Fixed Assets and Depreciation Including Intagible Assets
INTRODUCTION Fixed assets are classified as either capitalized or inventoried assets and are acquired for use in normal operations (i.e., not for resale). These assets are recorded at the historical cost for purchased assets and at the fair market value on the date of gift for donated assets. Notification is received through the Office of Sponsored Programs for donated gifts-in-kind. The asset's cost includes all payments required to place the asset in its intended state of operation.
The Office of the State Controller has mandated that, effective July 1, 2001, library books and other library materials will not be capitalized or recorded on the Fixed Assets System.
The Financial Reporting Section of the Controller's Office in conjunction with the Purchasing Department is responsible for the tagging, inventory and maintenance of the University's fixed asset accounting and control records which document equipment, land and buildings acquired and donated to the University, in addition to control and safeguarding of assets. This information is used in the computation of overhead rates, the computation of adequate insurance coverage and the computation of losses by fire or theft.
CAPITALIZED FIXED ASSETS The term capitalized fixed assets includes land, improvements to land, easements, buildings, building improvements, vehicles, machinery, furniture, equipment, works of art and historical treasures, infrastructure, and all other tangible or intangible assets that are used in operations and that have a normal life expectancy of more than two years.
On March 13, 1996, the North Carolina Office of the State Controller issued Memorandum No. 96-11 which established a $5,000 threshold for reporting fixed assets on university financial statements. This change was effective with the fiscal year ending June 30, 1996. Land purchases and land donations are not subject to the $5,000 threshold - all land additions are capitalized.
The Financial Reporting section of the Controller’s Office has responsibility for identifying and recording capitalized fixed assets on the Bassets Fixed Asset System and in Banner during the accrual process. The cost of capitalized fixed assets includes shipping charges, legal fees, setup costs, sales tax and component units in addition to the purchase price, all of which together must equal at least $5,000. University departments are required to use the appropriate expenditure object codes/account code when the acquisition cost is greater than or equal to $5,000. Expenditure codes for purchases over $5,000 have an FA (fixed asset) at the beginning of the account title. These object codes/account codes should not be used if the $5,000 threshold has not been met. Departments should use the expenditure code that has an NFA (Non Fixed Asset) at the beginning of the title if the acquisition cost is below $5,000.
Assets costing below $5,000 are expensed; they are not capitalized nor depreciated for financial reporting purposes. A physical inventory is taken of inventoried assets at least once a year at the same time the capitalized fixed assets are inventoried.
MAINTENANCE POLICY Costs incurred to keep a fixed asset in its normal operating condition that do not extend the original useful life of the asset or increase the asset's future service potential, are not capitalized. These costs are expensed as repairs/maintenance. Maintenance expenses are incurred to keep assets in normal operating condition and to help maintain the original use of the asset. Maintenance expenses do not extend the life of the asset beyond the expected useful life at acquisition or increase the future service potential of the asset. Maintenance costs are incurred to keep the asset operational throughout its useful life. Therefore, the replacement of roofs, plumbing and carpet are typically classified as maintenance costs. This was an expected cost at the time of purchase. It does not extend the life of the asset longer than originally intended, so the costs are expensed. Regardless of the dollar amount, maintenance costs are expensed and not capitalized. The costs are charged to repairs and maintenance expense. The following information pertains only to capitalized fixed assets that are reflected on the University's financial statements. Procedures applicable to identifying and recording inventoried fixed assets are discussed later in this policy.
LAND AND LAND/SITE IMPROVEMENTS (NON DEPRECIABLE) Acquired land is recorded at the purchase price plus additional costs such as legal and recording fees, surveying fees, damage payments, and land/site improvements that ready land for its intended use and produce permanent benefits. Examples of land/site improvements are excavation; fill and grading; removal, relocation, or reconstruction of property of others, such as railroads and telephone and power lines; and the construction of retaining walls.
If land and building are acquired as a single parcel, the value of the land will be determined separately from the building and recorded as land. Donated land or land that is obtained by means other than purchase is recorded at fair-market value based on appraisal at time of acquisition. Land is treated as a fixed asset regardless of its cost, which may include the following: purchase price, legal and title fees, surveying fees, appraisal and negotiation fees, and damage payments.
BUILDINGS Buildings are valued at the purchase price or construction cost. Cost will include all charges applicable to the building (i.e., broker's fees, architect's fees, etc.). Permanently attached fixtures to the building (i.e., heating and ventilation systems) should be included in the cost of the building.
Donated buildings should be capitalized at the appraised fair market value at the time the building was donated. Capital Improvement Fund acquisitions are capitalized when all construction costs are paid. Prior to this time, capital improvement costs are accumulated as construction-in-progress.
When a renovation/improvement is constructed, it is added to the Banner Fixed Asset System as a separate asset if it exceeds the University’s inventory/capitalization threshold. When a renovation/improvement is constructed, it is added to the Bassets Fixed Asset System as a separate asset if it exceeds the University’s capitalization threshold. If recorded on the Banner Fixed Asset System and Basset Fixed Asset System, the renovation/improvement will receive its own fixed asset number. Renovation and improvement costs are incurred to restore or improve buildings or other capitalized assets. Normally, these costs take place over an extended period. Care must be taken to distinguish between maintenance and renovation/improvement costs. These costs involve the substitution of old parts for new ones and increase the economic benefits to be derived from the asset.
In order to capitalize a renovation or improvement cost, certain criteria must be met. First, the cost must equal or exceed the $5,000 capitalization threshold established for all fixed assets. Second, the renovation or improvement must either: a) significantly extend the useful life of the original asset, or b) increase the future service potential of the asset. If both of these criteria are met, the expenditure must be capitalized and recorded separately in the Fixed Asset System at total purchase or construction cost. Expenditures not meeting both of these criteria will be classified as a maintenance expense.
An addition represents a new asset. It increases the physical size or operating capabilities of an asset through expansion or extension. Additions do not involve renovations. A new wing to a building or the addition of an air conditioning system to a building are examples of additions. The addition is capitalized if its cost is $5,000 or more. Additions valued below $5,000 are expensed; they are not capitalized nor depreciated for financial reporting purposes. Addition costs are different from maintenance costs. Additions add future benefits. Maintenance costs are incurred to keep the original asset in normal operating condition.
INFRASTRUCTURE Infrastructure assets are 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 utility systems, roads, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems. Land and land improvements must be capitalized separately from road system infrastructure.
University road costs will include the costs of pavement, culverts, lighting systems, drainage systems, guardrails, markings, traffic control devices, signage, bridges, tunnels, and other buildings that are an ancillary part of the road system.
Utility systems include, but are not limited to, water distribution systems, sanitary sewer collection systems, natural gas systems, electrical distribution systems, and telecommunications/fiber optics systems that are independent of a single building.
OTHER STRUCTURES AND IMPROVEMENTS
Other structures and improvements include, but are not limited to, landscaping that does not produce permanent benefits (see Land and Land/Site Improvements); towers; tanks; wells; fences; parking areas (including parking lots and parking decks); sidewalks; curbs and gutters; irrigation systems; general signage; pedestrian bridges; paved paths; fountains and swimming pools.
MACHINERY AND EQUIPMENT
This account group includes machinery and equipment with a normal life expectancy of more than two years. Examples of these assets are: furniture; equipment; and motor vehicles and motorized equipment.
RENOVATIONS / IMPROVEMENTS ON EXISTING CAPITAL ASSETS
Renovation and improvement costs are incurred to restore or improve buildings or other capitalized assets. These costs involve the substitution of old parts for new ones and increase the economic benefit to be derived from the asset.
In order to capitalize a renovation or improvement cost, certain criteria must be met.
First, the cost must equal or exceed the $5,000 capitalization threshold. Second, the renovation or improvement must either (a) significantly extend the useful life of the original asset, or (b) increase the future service potential of the asset. If both of these criteria are met, the expenditure must be capitalized and recorded separately in the Fixed Asset System at total purchase or construction costs.
If parts of an asset are removed during a renovation/improvement project, the original cost (less depreciation if applicable) of the part of the asset being removed should be retired. Because of the difficulty of measurement or of immateriality, this may not be possible. The removal costs associated with the renovation will be expensed. The remaining cost of adding the renovation would be the cost of the new asset.
A renovation/improvement less than $5,000 to an existing asset must be depreciated as follows or classified as maintenance expense.
- Depreciation expense of asset before additional cost plus depreciation expense of additional amount added to asset equals depreciation expense for the year.
- Depreciation expense of asset before additional cost less depreciation expense on new cost of asset equals depreciation expense of additional cost.
INVENTORIED FIXED ASSETS
Inventoried fixed assets includes all assets $2,500 or greater. The cost of inventoried items includes shipping charges, legal fees, setup costs, connected components (when applicable) etc. in addition to purchase price, all of which together must equal at least $2,500. Even though inventoried assets are entered into the Banner Fixed Assets System, they are not recorded on the general ledger as fixed assets. Items that cost less than $5,000 will be expensed in the accrual process.
Each department head is responsible for safeguarding all assets purchased for his or her department and assisting with the physical inventory process. Departments may maintain their own database or spreadsheet of assets to track their locations. Each department is also susceptible to internal and external audit verifications on a sample of fixed assets.
Based on the University's inventory and capitalization policies, the Receiving Department staff determines which items will be assigned a tag number and added to the Banner Fixed Assets System. Items $2,500 or greater will be added to the Banner Fixed Asset System and items $5,000 or greater will be added to the Bassets Fixed Assets System. The Receiving Department staff is responsible for physically placing the tag number on the front or other easily accessible area of the asset. Under no circumstances should anyone take an item off campus before the Receiving Department staff has properly tagged it.
FIXED ASSET IDENTIFICATION--PROPERTY TAGS
A tag number identifies items recorded in the Banner Fixed Assets System. The tag number is used to facilitate the physical inventory process. Maintaining a positive identification of assets is the primary purpose of tagging.
Tagging is important to:
- Provide an accurate method of identifying individual assets as University property,
- Aid in the taking of the physical inventory,
- Control the location of inventoried physical assets, and
- Provide a common ground of communication for both the Fixed Assets group and the assets' users.
The asset record includes information such as description, department, manufacturer, serial number, location, budget code, account number, purchase order number, check number, cost, commodity classification code and date acquired. Departments are encouraged to maintain an in-house inventory of all equipment items purchased, regardless of whether the item is recorded on the Banner Fixed Asset System. Fixed Asset records are verified annually for accuracy by the State Auditors.
The University of North Carolina at Pembroke uses the straight-line method of depreciation, with an assumed salvage value of zero, for buildings and equipment. When buildings and equipment are placed into service during the fiscal year, depreciation is computed using the half-year convention. Straight-line is a time-based method used when the service life of the asset is affected primarily by the passage of time. Straight-line depreciation is calculated by dividing total asset cost by estimated useful life in years.
THE UNIVERSITY OF NORTH CAROLINA AT PEMBROKE DEPRECIATION GUIDELINES
Depreciation is the allocation of the total acquisition cost of a capital asset over its estimated useful life. Land, certain land improvements, construction-in-progress, and inexhaustible works of art, historical treasures and similar assets are not depreciated. Land is considered to have an unlimited useful life and its salvage value is unlikely to be less than its acquisition cost. Certain land improvements may be considered to have an unlimited useful life and therefore not be depreciated. An example of a nondepreciable land improvement would include the movement or grading of dirt to prepare the land for its intended use. A non-depreciable land improvement should have permanent benefits. Total asset cost includes purchase price or cost of construction plus any other charges incurred to place the asset in its intended location and condition for use. Donated assets are valued at their fair market value at date of acquisition.
The estimated useful life of a depreciable capital asset is the period over which services are expected to be rendered by the asset. An estimated useful life is not reasonable if the associated capital asset is near full depreciation but will remain in use significantly longer than originally estimated. The general rule is that carefulestimates of useful lives that later prove to be incorrect based on new information will be considered changes in estimates. Changes in estimates must be handled prospectively (i.e., restatement of prior years is prohibited). However, estimates of useful lives that are computed incorrectly because of lack of historical useful life experience or failure to use available information will be considered accounting errors. Corrections of errors must be treated as prior period adjustments (i.e., restatements).
UNC Pembroke establishes estimated useful lives for buildings and general infrastructure based on historical data and general guidance from the Office of State Controller depreciation policy. Estimated lives for academic, administrative and auxiliary buildings are 50 years, dormitories 40 years and 35 years for all other buildings, including green houses, storage and maintenance. UNC Pembroke establishes estimated useful lives for equipment based on historical data and general guidance from the Office of State Controller depreciation policy. Each year UNC Pembroke re-evaluates the estimated useful lives of depreciable capital assets for reasonableness. During the re-evaluation an additional 10 years will be added to capital assets with a remaining estimated useful life of 5 years or less.
FULLY DEPRECIATED CAPITAL ASSETS Because depreciation is intended to allocate the cost of a capital asset over its entire useful life, it normally is not appropriate to report assets still in service as fully depreciated. However, because differences may occur between estimated useful lives used for depreciation computations and actual useful lives, UNC Pembroke may, in limited cases; report capital assets that are fully depreciated, but only if such balances are immaterial. If the balances of fully depreciated capital assets that remain in use are material, the related estimated useful lives will be changed based on the above policy. Buildings are not considered fully depreciated if renovations and improvements have been capitalized as separate assets and the combined amounts (initial costs plus renovations/improvements) are not fully depreciated.
HOME USE OF EQUIPMENT Responsibility for home use of equipment is at the departmental level. Home use of equipment must be for University business, be approved by the department head and the equipment cannot be removed from campus for an amount of time greater than 60 days. If equipment is needed for longer than 60 days it must be re-approved by the department head. If a physical inventory is conducted while the equipment is off campus this signed documentation must be made available for review by the inventory officer. This document should include, at a minimum, the items being checked out, check out/check in date and a statement that the individual borrowing the equipment is responsible for damages or loss.
DoIT policy - equipment available for checkout includes televisions, multi-power strips, overhead projectors, LCD projectors, screen and slide projectors, cassette recorders, video recorders, DVD players, audio/visual carts, laptops and LCD projectors. At least a 48-hour advance notice must be provided via the equipment checkout request Form. DoIT equipment may be checked out for 48-hours only. Equipment may be renewed twice within a seven-day period. The Individual borrowing equipment is responsible for damages or loss of equipment. Equipment may be renewed twice within a seven-day period.
MODULAR EQUIPEMENT The University’s use of modular / cubical type office furnishings is minimal. Due to the configuration of modular equipment and furnishings, the University has decided to treat each component as an individual asset. All components costing less than the University’s capitalization dollar level are expensed. Any component costing more than the capitalization level is capitalized.
Intangible assets are capitalized according to the following thresholds:
- $1,000,000 – Internally generated computer software (application development costs only)
- $100,000 – All other intangible assets (including purchased or licensed computer software)
Intangible assets with a cost equal to or greater than the threshold and a useful life of two or more years are capitalized. An asset costing below the threshold is expensed. When an internally generated computer project spans more than one year, the total application development costs of the project will be considered when applying the capitalization threshold, not the outlays incurred in individual years (Note: a project would include a modification to existing software).
Example: The University completed an internally generated computer project in two years. The application development outlays were $700,000 and $600,000 in year one and year two, respectively. The University should capitalize these outlays, beginning in year one, since the total application development costs exceed the threshold. At the end of year two, the agency should have capitalized $1,300,000 as computer software in development.
Example: The University has an internally generated computer software program that was placed into service in 2006. The program had total application development costs of $2.5 million. The program was not capitalized since retroactive application was not required. In 2010, the agency modified the program to increase its functionality. The application development outlays of the modification were $600,000. The University should not capitalize the modification since it is below the threshold (Note: if the outlays were $1.1 million, the agency would capitalize the modification).
Universities that acquire a site license to install software on multiple computers (e.g., Microsoft Office) should apply the capitalization threshold on a per unit basis (i.e., cost of the site license divided by the number of authorized users). The capitalization threshold for internally generated computer software should not be applied on a per unit basis.
RETROVACTIVE REPORTING Retroactive reporting is required for intangible assets, except as follows. Retroactive reporting is not required for 1) internally generated intangible assets, including those in development as of the effective date of this policy and 2) intangible assets with an indefinite estimated useful life as of the effective date of this policy.
Intangible assets are considered internally generated if they are created or produced by the government or an entity contracted by the government, or if they are acquired from a third party but require more than minimal incremental effort on the part of the government to begin to achieve their expected level of service capacity.
Computer software is a common type of intangible asset that is often internally generated. Computer software will be considered internally generated if it is developed in-house by the government’s personnel or by a third-party contractor on behalf of the government. Commercially available software that is purchased or licensed by the government and modified using more than minimal incremental effort before being put into operation will be considered internally generated. Any of the following activities would satisfy the “modified using more than minimal incremental effort” criterion: changing code, changing fields, adding special reporting capabilities, and testing any changes.
Intangible assets will be classified as capital assets, except that intangible assets acquired or created primarily for the purpose of directly obtaining income or profit will be classified as investments (e.g. copyright donated to a university to generate income). Existing authoritative guidance related to the accounting and financial reporting for capital assets will be applied to intangible assets, as applicable. Additionally, before an intangible asset can be recognized in the financial statements, it must meet one or both of the following criteria:
- The asset is separable, that is, the asset is capable of being separated or divided from the government and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, asset, or liability.
- The asset arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
If the types of intangible assets reported by UNC Pembroke differ in nature and usage, then they will not be reported collectively as a single major class of capital assets (e.g., intangible assets). For example, the nature and usage of patents differs from that of right-of-way easements such that they should not be aggregated in the same major class of capital assets.
INTERNALLY GENERATED INTANGIBLE ASSETS Capitalization of internally generated capital assets can only occur after ALL of the following conditions have been met:
- 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,
- Demonstration of the technical or technological feasibility for completing the project so that the intangible asset will provide its expected service capacity, and
- 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 will be capitalized. Outlays incurred prior to meeting those criteria will be expensed as incurred.
SPECIFIC APPLICATIONS TO COMPUTER SOFTWARE The activities involved in developing and installing internally generated computer software will be grouped into the following stages:
- Preliminary Project Stage. Activities in this stage include the conceptual formulation and evaluation of alternatives, the determination of the existence of needed technology, and the final selection of alternatives for the development of the software.
- Application Development Stage. Activities in this stage include the design of the chosen path, including software configuration and software interfaces, coding, installation to hardware, testing, including the parallel processing phase, and data conversion needed to make the software operational.
- Post-Implementation/Operation Stage. Activities in this stage include application training, data conversion that is beyond what is strictly necessary to make the software operational, and software maintenance.
All outlays associated with activities in the preliminary project stage will be expensed as incurred. All outlays related to activities in the application development stage will be capitalized, provided the following conditions are met: 1) the outlays were incurred subsequent to the completion of the preliminary project stage and 2) management authorizes and commits to funding (either implicitly or explicitly), at least through the current period. (Note: When these two conditions are satisfied, the above criteria for internally generated intangible assets are considered to be met). For commercially available software that will be modified to the point that it is considered internally generated, these two conditions generally are met at the time UNC Pembroke makes the commitment to purchase or license the computer software. Capitalization of such outlays will cease once the software is substantially complete and operational (i.e., ready for use).
All outlays associated with activities in the post-implementation/operation stage will be expensed as incurred.
The activities within the three stages of development may occur in a different sequence. The recognition guidance for outlays associated with internally generated computer software will be applied based on the nature of the activity, not the timing of its occurrence. For example, outlays associated with application training activities that occur during the application development stage will be expensed as incurred.
If the University is developing an enterprise resource planning (ERP) system with multiple modules, the guidance for reporting outlays based on the stages of software development will be applied for each individual module of the system rather than the system as a whole.
An improvement to existing computer software must do at least one of the following to qualify for capitalization:
- Increase the software’s functionality,
- Increase the software’s efficiency, or
- Extend the software’s estimated useful life.
If the modification does not result in any of the above outcomes, the modification will be considered maintenance, and the associated outlays will be expensed as incurred. If a maintenance contract covers all required maintenance and any unspecified upgrades issued during the year by the vendor, the unspecified upgrades will be considered maintenance.
For commercially available software acquired through a licensing agreement requiring multi-year payments, a long-term liability representing the agency’s obligation to make payments under the contract will also be reported. If no interest rate is stated in the licensing agreement, the long-term liability does not have to be discounted. The provisions of FASB Statement 13, Accounting for Leases, do not apply to licensing agreements.
AMORTIZATION An intangible asset will be considered to have an indefinite useful life if there are no legal, contractual, regulatory, technological, or other factors that limit the useful life of the asset (e.g., permanent right-of-way easement). Intangible assets with indefinite useful lives will not be amortized.
Intangible assets with limited useful lives (e.g., by legal or contractual provisions) will be amortized over their estimated useful lives. Amortization of computer software will begin when the program is placed into service. Renewal periods related to such provisions will be considered in determining the useful life of the intangible asset if the University expects to exercise the renewal option and any anticipated outlays to be incurred as part of achieving the renewal are nominal (in relation to the level of service capacity obtained through the renewal).
IMPAIRMENT INDICATOR 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 will be reported at the lower of carrying value or fair value, assuming the stoppage was considered to be permanent (see GASB Statement 42).
Common Types of Intangible Assets
- Computer software
- Purchased or licensed
- Internally generated
- Land use rights (e.g., water, timber, and mineral rights)
Note: land use rights associated with property already owned by an agency should not be reported as intangible assets separate from the property
- Patents, copyrights, and trademarks