Capitalization of Real Property

Corresponding Policy:  See ‘Acquisition of Capital Assets’ policy.
Corresponding Forms:  N/A
Process:  Seeking Additional Help on Capitalizing Real Property

Real property involves acquisition, new construction, and improvements to existing real property.

Capitalizable Expenditures
Expenditures for real property are by their inherent nature “capitalizable," meaning they are:

• Owned or considered owned (refers to capital leases, leasehold improvements) by the University

• Held for operations (not resale)

• Have a useful life that exceeds one year

Expenditures for improvements to existing real property are capitalizable if they (1) meet the above three conditions and (2) enhances the asset beyond its original functionality and/or materially extends the useful life of the underlying real property asset. Expenditures that merely restore the asset to its original or previously serviceable condition are not capitalizable. Refer to additional guidelines below.

Expenditures funded by tax-exempt bond proceeds are capitalizable if they (1) meet the above three conditions and:

• Bond repayment period is no greater than 120% of asset service life.

• Project either materially increases the value or life of the asset.

For additional guidelines, an expenditure is considered capitalizable if it:

1. Improves a condition or defect that either existed prior to the acquisition of the unit of property or arose during the production of the asset, whether or PSU was aware of the condition or defect at the time of acquisition or production;

2. Is for work performed prior to the date the asset was actually placed in service by the institution;

3. Adapts the unit of property to a new or different use (including a permanent structural alteration of the asset);

4. Results in a betterment (including a material increase in quality or strength) or a material addition (including an enlargement, expansion, or extension) of the asset; or

5. Results in a material increase in capacity (including additional cubic or square space), productivity, efficiency, or quality of output of the asset.

Due to a capitalization threshold, not all capitalizable real property expenditures are capitalized in the PSU accounting records. Use of a capitalization threshold avoids having a separate fixed asset record for every one of the numerous low-cost capitalizable items, and having to calculate, record, and report immaterial depreciation amounts on those items.

Real property acquisition, construction and improvement projects over the capitalization threshold are generally capitalized in PSU accounting records, and real property acquisition, construction and improvement projects less than capitalization threshold are generally expensed in the accounting records.