University Policy Number 2109
Responsible Office: Fiscal Services
Related Law & Policy:
- Policy 2104: Inventory Control of Office and Educational Equipment and Furniture
This policy applies to all George Mason University organizations, faculty, and staff at all University locations, owned or leased.
This administrative policy describes the general guidelines for capitalization in order to exercise appropriate stewardship and accountability for all capital assets regardless of the method of acquisition (purchase, lease, fabrication, donation, borrowings, etc.) or the source of funding. This policy complies with federal government and Commonwealth of Virginia policies for recording capital assets in the University’s financial records. All assets meeting the definitions and valuation thresholds in section III of this policy will be recorded in the University’s financial records and depreciated (Land, Construction in Progress and inexhaustible Works of Art and Historical Treasures are not subject to depreciation) on its financial statements in accordance with generally accepted accounting principles. Assets obtained by the University include those that are purchased with university or grant funds, or acquired by other means. Title to or ownership of allCommonwealth or University property shall be deemed to be vested in George Mason University unless stipulated otherwise by the funding source. Title does notrest with any department or employee, regardless of the source of funds or donations associated with the acquisition. This policy imposes the requirement that proceeds from sales of items held in uncapitalized collections of works of art or historical treasures, as defined in Section III, will be used to acquire other items for collections, or to preserve collections.
A. Capital assets include land, land improvements, infrastructure, buildings, building improvements, construction in progress, furniture and equipment; intangible assets such as software, easements, water rights, patents and trademarks; library books, works of art and historical treasures.
B. Depreciation is the process of allocating the cost of exhaustible tangible capital assets over a period of time, rather than deducting the cost as an expense in the year of acquisition.
C. Amortization is the process of allocating the cost of exhaustible intangible assets over a period of time, rather than deducting the cost as an expense in the year of acquisition.
D. Valuation of capital assets is the amount, expressed in U. S. dollars, assigned in the financial records as the recorded value of a long-lived asset.
1. Land acquired by purchase is recorded at cost and includes the amount paid for the land itself and all related acquisition costs.
2. Land acquired by gift or bequest is recorded at the fair market value at the date of acquisition.
3. When land is acquired with buildings erected thereon, total cost is allocated between land and building in reasonable proportion at the date of acquisition. If the transfer document does not show the allocation, other sources may be used, such as an expert appraisal or real estate tax assessment records.
4. Land improvements with a total cost greater than $100,000 and an estimated life greater than one year will be capitalized. Examples of such improvements include (but are not limited to) landscaping, parking lots, athletic fields, tennis courts, fencing, and outdoor lighting.
F. Infrastructure Assets
1. Infrastructure assets are long-lived assets that can be preserved for a significantly greater number of years than most capital assets and that are normally stationary in nature. Examples include roads, bridges, tunnels, utility distribution systems, water and sewer systems and dams. They do not include buildings, driveways, parking lots or any other items that are incidental to the property or access to the property. Infrastructure assets with a total cost greater than $100,000 and an estimated life greater than one year will be capitalized.
G. Buildings and Building/Leasehold Improvements
1. Buildings acquired by purchase are recorded at cost and include all permanent structures and all integral fixtures, machinery, and other appurtenances that cannot be readily removed without disrupting the basic building structure or services to the building.
2. Buildings acquired by gift or bequest are recorded at the fair market value at the date of acquisition.
3. When buildings are constructed, all identifiable costs are included, such as (but not limited to) contract costs, insurance and interest costs incurred during the period of construction. Costs are accumulated in Construction in Progress until the date of beneficial occupancy.
4. The costs of research buildings (buildings in which a significant portion of the total square footage is used for organized research) will be accumulated by major component and depreciated using the component method.
5. Structural remodeling/renovation and additions are capitalized when they enhance the use of, or extend the life of the building beyond its original estimated useful life, and the total cost equals or exceeds $100,000 or 20% of the building’s cost, whichever is less.
H. Construction in Progress
1. Construction in progress includes all expenditures directly related to building construction, renovations, or additions. These costs include contract costs (materials, labor, and overhead) as well as professional fees and interest incurred during the construction period.
2. Upon completion, construction-in-progress costs are transferred to buildings, improvements or infrastructure.
I. Furniture and Equipment
1. Furniture and equipment includes all personal property that is (i) not permanently affixed to land or buildings, (ii) has a useful life greater than one year, and (iii) has a unit cost of $5,000 or more. Personal property acquired for resale is not to be recorded as a capital asset but as merchandise inventory.
2. A unit of equipment is defined for purposes of this policy as an individual item, or group of items, which is usable for its intended function and which cannot be separated without a diminishment in the usability of the item for its intended purpose. For example: an individual computer workstation generally comprises a monitor, keyboard, and the computer processor. Neither the monitor nor the keyboard can function without the processor and generally would not meet the threshold. The processor, however, could perform its intended function independent of other items, and is to be capitalized if it meets the threshold. Capitalizing the monitor and keyboard depends upon whether or not they are classified as accessories. Capitalization of accessory items is based on the following guidelines:
(a) Accessory equipment should be included as a portion of the capitalized cost of the capital item if it was invoiced at the time of the initial purchase.
(b) Accessory equipment purchased with the intent of using it interchangeably with two or more items should be capitalized and recorded as a separate item of equipment, if it meets the dollar threshold.
(c) Accessory equipment acquired subsequent to the purchase of the parent item must meet the capitalization criteria separately.
3. For purchased equipment, the valuation is the net amount paid to the vendor, which is the invoice price less all discounts (except trade-in allowances). Freight and installation costs also are included if they are shown on the original invoice, or if they are readily available on related freight bills.
4. The rebuilding of equipment will be capitalized if the total rebuilding costs exceed the threshold and the rebuilding project effectively restores the equipment to a like-new condition and/or significantly extends the item’s useful life or markedly increases the item’s net book value.
5. Leased equipment is capitalized if it meets the capitalization criteria outlined in this policy and the Financial Accounting Standards Board (FASB) Standard No. 13, (November 1976). If any one of the following conditions exist at the initiation of the lease then the lease is to be treated as a capital lease:
(a) The lease transfers ownership of the leased asset to the lessee by the end of the lease term. There must be a provision in the lease contract that legal ownership will be transferred.
(b) The lease contains a bargain purchase option (BPO). The lease must have a provision that gives the lessee the right (an option) to buy the leased asset at a price that is significantly lower than the expected market value at the option date.
(c) The lease term is equal to 75% or more of the total estimated economic life of the leased asset.
(d) The present value of the minimum lease payments at the inception of the lease is at least 90% of the market value of the leased asset at that time. Minimum lease payments are the rental payments that the lessee is obligated to make in connection with the leased property. If the lease contains a BPO, the minimum lease payments equal the minimum rental payments plus the BPO amount. If the lease does not contain a BPO, the minimum lease payments include: (1) the minimum rental payments required by the lease over the lease term; (2) any residual value guarantee by the lessee at the expiration of the lease term; and (3) any penalty payment the lessee would be required to make if the lease is not renewed or extended at the expiration of the lease term.
6. Fabricated equipment, i.e., final operating units produced by combining component systems and subsystems are capitalized at the total cost of the component parts if the final assembly meets the three capitalization criteria stated in Section 1, above.
J. Intangible Assets
1. Intangible assets include computer software, property easements, water rights, timber rights, patents, and trademarks. Intangible assets developed or purchased for internal use with a useful life of more than one year are governed by this policy; intangibles held for the production of income are to be treated as investments and governed by accounting standards covering investments.
2. Intangible assets that are purchased or received in a non-exchange transaction should be capitalized if the unit cost of acquisition or the estimated fair value at the time of acquisition plus ancillary costs is $10,000 or more.
3. Internally developed intangible assets should be capitalized if the development costs are $100,000 or more.
4. Computer Software
a. Software is considered to be internally developed if both of the following tests are met:
i. The software is internally developed, or purchased and modified solely to meet the entity’s internal needs; and
ii. During the software’s development or modification, no substantive plan exists or is being developed to market the software externally.
b. Software development generally involves three phases, as follows:
i. Preliminary project phase. Conceptual formulation of alternatives, evaluation of alternatives, determination of existence of needed technologies, and final selection of alternative.
ii. Application development stage. Design of chosen alternative, including software configuration and interfaces, coding, installation of computer hardware, and testing.
iii. Post-implementation/operation phase. Training and application maintenance activities.
c. Costs associated with the preliminary project and post-implementation/operation phases are expensed as incurred. Costs (internal and external) associated with the application development stage are capitalized.
d. Capitalization of costs begins when the preliminary phase is complete and the University’s management has implicitly or explicitly committed to funding a software project with the intent it will be completed to perform the planned functions.
e. Capitalization ceases no later than the time when substantial testing is complete and the software is ready for its intended purpose or rendered in service.
f. Examples of expenditures that should be capitalized during the application development stage include:
i. External direct costs of materials and services consumed in developing or obtaining internal-use computer software (e.g., fees paid to third parties for services provided to develop the software during the application stage), costs of computer software purchased from third parties, and travel expenses of employees incurred in their duties directly associated with developing software;
ii. Payroll and payroll-related costs (e.g., employee benefits) for employees who are directly associated with and devote time to the internal-use computer software; and
iii Interest costs incurred while developing the software.
g. General and administrative cost and overhead costs are not capitalized; they are expensed as incurred.
K. Library Books and Materials
When library books and materials are considered to have a useful life of more than one year, they are capitalized. Because library collections consist of a large number of items with modest values, they are reported on a composite basis. The composite basis records net additions and deletions to reflect an overall increase or decrease in the value of the collection.
L. Works of Art and Historical Treasures
1. Works of art and historical treasures, whether they are held as individual items or in collections, are capitalized if their purchase cost or fair market value at the time of donation is $10,000 or greater, except as set forth in Section L.2, below.
2. In the ordinary course of business, collections will be capitalized in accordance with Section L.1, above. However, in certain circumstances, it might be preferable not to capitalize a collection. A collection is not required to be capitalized if it meets all of the following condictions for exemption from classification:
The collection is:
a. Held for public exhibition, education, or research in furtherance of public service, rather than financial gain;
b. Protected, kept unencumbered, cared for, and preserved; and
c. Subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections, or to preserve collections (see Section II, Policy Statement, above).
Depreciable capital assets include all tangible capital assets except land, construction-in-progress, works of art and historical treasures. Amortizable capital assets include all intangible capital assets that are not considered to have an indefinite useful life. Depreciation and amortization are calculated using the straight-line method over the applicable useful life with no salvage value. Useful life is determined by commodity nomenclature codes developed by the Commonwealth of Virginia Department of Accounts or by the primary manager of the asset category. The individual components of research buildings are depreciated over the estimated useful life of each component. Depreciation and amortization begin in the month following acquisition, and end in the month following disposal or at the end of the assigned useful life, whichever comes first. The acquisition date for capital construction and renovation projects is the beneficial occupancy date. The acquisition date for internally developed intangible assets is date on which the asset’s development is substantially complete and the asset is operational.
Expenditures for repairs, maintenance or replacement of component parts or accessories, which do not extend the unit’s original estimated useful life or significantly enhance its net value, are non-capital expenditures. For example, assume an automobile has a useful life of five years. In the third year the engine is rebuilt so that the original life expectancy can be realized. The rebuilding of the engine is not a capital expenditure even if the total cost exceeds the threshold, because the expected useful life of the automobile has not been extended beyond the original life expectancy.
Expenditures incurred in demolishing or dismantling equipment including those expenditures related to the replacement of units or systems are non-capital expenditures.
Expenditures incurred in connection with the rearrangement, transfer, or moving capitalized items from one location to another, including expenditures incurred in dismantling, transporting, reassembling and reinstalling such items in a new location are non-capital expenditures.
A. COMMONWEALTH ACCOUNTING POLICIES AND PROCEDURES MANUAL, Function No. 30000 — FIXED ASSET ACCOUNTING– CAPP MANUAL http://www.doa.virginia.gov/Admin_Services/CAPP/CAPP_Summary.cfm
B. OFFICE OF MANAGEMENT AND BUDGET’S UNIFORM ADMINISTRATIVE REQUIREMENTS, COST PRINCIPLES, AND AUDIT REQUIREMENTS FOR FEDERAL AWARDS (OMB UNIFORM GUIDANCE).
C. ACCOUNTING FOR THE COSTS OF INTERNAL USE COMPUTER SOFTWARE AND OTHER INTANGIBLES, GASBS 51.
All amendments and additions to this Administrative Policy are to be reviewed and approved by the Provost and the Senior Vice President.
The policies herein are effective July 1, 2009. The furniture and equipment capitalization threshold (III.I.1) is effective July 1, 2010. This Administrative Policy shall be reviewed and revised, if necessary, annually, to become effective at the beginning of the University’s fiscal year, unless otherwise noted.
Maurice W. Scherrens
Senior Vice President
Peter N. Stearns
Date approved: April 3, 2006
Revision approved: August 17, 2010
Revised April 16, 2012