized. For specific examples, see the appendix of this policy.
• Normal routine repair and maintenance that does not extend the asset’s useful life beyond its originally estimated useful life shall be expensed as incurred.
• Renovation and improvement projects that do not change the functional use of the space being renovated, cause the facility or equipment to be more productive, or extend the facility’s useful life beyond its originally estimated useful life shall be expensed as incurred.
• Donated non-cash assets that the College does not intend to use in the normal course of business (for example, donated land that is not adjacent to the campus) shall be recorded as an investment at the asset’s fair market value.
• Leases that do not meet the criteria established for capital leases shall be expensed as incurred (see the section entitled Leases).
Leases shall be accounted for in accordance with FAS 13. If a lease meets any of the following criteria (i.e., capital lease criteria), it shall be capitalized at the lower of the present value of the minimum lease payments or the leased property’s fair market value.
1. The lease transfers ownership of the property to the lessee by the end of the lease term.
2. The lease contains a bargain purchase option (an option to purchase the leased property at a price that is substantially below the expected market value at the date the option becomes exercisable).
3. The lease term is equal to 75% or more of the estimated economic life of the leased property.
4. The present value of the minimum lease payments (excluding executory costs such as insurance, maintenance and taxes) equals or exceeds 90% of the fair value of the leased property.
Neither the third nor the fourth criteria shall be used if the lease is entered into during the last 25% of the asset’s economic life.
All leases that do not meet one of the four criteria shall be accounted for as an operating lease (lease payments will be expensed as incurred).
Construction in Progress
The costs of buildings or other real property assets (capital projects) that are under construction at fiscal year end are captured in a separate asset account (C.I.P.) and reported in the College’s financial statements as “Construction in Process”. Construction in progress represents a temporary capitalization of labor, materials, and fixed equipment of a construction project for financial reporting purposes. Depreciation is not calculated for assets under construction. When the construction asset is put into use, accumulated construction in progress costs are capitalized and depreciated within their respective asset categories.
The costs included in construction in progress are the total direct project to date expenditures together with the related accounts payable, insurance premiums, interest and other related accrued costs.
An asset is substantially complete when the structure or project is ready for the purpose for which it was constructed (ie: an academic facility is ready for instruction or research). All construction activity does not have to be complete or accepted for final payment, but the project should be complete enough to commence the activities for which it was constructed. The Facilities Office should make the determination as to when a project is substantially complete.
Fixed assets shall be depreciated using the straight-line method with a half-year convention. Depreciation will begin with the fiscal year in which the College first places the asset in service. Construction-in-process will not be depreciated until the associated facility is placed in service. Land shall not be depreciated. The following useful lives will be employed for purposes of depreciation.
Masonry 60 years
Steel 30 years
Wood 30 years
Whenever possible, a newly constructed facility should be itemized by major component for purposes of depreciating the facility. For example, a new building might be considered to have the following components, each which would be depreciated according to the useful lives outlined above: shell (building); roof; infrastructure system (such as HVAC); furnishings.
Land Improvements 20years
Office 20 years
Classroom/residence hall/dining 10 years
Technology servers 4 years
Hardware/Software 5 years
Lab equipment 10 years
Other 15 years
Computer Information System 15 years
Athletic 5 years
Vehicles 5 years
Capital Leases the length of the lease (unless criteria 1 or 2 in the Leases section is met, in which case the asset is depreciated as if the leased asset were owned)
Renovations/improvements the renovated/improved area’s useful life
Examples of building improvements with a 15-year useful life include:
Electrical Improvements Plumbing Improvement- HVAC
Fire Sprinklers Fence
Networking Floor Covering/Carpeting
Fire/Exterior Doors Gutters
Windows Alarm/Security System
Shelving Attached kitchen Appliances
Examples of building improvements with a 20-year useful life include:
Signage Steam Lines
Vinyl Siding Roofing
Handicap Renovations General Renovations
Whenever possible, a general renovation to a facility should be itemized by major component for purposes of depreciating the renovation. For example, an office renovation might be considered to have the following components, each which would be depreciated according to their useful lives: computers; furnishings; infrastructure.
An asset that is sold or otherwise disposed of shall be removed from the accounting records when sold or disposed of. An asset that is fully depreciated shall remain in the accounting records until it is no longer in use, at which time it shall be removed from the accounting records.
The following list contains examples of projects and their accounting treatment under this policy.
Project Type Accounting Treatment
Roof replacement Capitalize and depreciate over a minimum of 20 years for shingle and 60 years for slate
Repointing of masonry Capitalize if comprehensive program; otherwise, expense
Window replacement Capitalize
Roof repair Expense
Painting (interior and exterior) Expense, unless part of larger project or new construction
Carpet/flooring replacement Capitalize
Energy saving retrofits Expense
Project feasibility study Capitalize if (a) project will be capitalized, (b) project will begin within three years from the study’s completion date and (c) study cost > $10K
Segment of building or entire building Capitalize and depreciate according to policy
Individual sporadic replacements Expense
Roadway repavement Capitalize if it extends original estimated useful life of roadway and if existing roadway’s book value is available; otherwise expense
Walkway replacement Same as roadway repavement
Landscaping Capitalize if comprehensive program; otherwise, expense
Computers Expense small single individual office replacement, Capitalize if part of classroom renovation or larger replacement purchase program
Software purchased Capitalize
Software developed Capitalize if >$5K and is project based; refer to SOP 98-1
Library books Expense
Collections Collections meeting the definition provided in the AICPA Not-for-Profit Audit Guide will not be capitalized; all other art with a cost of >$5K will be capitalized and depreciated over ten years