PCS 101: Capitalization of Property

To outline the accounting classifications of capital assets purchased or otherwise acquired by university departments

Property Control

Financial Services

All university agency/orgs

Capital assets acquired by university departments are classified for accounting purposes into plant acquisitions and equipment acquisitions. Special considerations must be noted for certain acquisitions and their related costs. For example, the treatment of property may vary for purchases charged to sponsored projects as described in the award document.

Property Control and Purchasing and Business Services interpret this policy as needed.

Plant acquisitions are divided into four categories:

1. land
2. improvements to land other than buildings
3. buildings

   and

4. fixed property.

Land

1. Acquisition by Purchase - Land purchased by the university is recorded at cost. Cost includes land; legal, title, and broker’s fees; landfill; and clearing, grading, and other costs necessary to prepare the land for its intended use.
2. Acquisition by Gift or Bequest - Recorded at the fair market value at the date of the gift (appraisal usually has been completed).
3. Acquisition through Eminent Domain - Recorded at the amount of the court award made to the landholder(s).

Improvements to Land Other than Buildings

This category consists of land improvements outside the building. Improvements to land other than buildings, which are required to make land ready for its intended use, are capitalized if the total expenditure is $100,000 or more per project.

This category includes roads, walkways, tunnels, utility facilities, drainage systems, landscaping, parking lots, tennis courts, athletic fields, fences, curbs, streetlights, and similar items.

Buildings

1. Buildings - The cost of buildings (permanent structures housing persons and personal property) is the construction cost of the building shell and its components. Examples of construction costs include, but are not limited to, building materials, architects’ fees, building permit fees, subcontract fees, rent for property, other than real property, to complete construction, operating and maintenance costs for property used in the construction, site preparation, compensation for work performed, and cost of supplies consumed in the construction. Capitalization takes place during the completion of the project.
2. Building Components - Building components are items permanently attached to the building shell necessary for the building to be used as intended. Building components are either integral to the building or cannot be removed without damaging the building or component. Examples of building components are plumbing systems, electrical wiring, and air-conditioning duct work.
3. Building Additions - New additions to buildings resulting in additional square footage are capitalized regardless of the dollar threshold.
4. Renovations - Major building component replacements or renovations of a building that extend the original life of the building and/or increase its value to the university are capitalized with the exception of projects involving expenditures of $100,000 or less, which are considered expense.
5. Demolition Costs - The cost of building demolition in preparation of new construction is added to the cost of the new building as “site preparation costs.” If new construction is not planned, the demolition costs are not capitalized.
6. Planning - Professional services and fees incurred with construction and remodeling (e.g., architects’ fees, construction and management fees, and engineering studies).

Fixed Property

Fixed property (building fixtures) includes carpeting, drapes, shades, venetian blinds, shelving, bulletin boards, awnings, and lab benches bolted to the floor. (Fixtures must be able to be removed without extensive alterations to the building structure and cannot be so affixed as to be legally considered part of the real property.)

Coding Criteria

If $100,000 or More

If the total acquisition cost of the fixture purchase (item[s]) is $100,000 or more, the purchase is coded as a capital acquisition.

If Less than $100,000

If the total acquisition cost of the fixture purchase is less than $100,000, the item is coded as an operational purchase.

When acquiring equipment on an online purchase request (RX) or an online internal purchase order (PO), correct object/sub-object codes are essential for determining capital vs. noncapital equipment. (For a list of capital equipment codes, see the Financial Services Policies and Procedures Manual—FIN 430–01, “Overall Expenditure Coding Structure.”) Correct commodity codes are also important to the timeliness and accuracy of reporting equipment in the property control system (see the Purchasing and Business Services Web site for the complete “Commodity Code Listing”).

Property Control records the item in the property control system at cost (net of any discounts and inclusive of freight, taxes, and installation), tags the item with a unique ASU identification number, and performs a physical inventory of the item once every two years or, in the case of equipment purchased with sponsored funds, as required by the sponsoring agency.

Capital Equipment

1. Capital Equipment - Equipment that is not permanently attached to buildings or grounds, has an acquisition cost of $5,000 or more (exclusive of sales and/or use tax, or freight), and has a life expectancy of one year or more is classified as capital equipment.
2. Trade-ins - The fair market value of equipment used as a trade-in to acquire new equipment is included in the cost of the new equipment in the property control record.
3. Gifts - Gifts and bequests are recorded at the fair market value at the date of the gift. The value of gifts and bequests in excess of $5,000 is determined through independent appraisal or through other approved valuation procedures.
4. Fabricated Equipment - Fabricated equipment having a completion cost of $5,000 or more and a life expectancy of one year or more is capitalized. The amount recorded should include the total of all identifiable direct and indirect costs.

Special Considerations

Microcomputers (Personal Computers)

The cost of microcomputers includes keyboard, Central Processing Unit (CPU), monitor, and operating system and is capitalized if the sum of these components equals $5,000 or more. Other computer peripherals are capitalized only if individual components meet the definition of capital equipment (more than $5,000).

Equipment Acquisitions and Fabrications Exempt from Sales Tax

Equipment having a life expectancy of one year or more and a unit cost of $5,000 or more that is purchased for basic and applied research in the sciences and engineering is, to the extent permitted by law, exempt from sales tax. Also exempt are designing, developing, or testing prototypes, processes, or new products. This exemption includes research and development of computer software that is embedded in or an integral part of the prototype or new product or that is required for exempt machinery or equipment to function effectively.

For purposes of this exemption, research and development do not include manufacturing quality control, routine consumer product testing, market research, sales promotion, sales service, research in social sciences or psychology, computer software research that is not included in basic and applied research in the sciences and engineering, or other nontechnical activities or technical services.

The exemption of sales tax does not apply to equipment with a life expectancy of less than one year or project cost of less than $5,000. (Fabricated equipment acquired at less than $5,000 is capitalized as long as the completed fabrication will be greater than $5,000.) Such items include expendable supplies; janitorial equipment and hand tools; office equipment, furniture, and supplies; tangible personal property used in selling and distributing activities; motor vehicles; shops, buildings, docks, depots, etc.; and motors and pumps used in drip irrigation systems.

Software

All software is expensed except for major system purchases ($50,000 or more per package). These purchases are capitalized as determined by Property Control. Inventory control of all other software is left to the discretion of the department having custody.

Library Books

Books acquired for use in official university libraries are capitalized at cost or fair market value (depending on whether purchased or donated). Property Control does not record or inventory books. Inventory and control are the responsibility of the individual library.

Books, films, and related materials are coded as materials and supplies purchases, Books/Reference Material. Books and other materials purchased by the university or law libraries are the only exceptions and are coded from one of the agency/orgs listed below.

Agency/Org Number	Agency/Org Name
MH1 1001	Law Library
YX1 1002	Library Books
YX5 1001	Gifts—University Libraries
YX5 1008	Lost Library Books
DB9 1001	Arthur Young Tax Library
DP1 5061	Fletcher Library (ASU West)

Art Objects, Displays, and Museum Acquisitions

University-owned art objects, displays, and museum acquisitions are capitalized at cost or fair market value (depending on whether they are purchased or donated). These items include art, scientific, and slide collections; and permanent displays of all kinds. Assets in this category are entered in the property control system as nontaggable equipment using a dummy property control number (e.g., 9003457). Inventory and control of these items are the responsibility of the individual departments.

Sales/Use Tax, Freight, and Installation Costs

Sales/use tax, freight, and installation costs associated with any capital coded purchase are capitalized and considered as part of the value of the equipment when charged on the same purchase order as the equipment. However, these costs do not determine whether an item is coded as capital or noncapital equipment. If sales tax, freight, and/or installation costs are charged on a different purchase order and cannot be identified to a particular asset, they are transferred to a noncapital object code.

Agency Fund Accounts

Equipment purchases made from agency fund accounts are not considered ASU assets and therefore should not be coded as capital and should not be tagged with ASU property control numbers.

Expenditures Relating to Capital Equipment

Maintenance and Repairs

Expenditures for maintenance are those required to maintain equipment in good working condition. Repairs are those expenditures required to bring equipment back into good working condition. Neither expenditure extends the intended useful life or changes the intended purpose of the asset. Therefore, costs incurred for maintenance and repairs are not capitalized. Floor and wall covering replacements (e.g., carpet, floor tile, and wallpaper) are considered maintenance and repairs, except when done in conjunction with a remodeling project.

Additions

An addition is capitalized if it meets the minimum requirements for capitalization as defined below.

Betterments

Betterments are capitalized if they meet the minimum requirements for capitalization as defined below. Alterations made solely for cosmetic purposes are not capitalized.

Replacement Parts

Replacement parts generally do not increase the value and/or intended useful life of an asset. Therefore, replacement parts are generally not capitalized. However, if a significant increase in value or useful life is provided through a replacement part, the guidelines for betterments are to be followed.

Sale of Capital Equipment between Departments

If capital equipment is sold between departments, the original cost (or fair market value when acquired) is recorded under the acquiring department’s inventory. All records of the property control system remain on file but indicate the change to the acquiring department.

A financial transaction should be performed on an Expense Transfer (IX) or Journal Voucher (JV) and should debit the receiving department and credit the relinquishing department’s agency/org for the selling price using the appropriate capital object code in both the credit and debit entry. The ASU property control number of the asset should be entered in the description field of the IX or JV, thus assisting Property Control with the entry.

Agency Fund Agency/Orgs

For agency fund agency/orgs (agency/orgs with 7 as the third digit of the area field), no property purchases may be coded as capital purchases (object/sub-object codes starting with 7810).

Lease/Purchases

For equipment purchased on a lease/purchase basis, separation is made between the cost of equipment and interest. The equipment cost is classified according to the criteria above; interest is charged to an operations object/sub-object code.

Differences between Estimated and Final Costs

Coding criteria for equipment purchases are initially based on estimated cost at time of requisitioning coding. In some cases, final costs differ so much from estimated costs that the equipment purchase is not correctly coded. In certain situations, Property Control adjusts the coding (e.g., equipment purchase estimated to cost at least $5,000 but having a final cost of less than $5,000, or vice versa).

Remodeling changes the use of building space or refurbishes to make space more functional or more cosmetically appealing.

Other building costs include installing equipment that is permanently attached to a building structure so that it cannot be removed without costly or extensive alterations. Such permanent equipment includes the following: nonportable, single-room air-conditioning units; fire protection systems; water distributing systems; heat distributing and electrical distributing systems; elevator shafts; utility outlets; and computer cabling.

Coding Criteria

If $100,000 or More

If the total acquisition cost of remodeling or other permanent modifications is $100,000 or more, the purchase is coded as a capital acquisition to object/sub-object code 7890 11, “Building Improvements/Remodeling.”

If Less than $100,000

If the total acquisition cost of remodeling or other permanent modifications is less than $100,000, the item is coded as an operational (“Repairs and Maintenance”) purchase.

Coding Examples

For examples of capital and operational transactions and their codes, see PCS 101B.

For information on the use of capital object codes, see the Financial Services Policies and Procedures Manual—FIN 430–01, “Overall Expenditure Coding Structure.”

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PCS 101A, Capital Equipment Object/Sub-Object Codes

PCS 101B, Examples of Capital and Non-Capital Transactions

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