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Accounting for Buildings & Improvements

Guidance on establishing when costs for buildings and improvements must be capitalized at the university.

  • Building & Structure: A building is a structure that is permanently attached to the land, is not infrastructure, and is not intended to be transportable or moveable.
  • Fixed Equipment: Includes furnishings and equipment which are permanently attached or fastened to the building, but are not themselves structural components. They cannot be removed without costly or extensive alterations or repairs to the building.
  • General Improvement: Improvements that cannot be assigned to a building or structure.
  • Construction in Progress (CIP): Accounts are only used at fiscal year-end by Capital Asset Accounting to report the amount of expenditures for projects that are not yet placed in service and ready to be formally capitalized.

The capitalization entry for CIP is reversed in the new fiscal year.


Procedures

1. Purchased Buildings:

All costs associated with the construction or purchase of new buildings and structures (including permanently anchored trailers or modular buildings) should be capitalized. Major and minor capital improvement projects are included as part of the university's Capital Improvement Program. The university defines a “capital project” as any construction, renovation, or capital asset acquisition activity that adds, or eliminates building or site services, utilities, or architectural components. There are two categories of capital projects at the university  Minor Capital Projects ($35,000 to $750,000) and Major Capital Projects (over $750,000). The expenditures for the year are tracked as spent and accounted for in the Plant General Ledger (Campus and School of Medicine Chart P, Med Center in Chart M, and ANR in Chart L). 

CAA reviews all project expenditures for proper accounting treatment (meets capitalization policy) and classification (appropriate asset type and CAAN number is assigned), as well as reviews the appropriations versus expenditures by fund source and communicates to Design and Construction Management (DCM) and Capital Space Planning (CSP) any overdrafts. For further information of the process refer to Capital Projects Flow Chart.

2. Construction and Improvements:

Plant Funds: All costs associated with the construction of new buildings and structures should be capitalized. These costs should be capitalized when construction projects are 90% complete or a certificate of occupancy has been issued.

Current funds: The range of expenditures that properly should be treated as capital additions is so varied that it is impossible to provide explicit guidelines. An analysis is made at the time a requisition or purchase order is issued to determine the nature of the work being performed.

An evaluation is made to decide if activity is a capitalized additions:

  • must be consistent,
  • additions must be material (over $35,000)
  • and the additions must benefit future periods (greater usefulness, increase efficiency, increased life of building).

Capital expenditures recorded to current fund must use object code 9700. At the end of each fiscal year, a listing of object code 9700 expenditures will be prepared and reviewed by Capital Asset Accounting for proper classification. Refer to attachment A for cost examples that are capitalized as building improvements or expensed.

Determining the capitalization of expenditures paid from current funds:

Activity

Description

Treatment

Improvements or betterments

Significant alterations or structural changes to plant assets which increase the usefulness, enhance the efficiency, or prolong the life of property.

Capitalize

Repairs

Normal, regularly recurring disbursements to keep property in an efficient operating condition, neither adding to the value of the property nor appreciably prolonging its life.

Expense

Replacements

Replacements of component parts of buildings or structures that do not significantly lengthen the a life of the entire asset.

Expense

Reconditioning

Purpose of improving operating efficiency.

Capitalize

Care should be taken to distinguish capitalizable improvements from non-capitalizable maintenance cost. Normal, regularly recurring repairs and maintenance to keep property in an efficient operating condition should not be capitalized. Repairs or replacements that have an effect on a capital asset’s functionality or materially extend a capital asset’s expected useful life should be capitalized.

  • The useful life of an asset is considered extended when the change to the asset is significant enough to cause the expected useful life to increase beyond the original estimation.
  • Improvements should either increase usefulness, function, or service capacity.

3. Fixed Equipment

Costs associated with the construction or purchase of new buildings and structures should be capitalized. Fixed equipment does not include:

  • Permanent coverings (such as paneling or tiling),
  • Central air conditioning and heating systems,
  • Plumbing and plumbing fixtures (such as sinks and bathtubs),
  • Electrical wiring and lighting fixtures, escalators, elevators, or sprinkler systems.

These items are building components. In addition, capital moveable equipment should not be included in fixed equipment. As a general rule, equipment will not be considered permanently fixed to the structure if it can be removed without costly or extensive alterations or repairs to the building and if the space it occupies could be readily used for other purposes. Fixed equipment costs of $35,000 or more that are associated with improvements or alterations in existing buildings should be capitalized.

Fixed equipment costs that are identified separately should be assigned the same CAAN as the building in which the equipment is attached.

4. General Improvements

Are improvements that cannot be assigned to a building or structure including:

  • Utilities Systems: This includes gas, electric, HVAC, steam, oxygen, chilled water, compressed air, microwave, fuel oil, and fire protection systems that cannot be directly assigned to a building or structure. Costs of all utilities constructed within a building are capitalized as part of the building.
  • Telephone and Data Communications: This includes the overall system architecture and cabling.
  • Equipment items over the capital threshold of $5,000 (e.g., routers, switches, etc.) will be identified as inventorial equipment and depreciated based on the appropriate useful life provided in the University Useful Life table.
  • Landscaping and Athletic Fields
  • Irrigation
  • Other Miscellaneous: This includes other general improvements such as signage, fences, decks, fountains, etc.