Effective Date: December 8, 2009
Last Reviewed: December 8, 2009


Purpose

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).

Overview

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

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.

Depreciation

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.

Buildings

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

Landscaping      20years

Furniture         

   Office 20 years

   Classroom/residence hall/dining         10 years

Equipment       

   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

Scoreboard       Bleachers

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.

Disposal

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.

Appendix

The following list contains examples of projects and their accounting treatment under this policy.

Project Type                                                       Accounting Treatment                                                  

Improvements

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

Repair/maintenance    

  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

Furniture replacement 

  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

Technology      

  Servers           Capitalize

  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