Capitalization Policy and Depreciation Policy for Capital Assets
July 01, 2011
This policy item applies to:
All assets meeting the definition of a fixed asset shall be considered a long-term asset and shall be recorded in the State University Fixed Asset Accounting System (SFAAS). SUNY and its related entities are responsible to account for all long-term assets under its jurisdiction. Such assets shall be systematically and accurately recorded; properly classified; and adequately documented in the SFAAS. All entities shall establish an internal control structure over fixed assets that provides reasonable assurance of effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations.
Fixed assets shall be recorded at historic cost or, if the cost is not readily determined, at estimated historic costs. Cost shall include applicable ancillary costs. All costs shall be documented, including methods and sources used to establish any estimated costs. In the case of gifts, the fixed asset should be recorded at fair market value at the date of receipt.
Asset Salvage Value
The salvage value of an asset is the value it is expected to have when it is no longer useful for its intended purpose. In other words, the salvage value is the amount for which the asset could be sold at the end of its useful life. This value can be based on (1) general guidelines from some professional organizations such as GFOA, (2) internal experience, or (3) professionals such as engineers, architects, etc.
Fixed assets should be categorized into the following:
General Policy for Capitalization
Fixed assets should be capitalized as follows:
The recorded cost of land includes (1) the contract price; (2) the costs of closing the transaction and obtaining title, including commissions, options, legal fees, title search, insurance, and past due taxes; (3) the costs of surveys; and (4) the cost of preparing the land for its particular use such as clearing and grading. If the land is purchased for the purpose of constructing a building, all costs incurred up to the excavation for the new building should be considered land costs. Removal of an old building, clearing, grading and filling are considered land costs because they are necessary to get the land in condition for its intended purpose. Any proceeds obtained in the process of getting the land ready for its intended use, such as salvage receipts on the demolition of the old building or the sale of cleared timber, are treated as reductions in the price of the land. Capitalization of land costs include, but are not limited to, the following:
Capitalization of building costs include, but are not limited to, the following:
Each building or addition of square footage to an existing building acquired or constructed is divided into 10 major building components. The components are as follows:
The total cost of the building or additional square footage is then allocated among the 10 major building components. Projects such as building construction included in the fixed asset value of the building, the cost of professional fees (architect and engineering), permits and other expenditures necessary to place the asset in its intended location and condition for use.
Furthermore, the cost of interest incurred during building construction should be capitalized. The capitalization period begins when the following three considerations are present:
The amount capitalized should be an allocation of the interest cost incurred during the period required to complete the asset. The interest rate for capitalization purposes is to be based on the rates on the University’s outstanding borrowings. If a specific new borrowing can be identified with the asset, the rate on that borrowing should be used as the basis for allocating the interest cost for the asset. A weighted average of the rates on other borrowings is to be applied to expenditures not covered by specific new borrowings.
A building renovation is defined as enhancements made to a previously existing building component. Any renovation to a building must at a minimum meet the following criteria to qualify as a fixed asset:
An improvement to a building is defined as adding a new component where one did not previously exist. The improvement must cost more than $100,000 and have an initial useful life extending beyond a single reporting period (generally one-year).
Land Improvements and Infrastructure
Land improvements include items such as excavation, non-infrastructure utility installation, driveways, sidewalks, parking lots, flagpoles, retaining walls, fencing, outdoor lighting, and other non-building improvements intended to make the land ready for its intended purpose. Land improvements can be further categorized as non-exhaustible and exhaustible. Expenditures for land improvements that do not deteriorate with use or passage of time are additions to the cost of land and are generally not exhaustible, and therefore not depreciable.
Infrastructure assets are defined as long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets. Examples of infrastructure assets include roads, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems.
Improvements to infrastructure or land improvements which extend the useful life or capacity of the asset and meet capitalization thresholds will be capitalized as a separate asset/component and depreciated over its estimated useful life
Equipment and Leased Equipment
Equipment should be capitalized if the lease agreement meets any one of the following criteria:
Leases that do not meet any of the above requirements should be recorded as an operating lease.
Capitalization of equipment costs include but are not limited to, the following:
Improvements to existing equipment assets which extend the useful life or capacity of the asset and meet capitalization thresholds will be capitalized as a separate asset/component and depreciated over its estimated useful life.
Capitalized Interest Costs:
The University will capitalize interest costs based on the criteria outlined in FASB Statements Nos. 34 and 62. The objective of capitalizing interest is to obtain a measure of the acquisition cost that more closely reflects the University’s total investment in the asset.
The amount of interest capitalized should theoretically be the amount of interest charged during the assets acquisition period that could have been avoided if the assets had not been acquired, or had not been acquired without incurring debt. As required under FASB Statement No. 62 involving tax-exempt borrowings, interest costs will be offset by interest income. As such, the amount of interest cost capitalized is all interest cost of the borrowing less any interest earned on related interest-bearing investments acquired with proceeds of the related tax-exempt borrowing from the date of the borrowing until the assets are ready for their intended use.
The capitalization period begins when the following three considerations are present:
The amount capitalized should be an allocation of the net interest cost incurred during the period required to complete the asset.
Computer Software Purchased computer software costing more than $5,000 with a useful life beyond a single reporting period (generally one-year) should be capitalized.
Intangible assets are those that lack physical substance, are non-financial in nature and have an initial useful life extending beyond a single reporting period. Intangible assets must be identifiable, meaning they are either capable of being separated by means of sale, transfer, license or rent, or they arise from contractual or other legal rights.
Intangible assets acquired or developed by the State University could include licensed software, internally generated computer software and campus owned websites or portals. Other examples include patents, copyrights and trademarks, permits and licenses, easements, and land use rights (e.g., water, timber or mineral rights).
The value of certain intangible assets, such as land use rights or easements, may already be included in the reported value of the associated real property asset. In these instances, although the individual rights associated with the property are separable and intangible in nature, collectively they represent the ownership of a tangible asset. Therefore, the value of the individual rights should remain aggregated and reported as a tangible capital asset, not separately as an intangible asset (i.e, easements on University/State owned land should not be reported separately, but be included in the reported land value).
Current policy requires purchased computer software costing greater than $5,000 to be capitalized by the campus (i.e., entered in the Property Control System). The additional recognition requirements for intangible assets apply to internally generated computer software. In this regard, the activities involved in creating (and/or significantly modifying commercially available) software need to be evaluated to determine if the internal costs meet the criteria for capitalization.
The software must be acquired, internally developed, or modified solely to meet internal needs and there must not be a substantive plan to market the software externally to other organizations. Software development generally involves three phases. These phases and their characteristics are as follows:
Costs associated with the preliminary project and the post-implementation/operating phases should be expensed as incurred. Internal and external costs associated with the application development phase should be capitalized. Costs to develop or obtain software that allows for access or conversion of old data by new information systems should also be capitalized. General and administrative costs and overhead expenditures associated with software development should not be capitalized as costs of internal use software.
Upgrades and enhancements are defined as modifications to existing internal-use software that result in the ability for the software to perform tasks that it was previously incapable of performing. In order for costs of specified updates and enhancements to internal-use computer software to be capitalized, it must be probable that those expenditures will result in additional functionality, increased efficiency, or the extension of the estimated useful life. If the modification does not result in any of these outcomes, the costs should be considered routine maintenance and be expensed as incurred.
Purchased library books should be recorded at cost. Generally, library books acquired by contribution would be recorded at fair market value. Under GASB 34 the University will now provide a depreciation charge for capital assets, to include library books. The University will establish a “layered” depreciation procedure for library books, where an annual layer for books/volumes purchased/donated will be maintained. Although not maintained in the fixed asset accounting system, the useful life of library books, reference materials and information sources other than library books will be 10 years. As such, a 10 percent charge would be applied to gross / historical cost balance of each layer (year). When books are disposed of, no gain or loss would be recognized, even if cash were received. The disposal will be recorded as a reduction of the gross library book value and the related accumulated depreciation balance.
Additions in the current year will be grouped by a layer and the total gross asset value would be depreciated over the established average useful life (10 years in this example). In the initial year of library book additions, the University will take one-half year worth as a depreciation charge. Assume the University purchased $20,000,000 in library books during the year. The entry to record depreciation on that layer only ($20,000,000/10*1/2) would be:
Depreciation Expense -Library Books 1,000,000
Accumulated Depreciation-Library Books 1,000,000
Artwork and Historical Treasures
Collections, works of art and historical treasures of significance that are owned by the State or the University should be considered for capitalization. Purchased works of art and historical treasures, whether they are held as individual items or in a collection, should be recorded based on historical cost. Gifts of these types are recorded using the fair market value at the date of donation.
To capitalize an art collection, the following conditions must be met:
Inexhaustible collections, works of art and historical treasures where the economic benefit or service potential is used up so slowly that the estimated useful lives are extraordinarily long are not depreciated. Because of their cultural, aesthetic, or historical value, these assets are protected and preserved in a manner greater than that for similar assets without such cultural, aesthetic, or historical value. Capitalized collections or individual items that are exhaustible, such as exhibits whose useful lives are diminished by display or educational or research applications, must be depreciated over their estimated useful lives. No depreciation shall be recorded for collections or individual items that are inexhaustible. All works of art and historical treasures acquired or donated will be capitalized.
Construction in Progress (CIP)
A CIP asset reflects the cost of construction work undertaken, but not yet completed. For construction in progress assets, no depreciation is recorded until the asset is placed in service. When construction is completed, the asset should be reclassified as building, building improvement, land improvement, or equipment and should be capitalized and depreciated.
Depreciation is the process of allocating the cost of tangible property over a period of time, rather than deducting the cost as an expense in the year of acquisition. Generally, at the end of an asset’s live, the sum of the amounts charged for depreciation in each accounting period will equal original cost less the salvage value.
Information Needed to Calculate Depreciation
To calculate depreciation on a fixed asset, the following five factors must be known:
Estimated Useful Life
Estimated useful life means the estimated number of months or years that an asset will be able to be used for the purpose for which it was acquired. Eligible fixed assets should be depreciated over their estimated useful lives. The University has established a table of useful lives that is hard-coded into the SUNY Fixed Asset Accounting System. When an asset is added to the system, depending upon the sub-category of fixed assets selected, a corresponding estimated useful life would be assigned.
The University has established the straight-line methodology for depreciating all fixed assets. Depreciation will begin in the month the asset is placed in service with the exception of library books. Under the straight-line depreciation method, the basis of the asset is written off evenly over the useful life of the asset. The amount of annual depreciation is determined by dividing an asset’s cost reduced by the salvage value, if any, by its estimated life. The total amount depreciated can never exceed the asset’s historic cost less salvage value. At the end of the asset’s estimated life, the salvage value will remain.
Library books will be depreciated using the straight-line methodology based on the half-year convention. Under the half-year convention, library books purchased during the fiscal year will be treated as though they were placed in service on the first day of the seventh month of the fiscal year. One-half of a full year’s depreciation will be taken for the library books in the first year they were placed in service.
SUNY Useful Life Schedule
The Asset Type Code is an identifier used in the SFAAS to properly classify the asset or asset component.
Building and Building Components:
|Asset Type Code||Description||Useful Life (in years)|
Asbestos and environmental removal costs – Qualifying costs not included as a component listed above, will be identified as a separate component and depreciated using a 30-year life.
* - Classified as Land
Capital Equipment, Furniture, Fixtures, etc.:
|Asset Type Code||Description||Useful Life (in years)|
|40||Gemeral Office Equipment||7|
|41||Printing & Related||10|
|42||Electronic Data Processing||5|
|84||General Lab Spt||6|
|85||Arts & Crafts||7|
|9||Hosp Furniture & Equipment||8|
|Land Improvements and Infrastructure||20|
|Library Book and Reference Materials||10|
Retiring an entire asset or building component – remove the entire asset and related accumulated depreciation from the fixed asset file. Any undepreciated balance will be reported as a disposal expense, net of any value received.
Generally with a building rehabilitation or renovation only a section of the asset is retired (partial retirement) for the piece of the asset being renovated. To determine the value of the asset being renovated, the University’s methodology is based on the current costs of the renovation and discounting back to the date of the asset being renovated. An escalation table (discounting rates) is used which reflects annual escalation (de-escalation) factors developed using industry data and other relevant information.
The methodology that will be employed for determining the value of the component/asset being retired / renovated is as follows:
Accounting for Environmental Remediation:
Generally, pollution remediation outlays, including outlays for property, plant and equipment, should be recorded as an expense. Some projects (for example, land improvements or remodeling), for which the primary objective is other than pollution remediation, may include pollution remediation activities. Except as provided below, incremental outlays attributable to pollution remediation activities (outlays that would not be incurred absent pollution) should be recorded as an expense. Pollution remediation outlays should be capitalized when goods and services are acquired if acquired for any of the following circumstances:
For outlays under the first two criteria, capitalization is appropriate only if the outlays take place within a reasonable period prior to the expected sale or following acquisition of the property, respectively, or are delayed, but the delay is beyond the entity’s control.
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