A. Requirements for Capitalization
(1) Acquisition of Equipment. To be considered for capitalization, and thus subject to depreciation, an asset must fulfill three characteristics: 1) the asset must be acquired (i.e., purchased, gift-in-kind) for use in operations, and not for investment or sale; 2) the asset (per individual unit) must have a useful life of at least three years
(two years for laptops) ; and 3) the asset must have a cost value exceeding, at a minimum, $5,000.
(2) Acquisition or Construction of Buildings. These expenditures include the cost for renovations, betterments, or improvements that add to the permanent value of the asset, make the asset better than it was when purchased, or extend its life beyond the original useful life. To capitalize these costs, the improvements must fulfill at least one of the following three criteria: (1) the useful life of the asset is increased; (2) the productive capacity of the asset is improved; (3) the quality of units/services produced from the asset is enhanced. The total project cost must also exceed $5,000.
B. Definition and Classification of Capitalized Costs
The basis for accounting for property, plant, and equipment is cost. All normal expenditures of readying an asset for its intended use are capitalized. Donated property, plant, or equipment is valued at its fair market value and is also capitalized. The capitalizable costs for each asset class are as follows:
(1) Land and Land Improvements. This category of asset classification is used for all costs connected with the acquisition or improvement of land. This includes purchase price, appraisals, professional services, and title insurance. If land is purchased as a building site, certain expenses may be added to the cost: razing and removal, land or site improvements, utilities to site, and landscaping activity associated with new construction.
(2) Buildings and Building Improvements. This category of asset classification is used for all costs related to the acquisition, or construction of a building if over $5,000, including the purchase price, professional services, appraisals, test borings, site preparation, materials, labor, and overhead as a direct result of the project during construction. Also included are all costs associated with projects involving significant alterations, renovations, or structural changes (i.e., gutting a building and completely rebuilding the interior) that exceed $5,000, and that increase or amend the usefulness of the asset, enhance its efficiency, or prolong its useful life by at least three years. Building improvements may include interior or exterior construction of a building or building systems, such as electrical or plumbing.
(3) Equipment. This category of asset classification is used for all costs associated with the purchase of tangible property that has a useful life of more than three years and cost in excess of $5,000 in total. All bulk purchases of tangible property are included in this category. Charges may also include the cost of installation, transportation, taxes, duty, or in-transit insurance. Tangible property includes furniture, fixtures, computer equipment, software, and vehicles. In addition to the net invoice price of an asset, all costs associated with modifications, attachments, accessories, or auxiliary apparatus necessary to make the property usable for its intended purpose may also be capitalized, only if incurred at the time of initial equipment purchase. All subsequent costs of this nature, to maintain the equipment, will be expensed.
This category also includes all costs per unit related to the external purchase of software applications and the associated implementation costs (including initial licensing fees) that have a useful life of three years. (Fees paid for the renewal of software licensing and maintenance will not be capitalized and will be expensed.)
(4) Construction in Progress. This category of asset classification is used for those costs incurred in connection with the construction of a building prior to the building being put into use.
C. Non-capitalizable Expenses
Costs that are below the $5,000 threshold for capitalization that neither significantly add to the permanent value of a property nor prolong its intended useful life are expensed. The following types of plant costs should be expensed:
(1) Maintenance. The recurring work required to preserve or immediately restore a facility to such condition that it can be effectively used for its designed purpose. It includes work done to prevent damage to a facility. Examples: Custodial services; repainting a room; recarpeting; fixing a leaky faucet.
(2) Preservation/Restoration Costs. Expenditures associated with maintaining special assets in, or returning them to, a level of quality as close to the original as possible. Example: Returning a stained glass window to its former level of beauty or acting to prevent any further deterioration.
(3) Interest Costs During Construction. The cost of interest related to the acquisition or construction of an asset will be expensed during the period of time that is required to complete and prepare the asset for its intended use.
(4) Feasibility Studies. Costs incurred in connection with preliminary planning and testing of site adequacy or the preparation of site modeling.
D . Equipment Leases . Please notify Financial Services regarding all equipment leasing to determine proper accounting treatment.
A provision for depreciation is recorded to attribute the cost of the asset over a useful life.
B. Depreciation Method
With the exception of land, artwork, and books, all capitalized assets will be depreciated using straight-line method over the useful life of the asset class. An asset’s useful life is the period of time over which services are expected to be rendered by the asset. The calculation of depreciation will be based on historical cost.
The University implemented the Banner Fixed Asset module July 2011. It was determined new acquisitions of fixed assets would be placed into newly created categories that more accurately reflect the nature of the assets that are purchased and placed in service. In addition to the new categories, the University also reevaluated the useful life of all assets placed in service as of July 2011. The following table summarizes useful life by category of assets placed in service prior to July 2011 :