F1.15 Capitalization of Fixed Assets

Effective Date: June 20, 2023

Last Reviewed: June 20, 2023

POLICY STATEMENT

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 ASC 842.  The ASC 842 definition of a lease is “a contract, or a part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration”.  

Contracts are reviewed by the Controller’s office with numerous factors in play to determine whether leases end up on the balance sheet.

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 (i.e: 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                             20 years

Landscaping                                       20 years

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

Renovations/improvements                  the renovated/improved area’s useful life

Examples of building improvements with a 15 year useful life include:

Electrical Improvements                      Plumbing Improvements-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.