Business Procedures Manual

Essential business procedural components for University System of Georgia institutions.

7.15 Appendices

(Last Modified on May 1, 2017)

Capital Assets are required to be accounted for and reported in accordance with generally accepted accounting principles (GAAP).

This section provides guidance on accounting and reporting of Capital Assets in the institution’s general ledger and the Annual Financial Report (AFR), as well as providing information on standards used in the initial implementation of GASB Statements Nos. 34 and 35 along with ongoing compliance with new reporting requirements. Included are asset category definitions, capitalization thresholds, depreciation methodologies, and examples of expenditures for each class of assets. Additionally, guidelines for leasehold improvements, impaired assets, intangible assets and construction in progress are included.

(Last Modified on May 1, 2017)

A Capital Asset is a tangible or intangible item with the following characteristics:

  • Expected useful life of more than one year
  • Acquisition cost(s) equals or exceeds capitalization limit/threshold
  • Not expected to be sold as part of normal business operation, i.e. Inventory.

Capital Assets may be acquired via purchase, donation, construction or transfer.

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. Equipment ( machinery, furniture, vehicles)
  5. Infrastructure
  6. Construction in progress
  7. Capitalized Collections (works of art and historical treasures)
  8. Library Collections
  9. Intangible Assets
  • Software
  • Other Intangible Assets

7.1.1 Capital Asset Classification

(Last Modified on May 1, 2017)

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 componentize 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

(Last Modified on May 2, 2017)

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 (including leased buildings) $100,000
Facilities & other improvements (including leasehold improvements) $100,000
Infrastructure (Major Systems, including leased infrastructure, if any)

Infrastructure (Additions, including leases if any)
$1,000,000

$100,000
Equipment / Leased Equipment $5,000
Library books/materials (collections) Capitalize All
Works of art/historical treasures Capitalize All
Intangible Assets
  Software developed (or obtained for internal use)

  Other Intangible Assets
    Water Rights
    Timber Rights
    Easements
    Patents
    Trademarks    
    Copyrights
$1,000,000


$100,000





Note: Capital assets purchased with federal funds may be subject to different capitalization thresholds. Please refer to the Uniform Administrative Requirements, Costs Principles, and Audit Requirements for Federal Awards to determine if different capital thresholds should be applied to assets in question.


7.1.3 Capital Asset Acquisition Cost

(Last Modified on May 1, 2017)

Capital assets must 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.

Capitalized interest, which is interest accrued during the construction period of a capital asset that has been financed, must be added to the cost value of the asset. This is most prominent with our Public Private Venture (PPV) program assets. Assets acquired with gifts and grants that are restricted by the donor or grantor for acquisition of those assets do not qualify for capitalization of interest.

Estimating historical cost– In some instances, the acquisition cost of property may not be available and some alternative basis must be used to record the capital asset. For instance, documentation may not have been available to determine the original cost of acquired or constructed property; also, it may be impossible or very time-consuming to reconstruct the actual cost of the property. In situations such as this, the original cost of the property may be estimated and used as the basis for capitalization. When estimates are used, documentation must be maintained to describe and support the estimation methods employed and the extent to which estimates were used. Insured values and current value estimates cannot be used for capital asset reporting purposes. Allowable estimation methods include using historical sources to determine the cost of similar assets at the time of acquisition and indexing where the historical cost of an asset is estimated by taking the current cost of a similar asset and dividing it by an index figure which adjusts for inflation.


7.1.4 Capital Asset Donations

(Last Modified on May 1, 2017)

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. Assets donated by parties outside the financial reporting institution should be reported at their fair market value plus ancillary charges, if any, as of the date of the donation.

See Section 7.1.9 for assets transferred from component units/cooperative organizations.


7.1.5 Depreciating Capital Assets

(Last Modified on May 1, 2017)

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 is placed into service.

Depreciation data should be calculated and recorded in the entity’s Capital ledger for each eligible asset. Depreciation expense and accumulated depreciation is calculated monthly through the Asset Management module and posted to the Capital ledger.

Depreciation for auxiliary services, including athletics, must be funded by a Renewals and Replacements (R&R) Reserve. The amount of R&R reserve recognized each year should be recorded in each auxiliary unit in an amount equal to depreciation expense charged on the auxiliary unit’s capital assets that are owned by the institution. For PPV leased assets, an R&R reserve will be maintained by a third party trustee.


7.1.6 Residual Value

(Last Modified on May 1, 2017)

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. For leased assets, generally no residual value will be applied if a ground lease is in effect. See Section 7.11.2 (example 2).


7.1.7 Sale of Capital Assets

(Last Modified on May 1, 2017)

A sale of a capital asset is a type of disposition whereby cash is involved. When as asset is sold to an entity outside of the State of Georgia reporting entity, a gain or loss must be recognized in the accounting records for the difference between the proceeds received from the sale of the capital asset and its net book value. If the asset that is sold has been fully depreciated, the net book value equals the salvage value, if any. No gain or loss would be recognized if cash exchanged equals the net book value of asset.

Example

An asset, which had a net book value of $ 3,000 (historical cost of $ 10,000 less $ 7,000 accumulated depreciation), was sold for $ 2,000, resulting in a loss on sale of asset of $ 1,000 ($ 2,000 minus $ 3,000).


7.1.8 Disposal Other Disposition of Capital Assets

(Last Modified on May 1, 2017)

Disposals/other dispositions related to theft, loss or destruction of capital assets normally would not involve cash, but would result in recognition of a gain or loss. When the capital asset is removed from the accounting records for disposal or other disposition, a loss would be recognized equal to the net book value of the asset to removed. No loss is recognized if the asset is fully depreciated or has no residual value. If the asset in question has a residual value, the residual value is recognized as the loss if the asset is fully depreciated.

Refer to the Department of Administrative Services Georgia Surplus Property Manual for tracking and disposal instructions for State owned assets.


7.1.9 Exchange of Capital Assets

(Last Modified on May 1, 2017)

An exchange is a reciprocal transfer between a government and another organization that results in the government acquiring capital assets by surrendering other capital assets. The transaction usually involves little or no monetary consideration as opposed to a trade-in.

Exchanges between organizations included in the State reporting entity should be recorded at the book value of the assets received whether the assets are similar or not.

    Note: Both State organizations participating in the transfer must report the same book value and these amounts should be reported as Special Item Transfers on the Statement of Revenues, Expenses and Changes in Net Position. Therefore, when institutions participate in capital asset exchanges, they should contact USO-Fiscal Affairs to ensure symmetry in reporting between units within the USG and other State organizations.

Assets acquired by the exchange of assets between the USG system office/USG institution and an organization outside of the State reporting entity should be recorded based on the value of the asset surrendered, if available. Whether the assets are similar or dissimilar will determine if the book value or the fair value of the assets surrendered will be used to record the asset acquired.

Similar assets are assets that are of the same general type, that perform the same function, or that are employed in the same line of operation.

When recording an exchange of similar assets with an entity not included in the State reporting entity, State organizations must use a book value basis for the assets surrendered.

  • When assets are exchanged and no monetary consideration is paid or received, the asset acquired is recorded at the book value of the asset surrendered.
  • When monetary consideration is given as part of the exchange, the asset acquired is 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 with an entity not included in the State’s reporting entity, State organizations must use a fair value basis for the assets surrendered.

  • When assets are exchanged and no monetary consideration is paid or received, the asset acquired is recorded at the fair value of the asset surrendered.
  • When monetary consideration is given as part of the exchange, the asset acquired is recorded at the sum of the cash paid plus the fair value of the asset surrendered.

7.1.10 Capital Asset Impairments

(Last Modified on May 2, 2017)

GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries addresses capital asset impairments. An asset impairment is a significant, unexpected decline in the service utility of a capital asset. The provisions of GASB Statement No. 42 should also be applied when determining impairments of intangible assets. Institutions must evaluate Capital Assets annually for impairment.

Impairments are indicated when events or changes in circumstances suggest that the service utility of a capital asset may have significantly or unexpectedly declined. The determination of an impairment is a two-step process. First potential impairments must be identified and then testing for the impairment must be conducted.

1) Indicators of impairment include:

  • Evidence of physical damage
  • Enactment or approval of laws or regulations or other changes in environmental factors
  • Technological changes or evidence of obsolescence
  • Changes in the manner or duration of use of a Capital Asset
  • Construction stoppage

When one or more of the above circumstances exist, the institution must test for impairment. Testing for the impairment must be conducted to determine if both of the following factors exist.

  • The decline in service utility of the capital asset is so significant that the cost of restoring or maintaining the asset outweighs the benefits provided; and,
  • The decline of service utility is unexpected and not part of the normal life cycle for the asset.

Note: A common indicator of impairment for internally generated intangible assets is development stoppage, such as stoppage of development of computer software due to a change in the priorities of management. Internally generated intangible assets impaired from development stoppage should be reported at the lower of carrying value or fair value. GASB Statement No. 51 adds “development stoppage” to the impairment indicators of GASB Statement No. 42.

After testing, if it is determined that a capital asset has been permanently impaired, the carrying value of the asset (value prior to impairment restoration costs) must be written down by the amount of the asset impairment loss if the impairment loss or insurance proceeds (if any) exceed $ 100,000.

    Example: A building had a net book value of $ 750,000 at date of impairment event. The impairment loss calculation yields a restoration cost ratio (actual restoration/rebuilding costs divided by estimated current replacement costs) of 12% which equates to an asset impairment loss of $ 90,000 ($ 750,000 X .12). Insurance proceeds of $ 400,000 were received on this property. Even with an impairment loss of less than $ 100,000, this property would still meet the threshold for reporting the impairment loss because the insurance recovery exceeded $ 100,000.

Note: When insurance recoveries are involved it is quite possible that a gain could be realized when calculating the impairment.

For impaired capital assets that will remain in service, the method used to calculate the impairment loss should be based on the indicator of impairment as follows:

Indicator of Impairment Method Used to Calculate Impairment Loss (*)
Physical Damage Restoration Cost Approach
Change in Legal or Environmental Factors Service Units Approach
Technological Changes or Obsolescence Service Units Approach
Change in Manner or Duration of Use Service Units Approach or Depreciated Replacement Cost Approach

(*) The methods used to calculate impairment losses are discussed in more detail in SAO’s Statewide Accounting Policy and Procedure Manual’s Section: Capital Assets, Subsection Impairments.

SAO requires each agency to report impairments; therefore, institutions must report any potential impairments to the system office within 20 days of discovery of impairment. Institution must also report results of impairment testing and inform as to any impairment loss/gain.

If capital assets are affected by one or more of the impairment indicators but do not meet both of the impairment tests, the capital asset’s useful life, salvage value and depreciation should be re-evaluated to determine if any changes should be made. Any changes made in these circumstances should be made prospectively.
An Impairment loss/gain must be reported as follows in the institution’s Annual Financial Report:

  1. If the impairment event was unusual and infrequent, report the loss/gain as an Extraordinary Item, which is separately reported at the bottom of the Statement of Revenues, Expenses and Changes in Net Position (SRECNP).
  2. If the impairment event was unusual or infrequent and within Management’s control, report the loss/gain as a Special Item, which is separately reported at the bottom of the SRECNP.
  3. If the impairment event was neither unusual nor infrequent, report the loss/gain as an Operating Expense on the SRECNP.

As evidence that a Capital Asset impairment has been evaluated, institutions should complete the Capital Asset Impairment Questionnaire annually.


7.1.11 Assets Held in Trust

(Last Modified on May 1, 2017)

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 methodology for such assets. Since the institution does not own these assets, the assets should be recorded at $ 0.00 cost.


7.1.12 Controlled Assets

(Last Modified on May 1, 2017)

Controlled assets are assets of the university system that must be secured and tracked as inventory. Moveable personal property with an acquisition cost of $3,000 or more must be inventoried and tracked by units of the university system. All weapons (including firearms), regardless of value, must be maintained and tracked in the asset management system. In addition to controlled assets, an institution 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.


7.1.13 Jointly Funded Capital Assets

(Last Modified on May 1, 2017)

Capital Assets paid for jointly by the state and other governmental entities should be capitalized by the entity responsible for future maintenance.


(Last Modified on May 4, 2017)

Capital asset transactions, which are housed in the Asset Management module, effect two accounting ledgers: the Capital Ledger and the Actuals Ledger. When capital assets are acquired, they are added to the Asset Management module and accounting entries are created which update the respective accounting/ reporting ledgers. The discussion in this section will center on how capital asset transactions affect the Capital Ledger and the Actuals Ledger.

When a capital asset is acquired/purchased, a debit is made in the Capitals Ledger to an account ranging from 161XXX to 1682XX. The credit offset is normally to an expense offset account, liability account or gift of asset account depending on how the asset was obtained. If a current flow of operating resources were associated with the acquisition, the Actuals ledger would also be affected by the asset transaction.

Example: A building, with a 15-year asset life, was purchased with cash for $ 150,000. For example purposes only, there will be no residual value assigned to this asset. After 14 years, the building is sold for $ 15,000.

Journal Entries for these transactions would be as follows:

Actuals Ledger (Purchase of Building from current operating funds)

860100 Building and Building Improvements-Expense150,000 
Cash 150,000



Capital Ledger (Recording Capital Asset and Depreciation Expense)

162000 Building and Building Improvements-Asset150,000 
860100 Building and Building Improvements-Expense 150,000
890100 Depreciation Expense (Yearly amount)10,000 
162900 Accumulated Depreciation-Buildings 10,000



Actuals Ledger (Sale of Building)

Cash15,000 
493310 Salvage Sales Capital Assets 15,000



 
Capital Ledger (Retirement of Asset)

162900 Accumulated Depreciation-Buildings (10,000 X 14)140,000 
493300 Realized Gain/Loss-Retirement of Capital Asset (non-cash)10,000 
162000 Building and Building Improvements-Asset150,000



Notes related to asset transactions of this nature:

1)  The 860100 expense accounts offset between the ledgers and the overall net entry is an increase to capital assets and a decrease to cash.

2)  When the asset is sold, the net gain is effectively $ 5,000 across all ledgers, which is the salvage sales of $ 15,000 less loss on retirement of $ 10,000.

3)  If this Building had been an ongoing construction project (eg. MRR campus managed project) instead of an outright purchase, the construction payments to the contractor and the architect fees would likely have been recorded in the Actuals Ledger in the 75XXXX series of accounts. In the Capitals Ledger, the asset would be recorded in the 169000-Construction Work In Progress account and the offsetting credit would have been in 860100 Building and Building Improvements. In instances like this, reconciliations must be maintained to show how the 75XXXX accounts in the Actuals Ledger offset the 860100 in the Capitals Ledger. Actual depreciation charges would not start until the construction is completed and the asset is placed in service and transferred to a depreciable capital asset account.


For specific examples of capital lease transaction accounting, see section 7.11.2.

7.3.1 Land Definition

(Last Modified on May 1, 2017)

Land is the surface or crust of the earth, which can be used to support structures, and may be used to grow crops, grass, shrubs, and trees. Land is characterized as having an unlimited life (indefinite).


7.3.2 Land Improvement Definition

(Last Modified on May 1, 2017)

Land improvements consist of betterments, site preparation and site improvements (other than buildings) that ready land for its intended use. The costs associated with improvements to land are added to the cost of the land.


7.3.3 Depreciation Methodology

(Last Modified on May 1, 2017)

Land and land improvements are inexhaustible assets and do not depreciate over time.


7.3.4 Capitalization Threshold

(Last Modified on May 2, 2017)

All acquisitions of land and land improvements will be capitalized. Expenditures to be capitalized as land and land improvements should include:

  • Original purchase price or fair market value at time of gift
  • Commissions, such as brokers’ commissions
  • Professional fees, such as title searches, architectural, legal engineering, appraisal, surveying, environmental assessments, etc.
  • Land excavation, filling, grading, drainage, etc.
  • Demolition of existing buildings and improvements, less salvage
  • Removal, relocation, or reconstruction of property of others, such as railroad tracks, telephone lines, power lines, etc.
  • Interest on mortgages accrued at date of purchase
  • Accrued and unpaid taxes at date of purchase
  • Other costs incurred in acquiring the land
  • Water wells, including the initial cost for drilling, the pump and its casing, etc.
  • Rights-of-way

Note: Land and Land Improvements held as investments should not be recorded as capital assets. They should be recorded as investments at fair value, with any changes to fair value being reported as investment income.


7.4.1 Building Definition

(Last Modified on May 1, 2017)

A building is a structure that is permanently attached to the land, has a roof, is partially or completely enclosed by walls, and is not intended to be transportable or moveable.


7.4.2 Building Improvement Definition

(Last Modified on May 1, 2017)

Building improvements are capital events that materially extend the useful life of a building or increase the value of a building, or both. A building improvement should be capitalized as a betterment and recorded as an addition of value to the existing building if the expenditure for the improvement meets or exceeds the capitalization threshold, or increases the life or value of the building by 25 percent of the original life or cost.

Building improvements meeting the capitalization threshold or increasing the building value by at least 25 percent of the original cost should be recorded as an addition of value to the existing asset using a parent/child asset management relationship. The useful life of the improvement (the “child”) should generally not exceed that of the original asset (the “parent”). However, if the improvement is not an integral part of the original asset, it may possess a different useful life than the parent asset.

For example, the useful life of a floor renovation project should not exceed the useful life of the building asset to which it relates because it is an integral part of the building that cannot exist on its own. Alternately, a wing addition to a building could have a useful life that exceeds the life of the building to which it is attached because it did not exist as part of the original asset.

Building improvements increasing the building’s useful life by at least 25 percent of the original life period should be capitalized in one of two ways:

  1. Capitalize as a betterment and record as an addition of value to the existing building using a parent/child asset management relationship. The parent’s useful life should be modified for the increase in useful life.
  2. If fully depreciated, recapitalize the eligible improvements as a new building asset and retire the original building asset. This procedure would be used in cases where major renovations are completed.

7.4.3 Depreciation Methodology

(Last Modified on May 1, 2017)

The straight-line depreciation method (historical cost less residual value, divided by useful life) will be used for buildings, building improvements, and their components. For useful lives of buildings, see Sections 7.15.1 and 7.15.2. Subsequent improvements that change the use or function of the building shall be depreciated.

Buildings designated as “historical” by the Georgia Department of Natural Resources will not be depreciated unless used in the operations of the University System of Georgia. However, any improvements or betterments not deemed “historical” by the Georgia Department of Natural Resources will be depreciated the same as any other improvements or betterments made to a building.


7.4.4 Capitalization Threshold

(Last Modified on May 1, 2017)

The capitalization threshold for buildings and building improvements is $100,000. Examples of expenditures to be capitalized as buildings include:

Purchased Buildings

  • Original purchase price
  • Expenses for remodeling, reconditioning, or altering a purchased building to make it ready to use for the purpose for which is was acquired (this would include payroll and related costs for employees directly involved in the modifications)
  • Environmental compliance, such as asbestos abatement, etc.
  • Professional fees, such as legal, architectural, inspections, title searches, etc.
  • Payment of unpaid or accrued taxes on the building to date of purchase
  • Cancellation or buyout of existing leases
  • Other costs required to place or render the asset into operation

Constructed Buildings

  • Completed project costs
  • Interest accrued during construction
  • Cost of excavating, grading, or filling of land for a specific building
  • Expenses incurred for the preparation of plans, specifications, blueprints, etc.
  • Cost of building permits
  • Costs of temporary buildings used during construction
  • Unanticipated costs such as rock blasting, piling, relocation of the channel of an underground stream, etc.
  • Permanently attached fixtures or machinery that cannot be removed without impairing the use of the building
  • Additions to buildings, such as expansions, extensions, enlargements, etc.

Building Improvements/Replacements

The following are examples that should be capitalized as improvements to buildings if (1) the addition of value to the existing building meets or exceeds the capitalization threshold, or (2) the addition increases the life or value of the building by 25 percent of the original life or cost.

  • Conversion of attics, basements, etc., to usable office clinic, research, or classroom space.
  • Structures attached to the building, such as covered patios, sunrooms, garages, carports, enclosed stairwells, etc.
  • Installation or upgrade of heating and cooling systems, including ceiling fans and attic vents
  • Original installation or upgrade of wall or ceiling covering, such as carpeting, tile, paneling, parquet, etc.
  • Structural changes, such as reinforcement of floors or walls, installation or replacement of beams, rafters, joists, steel grids, or other interior framing
  • Installation or upgrade of window or doorframes, upgrading of windows or doors, built-in closets and cabinets, etc.
  • Interior renovation associated with casings, baseboards, light fixtures, ceiling trim, etc.
  • Exterior renovation, such as installation or replacement of siding, roofing, masonry, etc.
  • Installation or upgrade of plumbing and electrical wiring
  • Installation or upgrade of phone or closed circuit television systems, networks, fiber optic cable, wiring required in the installation of equipment that will remain in the building, etc.
  • Other costs associated with the above improvements

Examples of building improvements that should be capitalized (even when the improvements do not meet the $100,000 threshold):

  • Institution has a storage/maintenance building that originally cost $ 200,000 with a useful life of 15 years. After 10 years the building was structurally reinforced with steel beams at a cost of $ 50,000, which extended the useful life to 20 years. Even though the $ 50,000 did not meet the capitalization threshold, this improvement would be capitalized because it extended the useful life by 5 years (33%).
  • Institution has a greenhouse that originally cost $ 300,000 with a 25-year useful life. In year 10, the original wooden floor was replaced with a concrete reinforced floor. The cost of the improvement was $ 80,000 and the useful life remained the same. The $ 80,000 should be capitalized because it improved the value of the overall asset value by 27%, which is more than 25% of the original cost.

7.4.5 Building Maintenance Expense

(Last Modified on May 1, 2017)

The following are examples of expenditures, which should be recorded as maintenance expenses because they do not qualify as capital improvements.

  • Adding, removing, and/or moving of walls relating to renovation projects that are not considered major rehabilitation projects and do not increase the value of the building
  • Improvement projects of minimal or no added life expectancy and/or value to the building
  • Plumbing or electrical repairs
  • Cleaning, pest extermination, or other periodic maintenance
  • Interior decoration, such as draperies, blinds, curtain rods, wallpaper, etc.
  • Exterior decoration, such as detachable awnings, uncovered porches, decorative fences, etc.
  • Maintenance-type interior renovation, such as repainting; touch-up plastering; replacement of carpet, tile, or panel sections; sink and fixture refinishing, etc.
  • Maintenance-type exterior renovation, such as repainting, replacement of deteriorated siding, roof or masonry sections, etc.
  • Replacement of a part or component of a building with a new part of the same type and performance capabilities, such as replacement of an old boiler or roof with a new one of the same type and performance capabilities or replacing a shingle roof with another shingle roof.
  • Any other maintenance-related expenditure that does not increase the value or useful life of the building

7.5.1 Facilities and Other Improvements Definition

(Last Modified on May 1, 2017)

Facilities (other than general use buildings) and Other Improvements are depreciable assets that are built, installed or established to enhance the quality or facilitate the use of land for a particular purpose.


Facilities should be capitalized if the new asset is at the capitalization threshold of $ 100,000. Other improvements should be capitalized if the improvement is at the capitalization threshold, or the expenditure increases the life or value of the original asset by 25 percent of the original life period or cost.

Other Improvements should be recorded as an addition of value to the existing asset using a parent/child asset management relationship. The useful life of the addition (the “child”) should generally not exceed that of the original asset (the “parent”). However, if the Other Improvement is not an integral part of the original asset, it may possess a different useful life than the parent asset. The useful life of the parent may be modified to reflect an increase in useful life.


7.5.2 Depreciation Methodology

(Last Modified on May 1, 2017)

The straight-line depreciation method (historical cost less residual value, divided by useful life) will be used for facilities and other improvements.


7.5.3 Capitalization Threshold

(Last Modified on May 1, 2017)

The capitalization threshold for Facilities and Other Improvements is $100,000. Examples of expenditures to be capitalized as Facilities and Other Improvements include:

  • Fencing and gates
  • Signs at institution entrances
  • Landscaping
  • Parking lots, driveways, parking barriers, etc.
  • Lighting systems, such as for the campus, parking areas, streets, etc.
  • Outside sprinkler systems
  • Recreation areas and athletic fields, including bleachers
  • Golf courses
  • Paths and trails
  • Septic systems
  • Swimming pools, tennis courts, basketball courts, etc.
  • Fountains
  • Plazas and pavilions
  • Retaining walls

7.6.1 Infrastructure Definition

(Last Modified on May 1, 2017)

Infrastructure assets are long-lived capital assets that normally are stationary in nature and can be preserved for a significantly greater number of years than most capital assets. Infrastructure assets are often linear and continuous in nature. The capitalization threshold for new infrastructure is $ 1,000,000.


7.6.2 Infrastructure Improvements

(Last Modified on May 1, 2017)

Infrastructure improvements are capital events that materially extend the useful life or increase the value/capacity of the infrastructure, or both. For example, additional lanes may added to a highway or the weight capacity of a bridge could be increased, which increases overall capacity, thus increasing the service level of the infrastructure. Another example would be re-engineering of a heating and cooling plant which produces the same temperature changes at a reduced cost.

Infrastructure improvements should be capitalized and recorded as additions to the value of the infrastructure if the improvement or addition to value is $100,000 or more. The improvement should be depreciated over the remaining life of the asset using the parent/child relationship in PeopleSoft. If the improvement increases the life of the asset, the asset takes on a new useful life.

If the $100,000 was expended intermittently during the year and if the intent of the expenditures are to allow the infrastructure to continue to be used as intended for the originally established useful life, those costs should be considered expenses rather than capital improvements


7.6.3 Maintenance Costs of Infrastructure

(Last Modified on May 1, 2017)

Maintenance costs allow infrastructure to continue to be used during its originally established useful life. Maintenance costs are expensed in the period incurred.


7.6.4 Preservation Costs

(Last Modified on May 1, 2017)

Preservation costs are generally considered to be those outlays that extend the useful life of an asset beyond its original estimated useful life, but do not increase the capacity or efficiency of the asset. Preservation costs should be capitalized if $100,000 or more. Since the useful life of the asset has been extended, the useful life of the asset should be changed.


7.6.5 Depreciation Methodology

(Last Modified on May 1, 2017)

The straight-line depreciation method (historical cost less residual value, divided by useful life) will be used for infrastructure assets.


7.6.6 Capitalization Threshold

(Last Modified on May 1, 2017)

The capitalization threshold for infrastructure is $1,000,000 for major systems ($100,000 for improvements to existing systems). Examples of major systems to be capitalized as infrastructure include:

Road Systems

Examples of costs to be capitalized would include payments, bridges, lighting systems (including traffic control devices) signage, curbs, and sidewalks.

Water Systems

Examples of costs to be capitalized would include distribution lines, fire hydrants, water meters, valves, joints and bends.

Drainage Systems

Examples of costs to be capitalized would include catch basins, storm drains, inlets, pipes, detention/retention facilities (ponds), and junction boxes.

Sewer Systems

Examples of costs to be capitalized would include piping, manholes, laterals, and lift stations

Fiber Optic and Telephone Distribution Systems Between Buildings

Examples of costs to be capitalized would include fiber optic cable and telephone distribution lines.

Waterway Systems

Examples of costs to be capitalized would include canals, wharves, docks, bulkheads, boardwalks and sea walls.

Note: The six major infrastructure systems identified above are not all inclusive. Some institutions may have other infrastructure assets that do not fit into these six categories. Examples could be major electrical lines or hubs, radio and television towers, etc. If management believes that their institution has infrastructure assets that have not been captured in the categories listed above, please contact the system office to discuss capitalization.


7.7.1 Equipment Definition

(Last Modified on May 1, 2017)

Equipment includes machinery, furniture, vehicles and other personal property that is either a fixed or a movable tangible asset to be used for operations, the benefits of which extend beyond one year from date of acquisition and rendered into service. Improvements or additions to existing equipment that meet the capitalization threshold and increase the value or life of the asset by 25 percent of the original cost or life should be capitalized and recorded as an addition to the value of the existing asset using a parent/child asset management relationship. The useful life of the parent may be modified to reflect an increase in useful life.

Generally, the useful life of the addition or improvement (the “child”) should not exceed that of the original asset (the “parent”). However, if the improvement is not an integral part of the original asset, it may possess a different useful life than the parent asset. For example, new memory in an existing file server could possess a different useful life than its parent because if necessary, this memory could be moved to another file server. See Section 7.1.15 for discussion on component depreciation.

For schedule of useful lives of capitalized assets, see Appendix, Section 7.15.3.

Note: Costs of extended warranties and/or maintenance agreements that can be separately identified from the cost of the equipment should not be capitalized.


7.8.1 Library Books and Reference Materials Definition

(Last Modified on May 1, 2017)

A library book is generally a literary composition bound into a separate volume and identifiable as a separate copyrighted unit. Library reference materials are information sources other than books which include journals, periodicals, microforms, audio/visual media, computer-based information, manuscripts, maps, documents, and similar items that provide information essential to the learning process or which enhance the quality of academic, professional or research libraries. Changes in value for professional, academic or research libraries may be reported on an aggregated net basis.


7.8.2 Library Characteristics

(Last Modified on May 1, 2017)

A professional, academic or research library normally has one or more of the following characteristics:

  1. Internal controls are in place in lieu of central property management.

  2. Information is housed in a separate centralized location.

  3. Physical security measures are in place to protect the assets.

  4. Checkout procedures and policies exist and are used.

  5. Individual item costs and supplemental information is generally contained in a supplemental database.

  6. Volumes assigned to libraries are typically available to employees, students, and other individuals for checkout or use.

  7. Existence of the library helps the institution fulfill its mission.

  8. The value is material to the organization.

  9. Equipment assigned to libraries typically remains under central security for on-premises use.

USG system libraries will be reported on a composite basis by making net adjustments to total value to reflect increase or decrease in total value. Net adjustments must be made at least once annually by the close of the fiscal year.


7.8.3 Depreciation Methodology

(Last Modified on May 1, 2017)

The straight-line depreciation method will be used. The useful life of library assets is 10 years. For depreciation methodology, please see worksheet associated with Year- end Journal Entry # 17.


7.9.1 Works of Art and Historical Treasures Definition

(Last Modified on May 1, 2017)

Works of art and historical treasures are collections or individual items of significance that are owned by an institution, which meet the following criteria:

  • Assets are held for public exhibition, education or research in furtherance of public service rather than for financial gain,
  • Assets are protected, cared for and preserved, and
  • Assets are subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.

Exhaustible collections or items are assets whose useful lives are diminished by display or educational or research applications. Inexhaustible collections or items are assets for which the economic benefit or service potential is consumed so slowly that the estimated useful lives are extraordinarily long. Because of their cultural, aesthetic, or historical value, the holder of the asset applies efforts to protect and preserve the asset in a manner greater than that for similar assets without such cultural, aesthetic, or historical value.


7.8.4 Capitalization Threshold

(Last Modified on May 1, 2017)

State Accounting Office (SAO) policy requires that all library collections that exceed $ 100,000 in value must be capitalized. Since all institutions have total library collections, which exceed this threshold, all purchases of books and materials for a professional, academic or research library must be capitalized. Library acquisitions are valued at cost or other reasonable basis, while deletions are valued at annually adjusted average cost. The library should maintain records of all books and other library items, which should suffice as detailed inventory records.

Books periodicals and other materials purchased, but not used in a library, should be expensed unless they constitute a capital event. Examples of expenditures to be capitalized as library books and reference materials include:

  • Invoice price
  • Freight charges
  • Handling
  • In-transit insurance charges
  • Binding
  • Reproduction and like costs required to place assets in service, with the exception of library salaries

Note: E-Books and other electronic reference materials are to be treated as software. Please refer to Section 7.10 for guidance on capitalization.


7.9.2 Depreciation Methodology

(Last Modified on May 1, 2017)

The straight-line depreciation method (historical cost less residual value, divided by useful life) will be used for exhaustible collections.

Note: Inexhaustible items should not be depreciated.


7.9.3 Capitalization Threshold

(Last Modified on May 1, 2017)

All works of art and historical treasures acquired or donated will be capitalized, unless held for financial gain. Works of Art and historical treasures should be capitalized at historic cost or fair value at date of donation.

If a collection is held for financial gain and not capitalized, disclosures must be made in the notes of the financial statements to provide a description of the collection and the reasons these assets are not capitalized. When donated collection items are added to non-capitalized collections, program expense(s) equal to the amount of revenue(s) should be recognized.

Examples of expenditures to be capitalized as works of art and historical treasures include:

  • Collection of rare books and manuscripts
  • Maps, documents, and recordings
  • Works of art such as paintings, sculptures, and designs
  • Artifacts, memorabilia, and exhibits
  • Unique or significant structures

7.7.2 Depreciation Methodology

(Last Modified on May 1, 2017)

The straight-line depreciation method (historical cost, divided by useful life) will be used for equipment.


7.7.3 Capitalization Threshold

(Last Modified on May 1, 2017)

The capitalization threshold for equipment is $5,000.

Examples of expenditures to be capitalized as equipment include:

  • Original contract or invoice price
  • Freight charges
  • Import duties
  • Handling and storage charges
  • In-transit insurance charges
  • Applicable sales, use, and other taxes imposed on the acquisition
  • Installation charges
  • Charges for testing and preparation for use
  • Costs of reconditioning used items when purchased
  • Parts and labor associated with the construction of equipment

(Last Modified on May 1, 2017)

GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets establishes standards for accounting and reporting of intangible assets. An intangible asset is property, which possesses the following characteristics:

  • Lack physical substance, such as computer software
  • Nonfinancial in nature which has no monetary form
  • Initial useful life extends beyond one reporting period.

Examples of intangible assets include easements, water rights, timber rights patents, trademarks and computer software. Intangible assets may be purchased, licensed or internally generated.

Intangible assets should be measured/valued in the same manner as other capital assets: historical cost, or if donated, estimated fair value at date of donation.

7.11.1 Leased Land, Buildings, Equipment and Other Assets

(Last Modified on May 1, 2017)

A lease agreement is considered a capital lease agreement when substantially all of the risks and/or rewards of ownership are assumed by the lessee. Land, buildings, equipment and/or other assets under capital lease, which meet or exceed established 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. A bargain purchase option gives the lessee the opportunity to acquire the property at the end of the lease for a very favorable 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 long-term leases for purposes of evaluating this criterion. Adequate documentation must be maintained to justify treatment of leased assets.

  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 operating leases and reported in the notes to the financial statements.


7.11.2 Calculation of Leased Asset and Liability Amounts

(Last Modified on May 4, 2017)

The lessee treats the capital lease as if an asset were being purchased over time. It is essentially a financing transaction whereby the asset is acquired and a corresponding obligation (liability) is created.

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. If lessor’s implicit interest rate in the lease is less than the lessee’s incremental borrowing rate and is known by the lessee, the lessee must use the lessor’s implicit rate. The lessor’s implicit interest rate is considered more accurate because it is effectively the discount rate that applies to difference between total minimum lease payments and fair value of the leased property.

Note: Generally, “cost” should be the basis we use, because it is unlikely that fair market value would be less than cost basis. If fair market value is determined to be the lower number, please contact the System Office before making entries.

In an effort to be consistent in accounting for PPV constructed capital leased assets and to match lease liability amounts to the lease receivable amounts reported by lessors, it has been determined that actual project costs should be used as the “cost” basis. Actual project costs will consist of construction/purchase costs plus capitalized interest paid during the construction period. These amounts should be obtained from the lessor/foundation.

Some capital lease obligations have executory costs built into the total lease payment. These are costs such as insurance, maintenance and taxes. If such costs are part of the periodic lease payments, they should be shown separately on the schedule of future lease payments as a reduction from the total minimum lease payments to get to the net lease liability outstanding. If the lessee pays these costs directly, they would be reported as part of normal operating expenses of the institution and there would be no adjustment to the scheduled 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, 20XX 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. In addition, the lessor’s implicit interest rate is not stated.

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 the four criteria has already been met.

Step 2: Determine the cost of the asset to be recorded. If the cost of the asset is provided by the lessor, use that number as the cost basis. If not, compute the present value of the minimum lease payments, excluding executory costs.

In this example, since the lease is with a third party and the cost of the asset was known to be $8,500, the present value of the minimum lease payments can be presumed to be $8,500. Since this example included a $500 down payment, the debt amortization schedule will be based on a debt amount of $ 8,000 for 3 years. Generally, the lessor should be able to provide an amortization schedule including principal and interest payments. However, if for some reason, amortization schedules are not available from the lessor, the institution/lessee will need to create amortization schedules using the Internal Rate of Return (IRR) function available from Excel. In this example, since the debt amount is known to be $ 8,000 and total payments on the lease are $ 9,000, by using the IRR function an interest rate implicit to the lease of 6.13% is calculated.

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

JOURNAL ENTRIES

  • To record the lease on the books at July 1, 20XX. Since a cash down payment is required, the Actuals Ledger will be used to record that payment, with the Capital Ledger recording the asset and liability.
    ACTUALS LEDGER
    DR 818100 Lease Purchase-Principal $500
    CR Cash $ 500


    CAPITAL LEDGER
    DR 165100 Leased Equipment $ 8,500
    CR 219400 Lease Purchase Obligations-Current $8,500 (*)
    (*) Since the lease liability automatically posts to Lease Obligations-Current Year, Year-end journal entry # 18 (b) is available to correctly break out current vs long-term portions of lease obligation.


  • To record the first year’s payment due on June 30, 20XX in Actuals Ledger. Also record depreciation expense and reduction of principal paid in Capitals Ledger.
    ACTUALS LEDGER
    DR 818200 Lease Purchase: Interest expense ($8,000 x 6.13%) $ 490
    DR 818100 Lease Purchase-Principal ($3,000 - $490.40) $2,510
    CR Cash $3,000

    CAPITALS LEDGER
    DR 890100 Depreciation expense ($8,500/5) (*) $1,700
    CR 165190 Accumulated depreciation-Leased Equipment $1,700
    DR 219400 Lease Purchase Obligation-Current $2510
    CR 818100 Lease Purchase - Principal $2510
    (*) The asset is depreciated over the assets useful life of 5 years and not the lease term, which is only 3 years.


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

University Foundation(lessor) leases a building to the University (lessee) for an initial term of one year plus twenty-two renewable one-year terms (total 23 years) beginning July 1, 20XX at an annual rental of $ 883,531 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, unless the University executes the terms of the ground lease. The first payment is due at the end of the first year and each subsequent year. As noted earlier, the cost basis for assets leased under the PPV program will be the construction costs paid from the Project Cost Fund plus capitalized interest paid during the construction period. This information is available from the lessor. If there are any unspent proceeds remaining in the Project Cost Fund at time asset is turned over to institution per the Certificate of Occupancy, the foundation should record an Accounts Payable for the unspent proceeds remaining. By making this entry, all Project Cost Funds, along with capitalized interest, will be included in the cost basis of the asset transferred to the University. There are no executory costs associated with this lease, and the University’s incremental borrowing rate is unknown. For this example, Project Cost funds spent were $11,700,000, unspent funds remaining in Project Cost Fund at time of transfer were $ 500,000 and capitalized interest paid during construction period was $ 300,000 for a total project cost of $ 12,500,000.

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 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.

The University Foundation provided an amortization schedule for principal and interest using an interest rate of 4.5%.

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

  • Ownership Transfer: Yes, but not applicable. 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<$12,500,000PV)

Step 2: Record the leased asset at the lesser of the assets’ fair market value at the inception of the lease or the present value of the minimum lease payments. Since the cost is known to be $12,500,000, the present value of the minimum lease payments is essentially the same as the fair market value, thus the leased asset and lease liability will be recorded at $ 12,500,000.

JOURNAL ENTRIES

  • To record the lease on the books at July 1, 20XX. Since no cash down payment involved, addition to AM module will update Capital Ledger only.
    CAPITAL LEDGER
    DR 162100 Leased Building and Building Improvements $12,500,000
    CR 219400 Lease Purchase Obligations-Current $12,500,000 (*)
    (*) Since the lease liability automatically posts to Lease Obligations-Current Year, Year-end journal entry # 18 (b) is available to correctly break out current vs long-term portions of lease obligation.
  • To record the first payment due on June 30, 20xx in Actuals Ledger. In addition, depreciation expense and reduction in lease obligation will be recorded in Capital Ledger.
    ACTUALS LEDGER
    DR 818200 Lease Purchase: Interest expense ($12,500,000 x 4.5%) $562,500 (*)
    DR 818100 Lease Purchase-Principal $321,031
    CR Cash $ 883,531
    (*) Interest will normally be calculated monthly or semi-annually, which would yield different results than this sample, which used an annual interest calculation for example purposes only.
    CAPITAL LEDGER
    DR 890100 Depreciation expense (12,500,000/23 years) $ 543,478 (*)
    CR 162190 Accumulated Depreciation-Leased Building $543,478
    DR 219400 Lease Purchase Obligation-Current $321,031
    CR 818100 Lease Purchase - Principal $321,031
    (*) Since the University has executed a ground lease with the lessor, which gives the University the option to require that the building demolished at the end of the lease term, it is appropriate to depreciate the building over the shorter life of the lease (23 years) as opposed to the normal depreciable life as set by BPM standards (30 years). In addition, no residual value was applied to this asset because of the ground lease.


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, the asset is built on foundation property and there is no need for any ground lease between the University and the University Foundation. The land has a value of $ 500,000. Total base rent/lease liability payments are $ 918,872 yearly. In addition, additional rent of $ 300,000 per year is paid by University into Renewals and Replacement Reserve held by Trustee. The $ 300,000 is considered executory costs.

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 ($13,000,000 x 90% = $11,250,000<$ 13,000,000 PV)

Step 2: Record the leased asset at the lesser of the assets’ fair market value at the inception of the lease or the present value of the minimum lease payments. Since the cost is known to be $12,500,000 for the building and $ 500,000 for the land, the present value of the minimum lease payments is essentially the same as the fair market value, thus the leased asset and lease liability will be recorded at $ 13,000,000.

JOURNAL ENTRIES

To record the lease on the books at July 1, 20XX. Only the Capitals ledger is effected since no down payment involved. The land value and building value must be separated when recording the transaction.

    CAPITALS LEDGER
    DR 161100 Leased Land and Land Improvements $ 500,000
    DR 162100 Leased Building and Building Improvements $12,500,000
    CR 219400 Lease Purchase Obligations-Current $ 13,000,000 (*)
(*) Since the lease liability automatically posts to Lease Obligations-Current Year, Year-end journal entry # 18 (b) is available to correctly break out current vs long-term portions of lease obligation.

To record the first payment due on June 30, 20XX in the Actuals Ledger. Also, the additional rent payment is recorded in Actuals Ledger. Depreciation expense and reduction in lease obligation will be recorded in Capital Ledger.

    ACTUALS LEDGER
    DR 818200 Lease Purchase: Interest expense ($ 13,000,000 x 4.5%) $ 585,000
    DR 818100 Lease Purchase-Principal $ 333,872
    CR Cash $ 918,872
    DR 719100 Rents $ 300,000
    CR Cash $ 300,000
Note: The additional rents portion of the lease payment that is sent to the Trustee to be held for repairs and renovations of the leased property under the PPV program should be included as part of executory costs.

    CAPITAL LEDGER
    DR 890100 Depreciation expense ($12,500,000 x 90%)/30 years) $375,000
    CR 162190 Accumulated Depreciation-Leased Building $ 375,000
    DR 219400 Lease Purchase Obligation-Current $333,872
    CR 818100 Lease Purchase - Principal $338,872
Note: Leased Land should not be depreciated. Also, residual values are currently calculated as assets are added to the Asset Management Module as long a proper asset profiles are used.

Lessor accounting treatment follows the same rules as Lessee. From Examples 2 and 3, the University Foundation should also treat the lease as a capital lease and record a Lease Receivable. The Lease Receivable recorded by the University Foundation should agree with Lease Purchase Obligation reported by the University. Universities must work with their Foundations to ensure consistent lease treatment.

7.12.1 Construction in Progress Definition

(Last Modified on May 1, 2017)

Construction in progress reflects the economic construction activity status of buildings and other structures, infrastructure (roadways, energy distribution systems, pipelines, etc.), additions, alterations, reconstruction, installation, and maintenance and repairs that are substantially incomplete.


7.12.2 Depreciation Amortization Methodology

(Last Modified on May 1, 2017)

Depreciation is not applicable while assets are accounted for as construction in progress. Refer to the appropriate capital asset category when the asset is capitalized.


(Last Modified on May 1, 2017)

The auxiliary enterprises renewals and replacement (R&R) reserve was established to be used for capital improvements to institutionally owned auxiliary capital assets. Major repairs, such as roof replacements, which do not meet applicable capitalization thresholds, may also be funded from these reserves. However, general repairs and maintenance should be funded from operating funds.

The R&R reserve should not be used to make any improvements to Public Private Venture (PPV) projects. PPV project lease payments include a maintenance component that is held by a third party trustee for use in making repairs and renovations to existing PPV projects.

Please refer to Section 3.4.2.6 of this Manual for instructions on capital improvements and reserve requirements related to dining and catering contracts.

7.12.3 Capitalization Threshold

(Last Modified on May 1, 2017)

Construction in progress assets should be capitalized to their appropriate capital asset categories upon the earlier occurrence of execution of substantial completion contract documents, occupancy, or when the asset is placed into service.


7.15.1 Building Classes of Construction

(Last Modified on May 1, 2017)

Class Frame Floor Roof Walls
A Structural steel columns and beams, fireproofed with masonry, concrete, plaster, or other incombustible material Concrete or concrete on steel deck, fireproofed Formed concrete, precast slabs, concrete or gypsum on steel deck, fireproofed Nonbearing curtain walls, masonry, concrete, metal and glass panels, stone
B Reinforced concrete columns and beams; fire-resistant construction Concrete or concrete on steel deck, fireproofed Formed concrete, precast slabs, concrete or gypsum on steel deck, fireproofed Nonbearing curtain walls, masonry, concrete, metal and glass panels, stone
C Masonry or concrete load-bearing walls with or without pilasters; masonry or concrete walls with steel, wood or concrete frame Wood or concrete plank on steel floor joists, or concrete slab on grade Wood or steel joists with wood or steel deck; concrete plank Brick, concrete block, or tile masonry tilt-up, formed concrete, curtain walls
D Wood or steel studs in bearing wall, wood frame, primarily combustible construction Wood or steel floor joists or concrete slab on grade Wood or steel joists with wood or steel deck Almost any material except masonry or concrete; generally combustible construction
S Metal bents, columns, girders, purlins, and girts without fireproofing, incombustible construction Wood or steel deck on steel floor joists, or concrete slab on grade Steel or wood deck on steel joists Metal skin or sandwich panels; generally incombustible

7.15.2 Building Useful Life by Type and Class of Construction

(Last Modified on May 1, 2017)

Public Buildings A B C D S
Good and Excellent libraries 60 60 55 50 50
Average libraries 55 55 50 45 45
Low-cost libraries 50 50 45 40 40
Good and excellent medical offices 50 50 45 40 40
Average and low-cost medical offices 45 45 40 35 35
Good and excellent governmental buildings 60 60 55 50
Average and low-cost governmental buildings 55 55 50 40 40
Good and excellent general hospitals 50 50 45 40
Average and low-cost general hospitals 45 45 40 35 35
Good and excellent convalescent hospitals 50 50 45 40
Average and low-cost convalescent hospitals 45 45 40 35 35
Average and good dispensaries 35 30 30
Average and good veterinary hospitals 45 45 40 35 35
Low-cost veterinary hospitals 35 30 30
Colleges and Universities A B C D S
Good and excellent buildings 60 60 50 45 45
Average buildings 50 50 45 40 40
Low cost buildings 40 35 35
Theaters, and Auditoriums A B C D S
Excellent auditorium 55 55 50 45
Good and average auditorium 50 50 45 40 40
Low-cost auditorium 40 35 35
Good and excellent theater 50 50 45 40
Average and fair theater 45 45 40 35 35
Low-cost and cheap theater 35 30 30
Good bowling alleys 40 35 35
Low-cost average bowling alleys 35 30 30
Good skating rink and tennis clubs 45 40 40
Average skating rink and tennis clubs 40 35 35
Low-cost skating rink and tennis clubs 35 30 30
Good handball racquetball clubs 45 40 40
Average handball racquetball clubs 40 35 35
Sheds and Farm Buildings A B C D S
Good creameries 45 45
Average creameries 45 45 35 30
Low-cost creameries 25 20
Grain elevator facilities 60 55
Grain storage buildings 30 30
Good and excellent dairies … 35 30 30
Average dairies and fruit packing buildings 30 25 25
Low-cost dairies 20 20 15
Bulk fertilizer storage 30 30
Excellent barns and stables 40 35
Good barns and stables 35 30 30
Average barns, hog barns, stables and silos 30 25 25
Low-cost barns and stables 20 15 15
Excellent poultry houses 30 25 25
Good poultry houses, equipment, and utility sheds 25 20 20
Average poultry, equipment, and utility buildings 20 15 15
Low-cost poultry houses 15 15 15
Tobacco barns 20 20 15
Portable outbuildings 15 15
Sheds 10 10
Good greenhouses 30 40
Average lath and greenhouses 20 25

7.15.3 Useful Lives of Capitalized Assets

(Last Modified on May 1, 2017)

Useful Lives of Capitalized Assets


(Last Modified on May 1, 2017)

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(Last Modified on May 1, 2017)

(Last Modified on May 1, 2017)

(Last Modified on May 1, 2017)

7.1.14 Fully Depreciated Capital Assets

(Last Modified on May 1, 2017)

Fully depreciated capital assets that are still in service should remain on the capital asset records until the asset is retired in accordance with guidance provided by GASB Comprehensive Implementation Guide question 7.13.5. The original cost of a capital asset cannot change; therefore, the only way to extend the service life is to change the depreciation period.

Institutions should review capital assets periodically and extend useful lives where appropriate. It is recommended that this be done when capital assets reach the 50% depreciation threshold. It is required for capital assets that have been depreciated 75% or more of their useful lives.

Salvage values, like depreciable periods, are accounting estimates and as such, they may change later in an assets life, therefore, any change to salvage value is a change that would be accounted for prospectively affecting only current and future periods.


7.1.15 Component Depreciation for Certain Capital Assets

(Last Modified on May 1, 2017)

Generally it is preferable to depreciate capital assets, such as buildings, as one unit, however, it is sometimes more appropriate to capitalize assets on a component basis. This is often true for research building and equipment that are included in organized research and affect indirect cost rate calculations.

When depreciating capital assets using a component basis approach, the depreciation is based on the useful life of each component. This will generally provide a more accurately measure of annual depreciation for multi-functional buildings with fixed equipment.

For Buildings that have multiple components, institutions that wish to use component depreciation approach should group the building components into (4) general categories.

  • Building Shell – basic building structure that includes site preparation, foundation, frame, construction exterior, floor structure, exterior walls, and roof structure.
  • Building Finishes – not part of basic building structure, but includes components such as roof covering, construction interior, and floor covering which enhance service and aesthetic quality.
  • Building Services System – includes components which enhance buildings functionality, such as electrical service and distribution lines, HVAC systems, plumbing, fire protection systems, and elevators
  • Fixed Equipment – generally includes built in components, such as built in lab equipment, cabinetry, fixtures, etc.

Useful lives should be applied separately by category as follows:

  • Building Shell – Since this is the basic structure, depreciation would be based on building useful lives found in the Appendix, Section 7.15.2.
  • Building Finishes – Useful lives of 20 years are recommended for this category.
  • Building Services System – Useful lives of 10 to 20 years are recommended based on type of component. Since many of these components are viewed as equipment type items when not capitalized as part of an overall building projects, Appendix, Section 7.15.3 will provide guidance to help determine their useful lives.
  • Fixed Equipment – Useful lives of 10 to 15 years are recommended depending on type of component. Appendix, Section 7.15.3 should also be referenced when determining the useful lives of these components.

While most component depreciation is related to a building and its components, there may be instances where it is appropriate to apply component depreciation methodology to assets other than buildings, such as complex machinery and IT network infrastructure.

Individual components may not have a longer asset life that the primary capital asset. For example, components of a building may not have asset lives longer than that of the primary structure (Building Shell).

Capital Assets to be componentized should be recorded at actual component cost if possible; however, if not practical, total costs may be allocated to individual components. If allocation methodology is used, the institution must maintain documentation of such methodology and apply consistently to all capital assets affected.

Any additions or future improvements to these assets that meet capitalization thresholds must also be componentized. If an existing capital asset is moved to component depreciation status, componentized depreciation should be applied prospectively on the undepreciated portion of the capital asset.

Note: If any institutions were using an internally developed component depreciation approach for certain capital assets prior to July 1, 2016, they may continue to use that approach on those particular assets until they are fully depreciated. Going forward, those institutions should adopt the requirements of this section for all new capital assets where the component approach is to be applied.


7.10.1 Depreciation Amortization Methodology

(Last Modified on May 1, 2017)

Amortization is the accounting process of allocating the intangible asset’s capitalized costs to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Amortization is not a matter of valuation, but a means of cost allocation. Intangible assets are not amortized based on a decline in their fair market value, but based on systematic charges to expense.

An intangible asset that has an indefinite useful life is not amortized if there are no legal, contractual, regulatory, technological, or other factors that limit its useful life. A permanent right of way easement would be an example of an intangible asset that is considered to have an indefinite useful life.

Intangible assets with discernable useful lives should be amortized over the estimated useful life using the straight-line method (historical cost less residual value, divided by the useful life.


7.10.2 Capitalization Threshold

(Last Modified on May 1, 2017)

Intangible assets should be capitalized on the accrual basis of accounting in the institution’s accounting records if the asset meets all of the following conditions:

  1. Is owned by the institution and held for operations, not for resale,
  2. Has a useful life that exceeds one (1) year,
  3. Meets the appropriate capitalization threshold(s), as shown below:

Intangible Asset Description and Capitalization Thresholds

Asset Description Cost Threshold Useful Lives
Software (purchased or internally generated) $1 Million 10 years
Water Rights $100,000 20 years
Timber Rights $100,000 20 years
Mineral Rights $100,000 20 years
Easements $100,000 20 years



Asset Description Cost Threshold Useful Lives
Patents $100,000 20 years
Trademarks $100,000 20 years
Copyrights $100,000 20 years

Note: SAO has made the determination that E-Books, software licenses and access rights to other electronic reference materials whereby access to databases is obtained through multi-year contracts (or a one-time cost is incurred that makes the data permanently accessible) should be capitalized as software. Otherwise, software licenses/access rights paid for on an annual basis, with no multi-year commitment of funds, are not subject to capitalization.


7.10.3 Internally Generated Intangible Assets

(Last Modified on May 1, 2017)

Common types of internally generated intangible assets include computer software, patents, trademarks and copyrights.

Generally, intangible assets are considered internally generated if they are:

  1. Created or produced by the institution or a third party entity contracted by the institution, or

  2. Acquired/purchased from a third party, but require more than a minimal incremental effort on the part of the institution to achieve their expected level of service capacity.

Costs incurred in creating an internally generated intangible asset should either be expensed or capitalized depending on the asset’s stage of development. In initial development, outlays incurred related to the development of an internally generated intangible asset, should be capitalized only when all three of the following have occurred:

  1. Determination of the specific objective of the project and the nature of the service capacity that is expected to be provided by the intangible asset upon the completion of the project.

  2. Demonstration of the technical or technological feasibility for completing the project so that the intangible asset will provide its expected service capacity.

  3. Demonstration of the current intention, ability, and presence of effort to complete or, in the case of a multiyear project, continue development of the intangible asset.

Only outlays incurred subsequent to meeting the above criteria should be capitalized. Outlays incurred prior to meeting those criteria should be expensed.

Internally Generated Computer Software

Internally Generated Computer Software (IGCS) is the most common type of intangible asset that is generated internally.

In addition to the capitalization criteria discussed above, which is applicable for all internally generated intangible assets, IGCS will only meet those capitalization criteria if/when both of the following occur:

  1. Activities in the preliminary project stage are completed; and,

  2. Management implicitly or explicitly authorizes and commits to funding the software project, at least currently in the case of a multiyear project.


As with other internally generated intangible assets, IGCS is considered internally generated when it is either:

  1. Developed in-house by institution personnel or contractors on behalf of the institution, or

  2. Commercially available software that is purchased or licensed by the institution and modified using more than minimal effort before placing in in operation. An example would be purchased software that has been specially modified to add special reporting capabilities.

Capitalization of IGCS Based on Stages of Software Development

Costs incurred in developing and installing IGCS are either expensed or capitalized depending on the stage of the asset’s development.

Software development generally involves three stages based on the nature of the activities, not timing of occurrence.

  1. Preliminary Project Stage: Activities in this stage include the conceptual formulation and evaluation of alternatives, the determination of existence of needed technologies, and final selection of alternatives for development of the software. Activities in this stage should be expensed as incurred.

  2. Application Development Stage: Activities include the design of the chosen path, including software configuration and software interfaces, coding, installation of computer hardware, and testing, including parallel processing phase. Activities in this stage should be capitalized to the point at which the computer software is substantially complete and operational.

  3. Post-Implementation/Operation Stage: Training and application maintenance activities. Activities in this stage should be expensed as incurred.

Data conversion costs, costs that allow for access or conversion of old data by new information systems should be capitalized only to the extent necessary to make the computer software operational. Otherwise, those costs should be expensed as part of Stage 3-Post Implementation.

When dealing with IGCS costs, it is particularly important to capture them into the appropriate project stage to ensure there is an accurate proration of costs between expenses and capitalized activity. Costs incurred during the Application Development State are subject to capitalization.

Examples of capital costs incurred during the Application Development State would include:

  • External direct costs of materials and services, such as third party fees for services
  • Costs to obtain software from third parties
  • Travel costs incurred by employees in their duties directly associated with development
  • Payroll and payroll-related costs of employees directly associated with or devoting time in coding, installing, or testing
  • Interest costs incurred during the application development

Modifications of internally generated software that is already in operation should only be capitalized if the modifications result in any of the following:

  • An increase in the functionality of the software; or,
  • An increase in the efficiency of the software; or,
  • An extension of the estimated useful life of the software.

Note: If an institution determines that a shorter useful life is appropriate for software, then the method for estimating the useful life must be formally documented.


7.14 Pollution Remediation

(Last Modified on May 1, 2017)

Normally pollution remediation costs will be expensed when the liability is recognized; however, paragraph 22 of GASB 49 provides specific instances where pollution remediation expenditures should be capitalized when goods and services are required for any of the following circumstances:

  1. To prepare the property in anticipation of sale. Institutions should only capitalize amounts necessary to place asset into its intended use and condition. Capitalized amounts should not exceed estimated fair value.

  2. To prepare the property (with known or suspected pollution that would require remediation) for use when the property was acquired. Capitalization should be limited to outlays expected to be necessary to place the asset into its intended location and condition for use.

  3. To perform pollution remediation that restore a pollution caused decline in service utility for an impaired asset.

  4. To acquire property, plant and equipment that have a future alternative use.

For items (1) and (2) above, capitalization is only appropriate if the outlays take place within a reasonable period prior to the expected sale for item (1) or prior to use for item (2). Capitalization is also appropriate if outlays are delayed and the delay is beyond the institutions control.


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