600.5 Acquisition of Capital Assets
- Chad
PURCHASE: Purchases of capital assets are processed through the Banner FIS accounts payable system.
Purchases of personal property from proprietary funds (auxiliary enterprises and service departments) involve using an "asset" A80xx general ledger account code to purchase and capitalize the asset in the proprietary fund.
Purchases of personal property from non-proprietary funds involve initially charging the purchase, for budget tracking purposes, to a 401xx or 402xx operating ledger account code and capitalizing the asset in the investment in plant fund.
Purchases of real property typically involve multiple invoices and multiple payments. The payments are initially recorded throughout the year with real property 403xx, 404xx, 405xx, or 407xx account codes in fund types 11 - Budgeted Operations, 81 - Unexpended Plant Funds and 83 - Renewal and Replacement Funds. Periodically (at least annually), the real property account codes are reviewed to determine which of those expenditures should be capitalized as construction in progress, or completed assets in Banner Fixed Assets. For additional information, see D Construction, below.
TRADE-IN: The trade-in of an old asset towards the purchase of a new asset often results in a gain or loss because the old asset's trade-in value differs from its book value (cost less accumulated depreciation). PSU recognizes gains and losses on exchanges for both similar (e.g., a vehicle for a vehicle) and dissimilar (e.g., a vehicle for machinery) assets.
CALCULATION OF GAIN OR LOSS: The gain/loss on the trade-in is calculated by the purchase price of the new asset less the sum of the cash paid and the net book value of the old asset. The gain or loss needs to be recorded in the accounting records, based on the calculation and accounting below.
The net book value of the old asset is the amount recorded in Banner Fixed Assets. It comprises the old asset's capitalized value less its accumulated depreciation.
The purchase price of the new asset is the amount one would pay in cash if no trade-in was involved. The purchase price maybe different from the list price, because often the actual purchase price for a new asset is less than the manufacturer's list price.
ACCOUNTING FOR GAIN OR LOSS:
Gains and losses should be recognized in the year the asset is traded-in.
For proprietary funds, gains and losses are recorded as part of the trade-in.
For non-proprietary funds, neither Banner FIS nor Banner Fixed Assets records the gain or loss on the trade in. Because of how Banner Fixed Assets works, the cost and accumulated depreciation of the old asset is simply removed from the investment-in-plant fund and the remaining book value is an adjustment to the investment-in-plant fund balance. The proceeds from the trade-in of an asset are recorded as a gain on sale in the fund that traded in the asset.
DONATION: PSU receives donations of capital assets. Donations of capital assets should be recorded in the accounting records as revenue at the fair value at date of receipt, and capitalized in the accounting records. The methodology used for determining fair value should be documented. The university's valuation might differ from the donor's valuation. Fair market value may be determined by:
A written appraisal,
A qualified expert on the faculty or staff if he or she is considered to hold special knowledge or expertise related to the property being donated,
Documentation obtained from a qualified outside source such as "blue book" or a knowledgeable dealer, or
Identifying what it would cost the university if it were to purchase the gift outright from a vendor or an original bill of sale for new equipment.
Refer to the procedures manual and the policy below for detailed accounting instructions pertaining to donations of personal property and real property.
CONSTRUCTION: Construction typically pertains to real property (e.g., land improvements, buildings, IOTBs, infrastructure) and involves the payment of many invoices over a long period of time. Expenditures for construction projects are paid from fund types 11 - Budgeted Operations 004000 Repair and Remodeling, 81 - Unexpended Plant Funds or 83 - Renewal and Replacement Funds. When completed, the total cost of a construction project should be capitalized and then allocated over multiple years through depreciation expense.
The following accounting issues arise:
CONSTRUCTION IN PROGRESS: At fiscal year-end when preparing annual financial statements, expenditures are divided into "expenses" and "amounts to be capitalized."
CAPITALIZABLE: Expenditures of incomplete construction projects must be capitalized but not depreciated until the project is complete. These expenditures become "Construction in Progress (CIP)." CIP is an asset account that reports the total capitalized expenditures of construction projects that are incomplete at fiscal year-end.
DETERMINATION OF WHEN TO REMOVE PROJECTS FROM CIP AND BEGIN DEPRECIATION: The project should be removed from CIP and depreciation should begin when the project is substantially complete. "Substantially complete" means receipt of an unconditional certificate of occupancy from the appropriate state and/or local building officials and the majority (i.e. 98%) of the expenditures related to the project have been paid. A project is complete when all invoices have been paid and the funds related to that project are closed. Ideally, projects would not be capitalized as a completed asset to be depreciated until the project is complete. The difficulty, however, is that a project maybe substantially complete and in operation, but miscellaneous expenditures continue to occur for several years until all invoices are finally paid and the funds are closed. In the meantime, the project has not been capitalized as a completed asset, and is not being depreciated. For this reason, the project should be removed from CIP and depreciation should begin when the project is substantially complete.
FREQUENCY OF IDENTIFYING AND CAPITALIZING PROJECTS: Expenditures of construction projects should be identified and capitalized periodically throughout the fiscal year but at least once at the end of each fiscal year. Expenditures of substantially completed projects should be removed from CIP to completed assets in the month of completion and immediately begin to depreciate
RECORDING ADDITIONAL EXPENDITURES AFTER CAPITALIZATION: Once a project has been capitalized and depreciation has started (i.e., no longer construction in progress), any additional capitalizable expenditure should be added to the asset's capitalized value in Banner Fixed Assets. For example, if a $10,000 capitalizable invoice is paid two years after the capitalization of a $500,000 building with a 30-year life, the $10,000 would be added to the $500,000 capitalized value in Banner Fixed Assets. The additional $10,000 will be depreciated over the remaining life of 28 years.
INSTALLMENT PURCHASE: Some fixed assets are acquired and owned by the institution but not immediately paid for. The payments occur over multiple years. PSU accounting policy for installment purchases (that exceed the capitalization threshold) is to capitalize the fixed asset and to create a liability in the accounting records for the principal portion of the installment purchase. The university must maintain a loan amortization schedule for each installment purchase.
CAPITAL LEASE: A capital lease is somewhat similar to an installment purchase. Although the university does not own the fixed asset being leased, the terms of the lease are such that the university in essence "purchases" the asset. If the leased fixed asset meets the capitalization threshold, and if the lease meets one or more of the following criteria, it is capitalized and becomes known as a "capital lease:"
The lease transfers ownership of the property to the lessee by the end of the lease term.
The lease contains an option to purchase the leased property at a bargain price.
The lease term is equal to or greater than 75 percent of the estimated economic life of the leased property (e.g., lease term six years, estimated life eight years). The present value of rental and other minimum lease payments equals or exceeds 90 percent of the fair value of the leased property less any investment tax credit retained by the lesser (e.g., future minimum lease payments $9,000, fair value $10,000).
Capital leases should be recorded in Banner Fixed Assets. The amount to be recorded upon signing the lease is the present value at the beginning of the lease term of the minimum lease payments during the lease term, or the fair value of the leased property, whichever is less. Executory costs (e.g., insurance and maintenance) are not included for purposes of calculating minimum lease payments. The university must maintain an amortization schedule for each capital lease. The periodic lease payments are divided between the lease obligation and interest as determined by the amortization schedule. For more information, please see the procedures manual
RENTAL: Some fixed assets are not purchased, but rented on a month-to-month basis. Since rented fixed assets are only used but not owned by PSU, PSU accounting policy is to expense the rental payment in a 240xx account code and not to capitalize the fixed asset. Although rentals are not capitalized, they may be included in Banner Fixed Assets for insurance coverage purposes.
OPERATING LEASE: Operating leases are similar to rentals except that the rental agreement has a specific time period. PSU accounting policies for operating leases are the same as for rentals, except that at the end of each year for financial reporting purposes, PSU must prepare a listing of all operating leases and the expected future payments of those operating leases. Since operating leases are not recorded in Banner Fixed Assets, the institution needs to maintain separate records of operating leases. Although operating leases are not capitalized, they may be included in Banner Fixed Assets for insurance coverage purposes. See Accounting for Leases policy for additional information.
For more information pertaining to the acquisition of capital assets, please see the procedures manual.