4202 Capitalization, Depreciation, and Disposal of Capital Assets

Policy Sections

                4202.1 Initial Capital Project Setup

                4202.2 Verification of Capitalization

                4202.3 Classifying Project Costs

                4202.4 Useful Life of Capital Assets

                4202.5 Depreciation of Capital Assets

                4202.6 Disposal of Capital Assets

This policy establishes the rules and guidelines for capitalizing costs related to the acquisition, construction, and renovation of Capital Assets, and for the depreciation and disposal of such assets. This policy applies to any Yale community member involved in the management of Capital Assets over the course of the asset’s lifecycle.

This policy does not cover software development or Moveable Equipment Inventory (“MEI”).  For amortization of costs related to software development, refer to Policy 4203 Accounting for Internal Use Software Development Projects.  For guidance on the capitalization, depreciation, and disposal of MEI, refer to Policy 4209 Moveable Equipment.

The University is responsible for the accurate management and accounting of Capital Assets in compliance with Generally Accepted Accounting Principles (“GAAP”). Expenses related to Capital Assets must be appropriately classified and are either capitalized or expensed as incurred, depending on the type of cost. Costs incurred for the acquisition, construction, or renovation of buildings and Fixed Equipment, are capitalized only under the following circumstances:

• The Capitalization Threshold for Eligible Costs related to the acquisition, construction, or renovation of Land Building and Equipment (“LBE”) on a Capital Project must equal or exceed $100,000; and
• the costs extend the original planned Useful Life of the Capital Asset by more than two years (not applicable to acquisitions).

This policy exists to ensure consistent and proper accounting for University Capital Assets and expenses in compliance with Generally Accepted Accounting Principles (“GAAP”) and to define Capitalized Costs properly to reflect the true cost of the Capital Asset during its Useful Life.

Capital Assets

Land, Buildings, and Equipment (“LBE”) and Other Assets (internally developed software) that are held for purposes other than investment or resale.

Capital Project

Project undertaken to construct, acquire, renovate, or improve buildings and fixed equipment with the intent to capitalize the project costs as LBE upon completion of the project.

Capitalization Threshold

The minimum value at which costs incurred for the acquisition, construction, or renovation of land, building, or fixed equipment under a capital project may be capitalized as LBE.  Yale University’s capitalization threshold for LBE on capital projects is $100,000.

Capitalized Costs

Direct and incremental expenses related to the acquisition, construction, or renovation of capital assets.

Eligible Costs

Eligible costs include external direct costs of materials and services incurred to acquire, construct, or improve a capital asset. Eligible costs are capitalized when they total $100,000 or more on a single capital project.

Fixed Equipment

Equipment attached to a building that cannot be removed without the need for costly or extensive repairs to the structure to make the space useable for other purposes. Equipment meeting this definition is considered to be non-moveable and distinctly separate from Moveable Equipment Inventory (“MEI”).

In Service 

A capital asset is in service when it is actively being utilized for its intended purpose. The date at which the asset begins to be utilized is known as the in service date.

Indirect Costs 

Costs that are not directly allocable to any one single project but are necessary for the progression and completion of two or more projects and can be proportionally allocable as such.

Land, Building, and Equipment (“LBE”)

Land, buildings, fixed equipment, and Moveable Equipment.

Mid-Year Convention

In the initial year a capital asset is placed in service and in the final year of the capital asset’s useful life, a half-year (6 months) of depreciation is charged regardless of the month in which the capital asset was originally placed in service.

Useful Life

An estimate of the number of years an asset is likely to remain in service.

Capital Project proposals may originate from any individual or unit within the University. Capital Projects may be specific to a department or pertain to the University as a whole.  If the project is budgeted to cost less than $100,000, project costs should be expensed as incurred.  If the project is budgeted to cost more than $100,000, it must be approved by Facilities Management (Facilities Managed projects), the Budget Office (Centrally located Department Projects), or the Lead Administrator (Self-Support Managed Projects) and the Capital Asset Accounting team, which work together to ensure that proper funding is secured, and costs are properly monitored.

All costs charged to Capital Projects require authorization and approval by the project manager and are subject to scrutiny by the Facilities finance department.  To qualify for capitalization, Indirect Costs that are capitalized must be directly allocable to a specific project that meets the University’s criteria for capitalization.

Note: Internal labor costs are not capitalizable and must be expensed as incurred.

All proposed Capital Projects must obtain approval via the Facilities Approval Process prior to initiating spending.  Once a proposed Capital Project receives approval, costs must be evaluated as to whether they may be capitalized or expensed as incurred.

Eligible Costs related to Capital Projects must be capitalized.  Eligible Costs are determined based on specified spend categories maintained by the Capital Asset Accounting team.  For more information, contact the Capital Asset Accounting team at capitalmgnt@yale.edu.  Ineligible costs (i.e. all those not authorized by the spend categories), must be expensed as incurred.

Land costs are generally capitalized but not depreciated.  However, land improvements that increase the usefulness of the land but have finite lives, such as the paving of a parking lot or installation of fencing or lighting, include costs that should be depreciated over the Useful Life of the improvement.

Treatment of costs incurred for the demolition of an existing building depends on the intention.  If land is purchased with an existing building on it, with the intent to demolish the existing building in order to make way for the construction of a new building, the cost of the demolition is considered part of the cost of the land.

The University prohibits the capitalization of direct payroll charges. Therefore, direct payroll cannot be charged to Capital Projects and capital funding. University payroll expenses must be charged to a department operating budget.

Facilities Management notifies Capital Asset Accounting when a Land, Building, and Equipment (“LBE”) project reaches the In Service date.  The Capital Asset Accounting team then performs the necessary steps within the Workday system to move the costs from construction in progress to LBE.

Capital Asset Accounting, in consultation with Financial Reporting, maintains a list of estimated Useful Lives for various types of Capital Assets.  Capital Asset Accounting is responsible for assigning the appropriate Useful Life to Capital Assets based on the list of estimated Useful Lives.  All exceptions must be approved by the Associate Controller of General Accounting.

Depreciation of Capital Assets is calculated and recorded by Capital Asset Accounting on a monthly basis. Depreciation is charged using a Mid-Year Convention in the year the asset is placed In Service. Depreciation is charged in the External Reporting Book (GAAP View) only.

Interest and Amortization (“I&A”) charges are assessed using the Mid-Year Convention in the year the asset is placed In Service on debt funded projects. I&A represents the interest and amortization of the principal balance paid over the life of the asset. I&A is charged in the Management Book (Internal View) only.

4202.6 Disposal of Capital Assets

The disposal of Capital Assets must be approved by the Associate Director of Capital Asset Accounting.  The department is responsible for notifying the Capital Asset Accounting team of the specific asset being disposed, the date of the disposal, and any proceeds resulting from any sale related to the transaction.

Department Business Offices (“DBO”)

• Prepares and submits project requests.
• Manages Capital Projects and monitors costs charged to these projects (Department managed projects only).
• Notifies Capital Asset Accounting team when projects have been completed (Department managed projects only).

Budget Office

• Reviews and approves requests for department managed projects that are centrally supported.

Capital Asset Accounting

• Oversees accounting and reporting of Capital Assets. 
• Initiates planned Capital Projects, identifies funding, and obtains approvals.
• Manages Capital Project including, setup, budgeting and funding, and accounting.
• Ensures that costs charged to Capital Projects are accurate and reported properly in the University’s financial statements.
• Moves Capital Project costs from construction in progress to LBE. 
• Assigns Useful Lives to Capital Assets. 
• Calculates and records depreciation. 
• Approves disposal of Capital Assets.
• Determines gain or loss resulting from disposal of Capital Assets. 
• Removes disposed assets from the Workday system.

Facilities Management

• Review and approve Facilities managed project requests.
• Manages Capital Projects and monitors costs charged to these projects.
• Notifies Capital Asset Accounting team when projects have been completed.

Self-Support School Lead Administrators

• Reviews and approves requests for projects to be managed by Self-Support Schools.
• Manages Capital Projects and monitors costs charged to these projects (Projects managed by Self- Support Schools only).
• Notifies Capital Asset Accounting team when projects have been completed (Projects managed by Self- Support Schools only).