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Capitalization Policy

 

West Virginia University Policy
Division of Administration and Finance

Policy Number: IARA-01


CAPITALIZATION POLICY


Reason For This Procedure:

To Whom Does This Procedure Apply:  

 

Definitions



Buildings

Includes buildings purchased or constructed. Construction projects are initially capitalized to construction in progress. Subsequently, the capitalized expenditures are recorded as an asset.

 

 

Building Improvements

 

The substitution of a better asset for the one currently used (example - install carpeting where none existed or substitute a concrete floor for a wood floor), or any change to the building which increases its future service potential and extends its useful life (example - substitute a new wooden floor for an old deteriorated wooden floor).    

 

Computer Software

Includes computer software acquired for internal use. Generally, only institutionally significant systems with a cost of $100,000 or greater are capitalized. Also includes major modifications (such as an upgrade) to the software.

 

 

Other Intangible Assets

An intangible asset is an asset that 1) lacks physical substance, 2) is nonfinancial in nature and 3) has an initial useful life of one year or more.  This includes right-of-way and other types of easements, water rights, timber rights, patents, copyrights, trademarks, licenses and permits with a cost of $25,000 or more.  This also includes gifts of software with rights to use.  This does not include assets acquired primarily for the purpose of directly obtaining income or profit. 

 

 

Donated Assets

Assets received in a voluntary non-reciprocal transfer from another entity such as gifts of capital assets.

 


 

Equipment

An article of non-expendable, tangible personal property that is free standing, movable, is complete in itself, does not lose its identity when affixed to or installed in other property and has a useful life greater than one year. Includes delivery equipment, office equipment, machinery, furniture and fixtures, factory equipment, instruments and vehicles. Also includes the following –

 

a)      Fabricated Equipment
Fabricated equipment includes self-constructed equipment where the total unit cost incurred to fabricate the equipment is $5,000 or more. Components include enhancement parts that materially and permanently increase the value or useful life of equipment. A system with multiple components which cannot operate independently of each other and together cost $5,000 or more will also be capitalized. The rule-of-thumb is that for a component to be included in the original acquisition cost of a piece of equipment, it should be an attached or installed option which, as assembled, is expected to operate as one unit for the remainder of its life.

 

b) Exceptions to Equipment
Exceptions to the equipment definition are –

Exceptions to the equipment definition are –

·          Assets purchased as repair parts for existing parts in previously tagged equipment.

·          Materials used in repair or replacement in previously tagged equipment.

·          Household equipment (drapes, bedding, carpet replacement).

·          Built-in equipment – such items become part of the building or structure after installation and may be capitalized as building improvements. For example – built-in cabinets, garbage disposals, furnaces, and air conditioners. Please see the definition of Building Improvements.

·          Livestock – is neither tagged nor capitalized.

 

Federally Owned Assets

Includes assets purchased with federally sponsored award funds. These federally funded assets are tagged, recorded and tracked in WVU’s Fixed Assets System but are not reported on the Financial Statements of the University. The title to such assets generally remains with the federal sponsor. However, in some situations the federal sponsor may transfer the title of the asset to WVU.

 

 

Other Party Owned Assets

Includes assets purchased with sponsored award funds (other than federal funds) or assets furnished by the sponsor (non-federal). These sponsor funded or sponsor furnished assets are tagged, recorded and tracked in WVU’s Fixed Assets System but are not reported on the Financial Statements of the University. The title to such assets generally remains with the sponsor. However, in some situations the sponsor may transfer the title of the asset to WVU.

 

 

Federally Furnished Assets

Includes assets directly acquired by and in the possession of the government and subsequently furnished by the government to the University as part of a sponsored award. These federally furnished assets are tagged, recorded and tracked in WVU’s Fixed Assets System but are not reported on the Financial Statements of the University. The title to such assets remains with the federal sponsor and the assets are returned to the government at the end of the contract or sponsored award through which it is provided.

 

 

Infrastructure

Long-lived capital assets that are part of a network of assets that can have service potential for an extended period and that are normally stationary. Example of infrastructure networks – roads, sidewalks, electrical, sewer and water systems, fiber optic cabling system, transit systems, bridges, dams and tunnels.

 

 

Land

Land purchased by WVU or acquired by gift or bequest.

 

 

Land Improvements

Any improvements with a limited life made to ready land for its intended use that is not part of an infrastructure network. Examples of land improvements -  parking lots, landscaping, benches, fountains, bleachers, retaining walls, septic systems.

 

 

Leased Assets

Assets that are purchased under lease purchase contracts or agreements. Leased assets are capitalized if the non-cancelable lease agreement meets any one of the following requirements (as prescribed by GASB Statement No. 62) –

I. The lease transfers ownership of the property to the lessee (WVU) by the end of the lease term.
II. The lease contains a bargain purchase option, i.e., allows the lessee (WVU) to purchase the asset for a price that is substantially lower than the expected fair value of the asset at the date the option becomes exercisable.
III. The lease term is equal to 75 percent or more of the estimated economic life of the leased property.
IV. The present value of the minimum lease payments at the inception of the lease equals at least 90 percent of the fair value of the leased property.

Lease agreements not meeting any one of the above criteria are considered operating leases and not capitalized. The period payments are recorded as an expense.

 

Leasehold Improvements

Improvements to land and building leased by the University. These may include walls and partitions, electrical wiring and fixtures, heating and cooling systems, roofing and plumbing. Repair, maintenance and painting of existing improvements are not leasehold improvements.

 

 

Library Resources

Library acquisitions include regular volumes, books, journals, periodicals, archives, subscriptions, microforms, audio/visual media, CD-ROMs, and electronic resources.

 

Repairs and Maintenance

Expenditures incurred to maintain assets in operating condition. Repairs and maintenance does not usually make the asset more useful or add to the estimated life of the asset. Examples: Land - mending a broken fence, unclogging drainage systems, and repainting park benches. Building - replacing old carpet with new carpet, repainting interior or exterior, mending a roof (not replacing a leaky roof). Equipment - replacing minor parts, lubricating and adjusting, getting a computer cleaned.

 

Repairs and maintenance expenditures are not capitalized and are charged as an operating expense.

 

Works of Art, Literature and Historical Treasures

The University maintains various collections of inexhaustible assets including contributed works of art (paintings, sculptures, and other artifacts), historical treasures (memorabilia, unique and significant structures) and literature (rare books and manuscripts). They are held for exhibition, education, research and furtherance of public service. These collections are neither disposed of for financial gain nor encumbered.

 

Since no value can be practically determined for these assets, such collections are not capitalized.

 

 

Procedure     

For Financial Statement purposes the capitalization requirements are as follows –

 

1.  Movable Equipment having a useful life of one year or more and a total acquisition cost of $5,000 or more per single unit. A single unit is defined as a piece of equipment, that when assembled, functions as a stand-alone unit.

Leased Equipment if it meets the capitalization criteria of Governmental Accounting Standards Board Statement (GASB) Statement No. 62. Please see the definition of Leased Assets in Appendix A.

Donated Equipment having a useful life of one year or more and fair market value of $5,000 or more.

 

2. Buildings, Building Improvements, Land Improvements and Infrastructure having a useful life of one year or more and a cost of $25,000 or more.

Leased Buildings if they meet the capitalization criteria of GASB Statement No. 62. Please see the definition of Leased Assets in Appendix A.

Donated Buildings having a useful life of one year or more and fair market value of $25,000 or more.

 

3. Computer Software having a useful life of one year or more and a cost of $100,000 or more.

Leased Computer Software if it meets the capitalization criteria of GASB Statement No. 62. Please see the definition of Leased Assets in Appendix A.

4.    Other Intangible Assets having a useful life of one year or more and a cost of $25,000 or more.

5. Leasehold Improvements having a useful life of one year or more and a cost of $25,000 or more.

6. Land is capitalized irrespective of cost.

7. Library Books, Reference Materials and Resources are capitalized irrespective of cost.

8. Federally Owned and Other Party Owned Assets are not capitalized unless the title to the asset is transferred to WVU. In that case such assets are capitalized at their fair market value (net book value at the time of transfer).

9. Works of Art, Literature and Historical Treasures are not capitalized.

10. Repairs and Maintenance related expenditures are not capitalized.

Responsibilities

Procedure Development

Implementation

Interpretation

Contacts

Additional information or questions regarding this procedure can be obtained by contacting:

Related Documents

Appendix A

West Virginia University Capitalization Policy

Definitions

1.      BUILDINGS

Definition

Capitalized Costs

2.      BUILDING IMPROVEMENTS

Definition

Capitalized Costs

3.      COMPUTER SOFTWARE

Definition

Capitalized Costs

4.       OTHER INTANGIBLE ASSETS

Definition

Capitalized Costs

5.      DONATED ASSETS

Definition

Capitalized Costs

6.      EQUIPMENT

Definition

Fabricated Equipment

 

Exceptions to Equipment

Capitalized Costs

The cost of equipment includes all expenditures incurred for the equipment and preparing it for its intended use. This includes the invoice purchase price, one-time charges for freight and handling, insurance on the equipment while in transit, cost of special foundations if required, assembling and installation costs, and blueprint and development costs if applicable.

7.      FEDERALLY OWNED ASSETS

Definition

Capitalized Costs

8.      OTHER PARTY OWNED ASSETS

Definition

Capitalized Costs

9.      FEDERALLY FURNISHED ASSETS

Definition

Capitalized Costs

10.  INFRASTRUCTURE

Definition

Capitalized Costs

11.  LAND

Definition

Capitalized Costs

12.  LAND IMPROVEMENTS

Definition

Capitalized Costs

13.  LEASED ASSETS

Definition

Assets that are purchased under lease purchase contracts or agreements. Leased assets are capitalized if the non-cancelable lease agreement meets any one of the following requirements (as prescribed by GASB Statement No. 62) –

I.      The lease transfers ownership of the property to the lessee (WVU) by the end of the lease term.

II.      The lease contains a bargain purchase option, i.e., allows the lessee (WVU) to purchase the asset for a price that is substantially lower than the expected fair value of the asset at the date the option becomes exercisable.

III.      The lease term is equal to 75 percent or more of the estimated economic life of the leased property.

IV.      The present value of the minimum lease payments at the inception of the lease equals at least 90 percent of the fair value of the leased property.

Lease agreements not meeting any one of the above criteria are considered operating leases and not capitalized. The period payments are recorded as an expense.

Capitalized Costs

14.  LEASEHOLD IMPROVEMENTS

Definition

Capitalized Costs

15.  LIBRARY RESOURCES

Definition

Capitalized Costs

16.  REPAIRS AND MAINTENANCE

Definition

Expenditures incurred to maintain assets in operating condition. Repairs and maintenance does not usually make the asset more useful or add to the estimated life of the asset. Examples –

Repairs and maintenance expenditures are not capitalized and are charged as an operating expense.

17.  WORKS OF ART, LITERATURE AND HISTORICAL TREASURES

Definition

Since no value can be practically determined for these assets, such collections are not capitalized.

Outline

A.    Background

B.     Definition of Internally Developed Software for Internal Use

C.     Stages of Software Development

D.    Capitalization of Software Costs

E.     Upgrades/Internally Generated Modification of Software Already in Operation

F.      Costs of Website Development

GASB: Governmental Accounting Standards Board

Capitalization: Recording costs incurred as an asset instead of an expense

A.    Background

B.     Definition of Internally Developed Software for Internal Use

C.    Stages of Software Development

(Costs should be expensed as incurred & not capitalized)

Includes the following activities:

Application Development Stage

(Cost Accumulation Phase)

Includes the following activities:

 D.    Capitalization of Software Costs

When to capitalize

Capitalization of costs should begin when both:

a)      the Preliminary Project phase is complete and

b)      the institution’s management has authorized or committed to funding the software project with the intent it will be completed and used to perform its planned functions.

For commercially developed software that will be modified to the point that it is considered to be internally generated, (a) and (b) are considered to have occurred upon the institution’s commitment to purchase or license the software.

Capitalization should cease no later than the time at which the software is substantially complete and operational. 

The University’s capitalization threshold is $100,000.

Allowable costs to be capitalized

The following internal and external costs associated with the Application Development phase should be capitalized:

External direct costs from third party transactions including:

Payroll & payroll-related costs including:

The following costs should not be capitalized:

 

Amortization/depreciation of capitalized costs

E.     Upgrades/Internally Generated Modification of Software Already in Operation

F.      Costs of Website Development

 

Originally Issued: July 1, 2010
Updated: February 8, 2016
Approved by: Daniel A. Durbin, Senior Associate Vice President for Finance