Administrative Procedure 8.550 Administrative Procedure 8.550

Capitalization

Administrative Procedure Chapter 8, Business and Finance
Administrative Procedure AP 8.550, Capitalization
Effective Date:  July 2016
Prior Dates Amended:  This Administrative Procedure replaces A8.550, Capitalization, July 1999, June 2001, May 2003, May 2009; A8.551 Non-Expendable Personal Property May 2002, May 2003; and A8.552 Real Property December 2000, May 2002, May 2003
Responsible Office: Office of the Vice President for Budget and Finance/Chief Financial Officer
Governing Board and/or Executive Policy: EP 1.102, Authority to Manage and Control the Operations of the Campus 
Review Date:  July 2019

To establish capitalization policies and procedures for the proper accounting treatment of the University of Hawai‘i’s (University) capital assets to ensure conformity with Federal and State regulations and generally accepted accounting principles (GAAP).  Capital assets include property, plant, and equipment purchased and constructed by the University.

A.  Building - A structure with a roof and walls standing more or less permanently in one place, such as a house or school.  Common components of a building include:  foundations, framing, floors, walls, roofs, interior and exterior finish, doors, windows and hardware.  The costs to be recorded are the costs of acquiring or constructing a building to be used by the University.  Generally, all costs incurred beginning with excavation through completion of construction are considered part of the building costs.  However, the cost of the building should not include the cost of land, land improvements, or equipment.

B.  Building Improvement – An improvement that involves major alteration or renovations to an existing building.  These costs should be capitalized and added to the building asset category for depreciation purposes.  Routine maintenance projects such as repairing, painting, refurbishing should not be capitalized but charged as operating expense.

C.  Capitalization – A process to record a cost as an asset, rather than an expense.  This approach is used when an asset is expected to have a useful life more than one year.  Capitalized assets include:  property, plant, and equipment.

D.  Capitalization threshold – A minimum dollar amount that is established by the University for asset capitalization purposes.  The thresholds are as follows:

Asset Classification	Capitalization Threshold
Land	All acquisitions
Land Improvement	$100,000
Building & Building Improvement	$100,000
Infrastructure	$100,000
Equipment	$5,000
Software	$25,000

E.  Construction in Progress (CIP) Asset – An accounting term that refers to an asset in which construction and related costs are recorded until the project is completed.  When the project is completed, the asset or assets are classified in their actual form such as:  buildings, building improvements, infrastructure, equipment, etc.

F.  Depreciation – An accounting process to allocate the cost of a tangible capital asset over its estimated useful life in a systematic and rational manner. 

G.  Equipment – Tangible property that is used in the operations of a business that has a useful life for more than one year and an acquisition cost of $5,000 or more per unit. 

    1.  Fixed Equipment – Equipment which is attached to a building but would not require an extraordinary expenditure to remove.  It includes furniture and equipment affixed to the building that serves the function of the institution, such as built-in benches, cabinets, counters, and lockers.

    2.  Moveable Equipment – Equipment that is not built into or permanently fastened to a building and does not lose its identity when incorporated into a more complex unit.  Examples are machinery (which is not part of a building’s mechanical system), furniture and furnishings, instructional and research equipment.

H.  Infrastructure – A long lived capital asset that is normally stationary in nature and can be preserved for a significantly greater number of years than most capital assets.  Examples of infrastructure assets include roads, sidewalks, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems.

I.  Intangible Asset – An asset that lacks physical substance and usually is very difficult to evaluate for valuation.  Corporate intellectual property, trademarks, copyrights, goodwill, and brand recognition are examples of intangible assets. 

J.  Land - Land comprises the portion of real property that is not a building or other classification of asset.  It is basically the ground that the title document identifies.  Land cost should include all expenditures to acquire a site (purchase price, closing costs, legal fees, and recording fees) and costs to prepare a site for construction (removal of existing structures, draining, filling, and clearing).

K.  Land Improvement – Betterments that are made to prepare the land for its intended use.  Costs incurred for land improvement should have limited lives such as parking lots, fences, and landscaping. 

L.  Library Books – Collections that are maintained by the libraries.  Library collections shall include, but not limited to books, bound volumes, periodicals, photographs, audio-visual materials, etc. that are identified, cataloged, shelved, and stored by the libraries.

A.  Accounting Principles

    1.  Purchased assets should be reported at historical cost.  The cost of a capital asset should include ancillary charges necessary to place the asset into its intended location and condition for use.

    2.  Donated capital assets should be reported at their estimated fair value at the time of acquisition plus ancillary charges, if any.

    3.  The proper timing of capitalization of expenditures is required to comply with the matching principles of GAAP. 

B.  Capitalization

    1.  Construction (CIP Projects)

        a.  Capitalized Expenditure

            (1)  Expenditures are capitalized if aggregate project costs are expected to equal or exceed the applicable capitalization threshold and:

                (a)  Result in additional asset services (expanded facilities);

                (b)  Result in more valuable asset services (upgraded facilities); or

                (c)  Extend normal service life beyond one year; or

                (d)  Subsequent costs to initial acquisitions that result in extending the life or increasing the value of a real property asset shall also be capitalized. 

            (2)  Assets should be placed in service when the project:

                (a)  Is substantially completed at 95% or more, either in phase or the entirety of a project and in use;

                (b)  Facilities offices receive Notice of Beneficial Occupancy or Project Acceptance Notice.

Note:  Resolution of punch list items and billing disputes should not delay capitalization unless the nature is so significant that the asset is rendered virtually unusable until resolution.

        b.  Non Capitalized Expenditure

Expenditures should not be capitalized if they were incurred to maintain an asset in good operating condition.  The following examples, although not all inclusive and subject to varying circumstances, are generally considered to be current non-capitalized expenditures:

            (1)  General Repairs

            (2)  Roof Repairs

            (3)  Repainting

            (4)  Window Replacements

            (5)  Alterations and rearrangement which prepared existing space for new purposes

            (6)  Replacement  projects (e.g. building improvement) which cost less than $100,000.

            (7)  Replacement floor and window coverings, such as:  linoleum, tile, carpet, blinds, and drapes.  Such costs associated with new construction, however, are capitalized. 

    2.  Equipment

        a.  Expenditures should be capitalized if the equipment has a useful life for more than one year, and an acquisition cost of $5,000 or more per asset accountability unit (AAU).  AAU is defined as encompassing all components and/or subsystems as necessary for the asset to perform and function for an intended purpose or mission.  The capitalization value shall consist of the purchase price, and costs incurred to prepare the asset for its normal or intended use.

        b.  Equipment fabricated or constructed by the University for its own use shall be identified as an AAU and capitalized accordingly.  Each AAU shall include all direct costs (materials, purchased components and labor expenses).

        c.  Costs incurred for repairs and maintenance, which either restore the moveable equipment AAU to, or maintain it at its normal or expected service life or production capacity shall be treated as operating costs of the current period.

    3.  Software

        a.  Purchased software with a unit acquisition cost of $25,000 or more per unit shall be capitalized.  Software developed or obtained for internal use with a unit acquisition cost of $25,000 or more shall be capitalized.  Costs of software developed or obtained for internal use shall include:

            (1)  Payroll and payroll-related costs for employees who are directly associated with developing the internal use software.  Eligible employees, for example, are programmers and end users who are directly involved with the development or testing of the software.

            (2)  External direct costs of materials and services consumed in developing or obtaining the internal use software such as fees paid to third party consultants, cost of developing or acquiring coding, and testing.

        b.  Costs for training, maintenance associated with an existing system where no substantive new functionality is being added, and data conversion shall be expensed as incurred. 

        c.  Software developed for internal use with unit acquisition cost of $25,000 or more shall be reported to the Property and Fund Management Office (PFMO) via PFMO-73 Fabricated Equipment.  Capitalization costs shall cease when the software has completed testing and ready for its intended use.  Upon completion of software development, the Fiscal Administrator, or Asset Representative shall inform the PFMO via memorandum of the completion of the project and the in-service date.   

    4.  Works of Art

        a.  For works of art, estimated current market value in lieu reporting of reporting a cost-based amount is acceptable.  Works of art may be excluded from inclusion in the financial reports if all of the following criteria are met:

            (1)  They are held for exhibition, education, or research in furtherance of public service rather than financial gain;

            (2)  They are protected, kept unencumbered (i.e., not pledged as collateral), cared for, and preserved.

    5.  Library Books

        a.  Library books will be capitalized monthly based on aggregate acquisition costs.

        b.  A monthly report is sent to Fiscal Administrators to verify their acquisitions for accuracy.

        c.  Acquisitions defined as library books shall be coded according to the table in section D.

        d. Yearly depreciation will be calculated based on acquisitions.

    6.  Donated Assets

Donated asset units that meet the criteria for capitalization shall be assigned a fair market value at the time the institution takes custody.  The University of Hawaii Foundation DP014, Transmittal Form for Non-Cash Gifts, shall be completed to document the donated transaction.

    7.  Maintenance and Warranty

The cost of maintenance, whether purchased with the property or purchased separately, shall not be capitalized for financial reporting since the cost of maintenance or warranty are not considered tangible, i.e., it is a guarantee against defects or poor workmanship under normal use.

    8.  Examples of Capitalized Expenditures

Attachment 1 provides examples of expenditures, which are to be capitalized as land, land improvements, infrastructure, building, and equipment.  The list is intended to suggest the scope of capital expenditures processed by the University and is not exhaustive. 

C.  Depreciation Schedule

Depreciation is an accounting method of allocating the cost of a capital asset over its estimated useful life.  In the Kuali Financial System (KFS), the “in-service date” records the starting date in the useful life of a capital asset.  The University uses the straight-line method to depreciate its capitalized assets.  Refer to Attachment 2 for details.

D.  Object Codes Used in the KFS

    1.  The object codes used in the KFS for capitalized assets describe the asset category and the ownership.  The first three digits of the object code describe the asset category and the last character describes the ownership.

    Object Codes
    76XX = Construction
    77XX = Equipment
    78XX = Library Books

    Ownership Codes
    A = Agency owned
    F = Federal owned
    G = Federally funded, University vested
    U = University owned

    2.  Construction

Payments made during the construction for buildings, land improvements, and infrastructure shall utilize the object codes in the following table until the capital project is first placed into service.

Category of Asset	Object Code	Threshold Amount
Construction	760X	$100K or more
Construction-Disaster Recovery Proj	761X	$100K or more
Construction-Architects & Engineers	762X	$100K or more
Construction-Arch & Engr-Disaster Recov	763X	$100K or more

    3.  Equipment, Capital Lease, Controlled Property, and Non-Capitalized Equipment
Payments for these items shall utilize the object codes in the following table:

Category of Asset	Object Code	Threshold Amount
Equipment	770X	$5K or more
Equipment-Disaster Recovery Proj	771X	$5K or more
Equipment-Fabrication	772X	$5K or more
Equipment-Fabr-Disaster Recovery Proj	773X	$5K or more
Capital Lease	774U	$5K or more
Weapons/Firearms	775X	Any amount
Controlled Property Owned by Agency	776A	Less than $5K
Controlled Property Owned by Federal	776F	Less than $5K
Non-Capital	777U	Less than $5K

    4.  Library Books

Payments for library collection items shall utilize the object codes in the following table:

Category of Asset	Object Code	Threshold Amount
Library Acquisition Operations	780X	Any amount
Library Acquisition Periodicals	781X	Any amount
Library Acquisition Other Materials	782X	Any amount
Library Acquisition-Disaster Recovery Proj	783X	Any amount

                
E.  Project Completion Reporting

Upon completion of a capital project or fabrication, the Fiscal Administrator, Facilities Project Manager, or Asset Representative must inform the PFMO via memorandum of:

    1.  Completion of the capital project or fabrication

    2.  In-Service date

    3.  Percentage of cost allocations for construction projects involving multiple AAU.  It is to ensure that the expenditures are appropriately capitalized for audited financial statement purposes. 

    4.  A copy of Notice of Beneficial Occupancy or Project Acceptance Notice.

There is no administrative specific delegation of authority.

Property & Fund Management Office, 956-8735, or pfmo@hawaii.edu
Website:  http://www.fmo.hawaii.edu/capital_assets/index.html

    A. Link to superseded Executive Policies in old format https://www.hawaii.edu/policy/archives/ep/
    B. Link to Administrative Procedures in old format https://www.hawaii.edu/policy/archives/apm/sysap.php

Attachment 1:    Examples of Capitalized Assets and Expenditures
Attachment 2:    Depreciation Schedules by Asset Classification

    Vice President for Budget and Finance/Chief Financial Office