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Business Procedures Manual

7.1 Capital Asset Definitions and Guidelines

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Capital assets are real or personal property that have a value equal to or greater than the capitalization threshold for the particular classification of the asset and have an estimated life of greater than one year.

The University System of Georgia (USG) has invested in a broad range of capital assets that are used in system operations, which include:

  1. Land and land improvements
  2. Building and building improvements
  3. Facilities and other improvements
  4. Infrastructure
  5. Construction in progress
  6. Leasehold improvements
  7. Personal property
    • Furniture and equipment
    • Vehicles
    • Software developed or obtained for internal use
    • Other assets
      • Works of art and historical treasures
      • Library books and materials
      • Intangible assets

7.1.1 Capital Asset Classification

Assets purchased, constructed or donated that meet or exceed the University System’s established capitalization thresholds or minimum reporting requirements must be uniformly classified. *

*Note: Institutions using the PeopleSoft Financial software will use the PeopleSoft asset categories and profiles to classify these assets. Included in these asset profiles are codes that can be used to componetize research buildings in conjunction with parent/child relationships. Each asset profile in the PeopleSoft system contains a default value for estimated useful life (expressed in months).

Institutions will follow USG accounting standards for establishing the historical acquisition cost for each asset. Institutions will be allowed to substitute information for residual value and/or estimated life based on individual experience. Any substitutions must be substantiated and auditable. Residual values for equipment will be zero. Equipment is normally disposed of through the state where the value to the system and state is nominal.


7.1.2 Capitalization Thresholds

Standard capitalization thresholds for capitalizing assets have been established for each asset category. All University System of Georgia entities are required to use these thresholds.

Class of Asset Threshold
Land/land improvements Capitalize All
Buildings/building improvements $100,000
Facilities & other improvements $100,000
Infrastructure (Major Systems) $1,000,000
Equipment / Leased Equipment $5,000
Library books/materials (collections) Capitalize All
Works of art/historical treasures Capitalize All
Software developed or obtained for internal use $1,000,000
Capital Leases - Buildings $100,000

7.1.3 Capital Asset Acquisition Cost

Capital assets should be recorded and reported at their historical costs, which include the vendor’s invoice (plus the value of any trade-in), plus sales tax, initial installation cost (excluding in-house labor), modifications, attachments, accessories or apparatus necessary to make the asset usable and render it into service. Historical costs also include ancillary charges such as freight and transportation charges, site preparation costs and professional fees.

Interest is capitalized on assets that are constructed or otherwise produced for an institution’s own use, including assets constructed or produced for the institution by others for which deposits or progress payments have been made.

Assets acquired with gifts and grants that are restricted by the donor or grantor to acquisition of those assets do not qualify for capitalization of interest.


7.1.4 Capital Asset Donations

GASB Statement No. 33, Accounting and Financial Reporting for Non-Exchange Transactions, defines a donation as a voluntary non-exchange transaction entered into willingly by two or more parties. Both parties may be governments or one party may be a non-governmental entity, including an individual. A voluntary contribution of resources between state agencies is not a donation.

Assets donated by discretely presented component units (other state agencies) or parties outside the financial reporting institution should be reported at their fair market value on the date the donation is made.


7.1.5 Leased Land, Buildings, and/or Equipment

Land, buildings, and/or equipment exceeding capitalization thresholds should be capitalized if the lease agreement meets any one of the following criteria:

  1. The lease transfers ownership of property to the lessee by the end of the lease term.

  2. The lease contains a bargain purchase price.

  3. The lease term is equal to 75 percent or more of the estimated economic life of the leased property.

    Note: Leases with annually renewable lease terms, in which the likelihood of non-renewal is remote, should be considered as long-term leases for purposes of evaluating this criterion.

  4. The present value of the minimum lease payments at the inception of the lease, excluding executory costs, equals at least 90 percent of the fair value of the leased property.

Leases that do not meet any of the above requirements should be recorded as an operating lease and reported in the notes to the financial statements.


7.1.6 Calculation of Leased Asset and Liability Amounts

The lessee treats the capital lease as if an asset were being purchased over time; that is, it is a financing transaction in which an asset is acquired and a corresponding obligation (liability) is created.

DR   Land/Building/Equipment Under Capital Lease   xxx
CR   Lease Purchase Obligations   xxx

The asset and liability should be recorded at the lower (lesser) of:

  • Fair market value of the asset at the inception of the lease, or
  • Cost = present value of the minimum lease payments, using the lessee’s incremental borrowing rate as the interest rate.
    • Note: The lessor’s implicit rate of interest may be used if lower than the lessee’s incremental rate.

This should include all payments that the lessee is obligated to make, such as required payments, bargain purchase options, and guaranteed residual value. They should exclude executory costs such as insurance, maintenance, and taxes that are paid by the lessor. If the lessee pays these costs directly, there is no adjustment to the periodic lease payments.

Example 1: Recording a Capital Lease with a Third Party – Lessee’s Books

The University leases a copier from an office equipment retailer for three years. The lease term begins July 1, 2007 at an annual rental of $3,000 with a down payment of $500 due on the first day of the lease. At the end of the lease term, the University may purchase the copier for $1. The asset has a useful life of 5 years. If the University had purchased this copier outright, the cost would have been $8,500. The incremental borrowing rate of the University is unknown.

Step 1: Does the lease meet the criteria for capitalization?

  • Ownership Transfer: – No
  • Written Bargain: – Yes
  • 75% life: – No (3 years/5 years = 60%)
  • 90% of FMV: – Maybe, but it is not necessary to calculate because one of he four criteria has already been met.

Step 2: Compute the present value of the minimum lease payments, using the lessee’s incremental borrowing rate, unless:

  • The lessor’s implicit rate is lower, and
  • The lessee has knowledge of the lower rate.

Use the lessor’s rate if it is lower and the lessee has knowledge of it. In this example, since the lease is with a third party and the cost of the asset is known to be $8,500, the present value of the minimum lease payments can be presumed to be $8,500. The amortization of the principal balance should be at the lessor’s implicit rate, or the interest rate at which the principal balance amortizes to $0 at the end of the lease term, which in this case is 6.13%.

Step 3: Record the leased asset at the lesser of the asset’s fair market value at the inception ($8,500) or the present value of the minimum lease payments (determined to be the same as fair market value in this example). Since the present value of the minimum lease payments is determined to be the same as the fair market value, capitalize the asset and lease liability at $8,500.

Journal Entry: To record the lease on the books at July 1, 2007.

DR Equipment Under Capital Lease       $8,500

CR Cash       $ 500
CR Lease Purchase Obligations       $8,000

Journal Entry: To record the first year’s payment due on June 30, 2008.

DR Lease Purchase Interest
      ($8,000 x 6.13%)       $ 490.40
DR Lease Purchase Obligations
      ($3,000 - $490.40)       $2,509.60

CR Cash       $3,000

The second entry would be to record depreciation at year-end.

Journal Entry: To depreciate the asset over the five-year life on June 30, 2008; asset has no residual value. Note that the depreciable life follows BPM guidelines and not the lease term.

DR Depreciation expense
            ($8,500/5)       $1,700

CR Accumulated depreciation-Capital Lease       $1,700

Example 2: Recording a Capital Lease with a Related Party when a Ground Lease is in Effect – Lessee’s Books

University Foundation leases a building and equipment to the University for an initial term of one year plus twenty-two renewable one-year terms beginning July 1, 2007 at an annual rental of $800,000 per year. The building asset has a thirty-year useful life according to BPM useful life guidelines. There is a special stipulation in the lease that states that the building and contents will be gifted to the University when all of the lease payments have been made. The University (lessee) does not know the University Foundation’s (lessor) implicit borrowing rate. However, its average coupon rate for the associated bond issue is known and is 4.5%. The first payment is due at the end of the first year and each subsequent year. The asset’s fair market value (FMV) is estimated to be the Total Uses of Funds from the “Official Statement” of the related bond issue, which is $12,500,000. There are no executory costs associated with this lease, and the University’s incremental borrowing rate is unknown.

The University owns the land upon which the leased improvements were constructed and leases the land to the University Foundation for a lease term that ends on the same date as the building and equipment lease. At the end of the ground lease term, all improvements title to the University. Within the ground lease, there is language giving the University the option to require the University Foundation to remove all improvements at the Foundation’s expense.

Because neither the Foundation’s implicit rate nor the University’s incremental borrowing rates are known, the approved interest rate to use for net present value determination is the average coupon rate of the related bond issue. The Net Present Value of the minimum lease payments using the 4.5% interest rate is $11,318,220.

Step 1: Does the lease meet the criteria for capitalization?

  • Ownership Transfer:     Yes, but due to the language in the Ground Lease, there may be no capital asset at the end of the lease term if the University exercises its option to have the building removed by the Foundation, making this criterion not applicable.
  • Written Bargain:         No
  • 75% life:                   Yes (23 years/30 years = 76.7%)
  • 90% of FMV:             Yes ($12,500,000 x 90% = $11,250,000<$11,318,220 PV)

Note that if neither the 75% life nor the 90% of FMV criteria were met, this lease would be treated as an operating lease for accounting and reporting purposes.

Step 2: Record the leased asset at the lesser of the assets’ fair market value at the inception ($12,500,000) or the present value of the minimum lease payments ($11,318,220). Since the present value of the minimum lease payments is less than the fair market value, capitalize the assets and lease liability at $11,318, 220. The University Foundation should be able to provide assistance in allocating the amount between Building and Equipment.

Journal Entry: To record the lease on the books at July 1, 2007.

DR Building Under Capital Lease       $9,000,000

DR Equipment Under Capital Lease       $2,318,220

CR Lease Purchase Obligations       $11,318,220

Journal Entry: To record the first payment due on June 30, 2008.

DR Interest Expense – Capital Leases ($11,318,220 x 4.5%)       $509,319.90

DR Lease Purchase Obligations       $290,680.10

CR Cash       $800,000

The second entry would be to record depreciation at year-end.

Journal Entry: To depreciate the asset over the shorter of the useful life per BPM guidelines or the lease term. The Building has no residual value due to the ground lease stipulation that the University has the option to require removal of the improvements. For this example, the Building should have a depreciable life of 23 years, which is the shorter of the useful life per BPM guidelines (30 years) and the lease term (23 years). The equipment depreciable lives will normally follow the BPM guidelines; however, the lease term should be followed if BPM guidelines are longer.

DR Depreciation expense-Building
            ($9,000,000/23 years)       $391,304

DR Depreciation expense-Equipment
($2,318,220/5 years (for example purposes)       $463,644

CR Accumulated depreciation-Capital Lease       $854,948

Example 3: Recording a Capital Lease with a Related Party when no Ground Lease is in Effect – Lessee’s Books

The circumstances here are the same as in Example 2, except that in this scenario there is no ground lease between the University and the University Foundation.

Step 1: Does the lease meet the criteria for capitalization?

  • Ownership Transfer:     Yes
  • Written Bargain:       No
  • 75% life:             Yes (23 years/30 years = 76.7%)
  • 90% of FMV:     Yes ($12,500,000 x 90% = $11,250,000<$11,318,220 PV)

Note that if the 75% life and the 90% of FMV criteria were ‘No,’ the lease should still be accounted for as a capital lease because only one criteria is required to be met.

Step 2: Record the leased assets at the lesser of the assets’ fair market value at the inception ($12,500,000) or the present value of the minimum lease payments ($11,318,220). Since the present value of the minimum lease payments is less than the fair market value, capitalize the assets and lease liability at $11,318,220.

Note: The present value amount should be broken out by Land, Building, and Equipment.

Journal Entry: To record the lease on the books at July 1, 2007.

DR Land Under Capital Lease       $ 500,000

DR Building Under Capital Lease       $8,500,000

DR Equipment Under Capital Lease       $2,318,220

CR Lease Purchase Obligations       $11,318,220

Journal Entry: To record the first payment due on June 30, 2008.

DR Lease Purchase Interest
            ($11,318,220 x 4.5%)       $509,319.90

DR Lease Purchase Obligations       $290,680.10

CR Cash       $800,000

The second entry would be to record depreciation at year-end.

Journal Entry: To depreciate the asset over the useful life per BPM guidelines. The Building should have a 10% residual value, per BPM guidelines. For this example, the Building should have a depreciable life of 30 years. The equipment depreciable lives will also follow the BPM guidelines.

Note: Leased Land should not be depreciated.

DR Depreciation expense-Building
            (($8,500,000 x 90%)/30 years)       $255,000

DR Depreciation expense-Equipment
            ($2,318,220/5 years (for example purposes)       $463,644

CR Accumulated depreciation-Capital Lease       $718,644

Lessor accounting treatment follows the same rules as Lessee. The University Foundation from Examples 2 and 3 should also treat the lease as a capital lease and record a Lease Receivable for the minimum lease payment amounts and a Deferred Revenue for the interest payment amounts. Universities should work with their Foundations to ensure consistent lease treatment.


7.1.7 Depreciating Capital Assets

Capital assets should be depreciated over their estimated useful lives unless they are inexhaustible. Please refer to Section 7.9, Works of Art and Historical Treasures for a definition of an inexhaustible asset.

All University System of Georgia institutions will use the straight-line depreciation method (historical cost less residual value, divided by useful life). Institutions will use the following-month convention for depreciation for indicating when the asset was rendered into service.

Depreciation data should be calculated and recorded in the entity’s capitalization ledger for each eligible asset. Depreciation expense and accumulated depreciation will be calculated monthly and posted to the capital ledger. Depreciation for University System assets other than auxiliary service’s assets will be posted to the capital general ledger and will not be funded under the Appropriation Act.

Depreciation for auxiliary services and athletics must be funded and an actual expense will be recognized by the particular auxiliary.


7.1.8 Residual Value

In order to calculate depreciation for an asset, the estimated residual value must be declared and deducted before depreciation can be calculated. The use of historical sales information becomes invaluable for determining the estimated residual value. Since the residual value of machinery and equipment is normally nominal for USG institutions, there will be no residual value considerations.

Residual value will be considered in depreciation for buildings, building improvements, facilities and other structures, and infrastructure. Residual value for buildings, building improvements, facilities and other structures, and infrastructure will be 10% of historical cost, unless the institution can justify another value.


7.1.9 Sale of Capital Assets

When an asset is sold to anyone other than a USG organization, a gain or loss must be recognized in the accounting records when:

  • Cash is exchanged and the amount paid does not equal the net book value of the asset.
  • Cash is not exchanged and the asset is not fully depreciated or has a residual value.

A gain or loss is not recorded when:

  • Cash exchanged equals the net book value of the asset.
  • Cash is not exchanged and the asset is fully depreciated.

7.1.10 Computation of Gain and Loss from Sale of Assets

To compute a gain or loss, proceeds received must be subtracted from the asset’s net book value.

Example

   
Asset’s Historical Cost: $10,000
Less Accumulated Depreciation: 7,000
Net book value: $ 3,000
Subtract Proceeds Received: 2,000
Loss from Sale of Asset: 1,000

7.1.11 Assets Acquired by the Exchange of Other Assets Similar Assets

Similar Assets

When recording an exchange of similar assets, institutions must use a book value basis for the assets surrendered or acquired.

  • When assets are exchanged and no monetary consideration is paid or received, the cost of the asset acquired is recorded at the book value of the asset surrendered.
  • Where monetary consideration is given, the new asset must be recorded at the sum of the cash paid plus the book value of the asset surrendered.

Dissimilar Assets

When recording an exchange of dissimilar assets, institutions must:

  • Record the value of the asset being traded and the resulting transaction for acquiring the new asset, using the fair value of the asset being traded.
  • If cash is used to purchase the asset, agencies must record the transaction for the new asset as cash paid plus the fair value of the asset surrendered.

7.1.12 Assets Held in Trust

Capital assets held by an institution on behalf of a non-state entity (such as art collections owned by families, estates and others) and that are under the temporary control of the agency should be accounted for in the institution’s accounting records. This includes assets owned by the federal government that have been loaned to an institution. Assets held in trust must be recorded using the appropriate acquisition and disposal method for such assets. Since the institution does not own these assets, the assets should be recorded at a cost of zero.


7.1.13 Controlled Assets

Controlled assets are assets of the state that must be secured and tracked as inventory as set forth by Georgia Code Section 50-16-161.1. This code section states that movable personal property with an acquisition cost of $3,000 or more must be inventoried and tracked by state agencies. In addition to controlled assets identified by Georgia law, an agency may inventory other assets it considers high risk or for management purposes. Controlled assets with an acquisition cost of less than $5,000 will not be capitalized or depreciated for general-purpose or external financial reporting purposes.


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