4202 Capitalization, Depreciation, and Disposal of Capital Assets

Policy Sections

                4202.1 Initial Project Setup

                4202.2 Verification of Capitalization

                4202.3 Stages of Construction

                4202.4 Useful Life of Business Assets

                4202.5 Depreciation of Business Assets

                4202.6 Disposal of Business Assets

This policy provides guidelines for the capitalization of costs related to the acquisition, construction, and alteration of business assets, and for the depreciation and disposal of such assets.

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 Costs, Including Cloud-Based Computing Arrangements, and Business Process Reengineering.  For capitalization, depreciation, and disposal related to MEI, refer to Policy 4209 Equipment.

Costs incurred for purchase or construction of buildings, purchase or construction of fixed equipment, and renovation or alteration of buildings and fixed equipment should be capitalized only under the following circumstances:

• the capitalization threshold for eligible costs related to the purchase or construction of a capital project must equal or exceed $100,000; and
• the costs extend the original planned useful life of the asset by more than two years.

Land costs should be 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.

This policy seeks to:

• promote consistent and proper accounting for University assets and expenses in conformity with Generally Accepted Accounting Principles (GAAP); and
• define those costs that are to be capitalized to properly reflect the cost of the asset during its useful life.

Business Assets
Also referred to as Capital assets, Plant, Property, and Equipment that is held for purposes other than investment or resale.

Capital costs
Direct and incremental expenses related to the acquisition, construction, or improvement of Business Assets.

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.

Plant, Property, and Equipment (PPE)
Land, buildings, improvements, and equipment that appear on the University’s balance sheet.

Planned 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 needs to be approved by the following groups, which work together to ensure that proper funding is secured and costs are monitored:

• Facilities Management: manages capital projects and monitors costs charged to the project;
• Capital Accounting: reviews the project setup, manages the capital budgeting and funding, monitors capital accounting policy, and ensures that costs charged to capital projects are accurate and reported properly in the University’s financial statements.

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 capitalized shall be directly allocable to a specific project that meets the University’s criteria for capitalization.  Internal labor costs are not capitalizable and must be expensed as incurred.

Planned capital projects may be specific to a department or pertain to the University as a whole.  Proposal of capital projects may originate from any individual or unit within the University.

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 must be expensed as incurred.

Eligible costs related to capital projects may be capitalized.  Eligible costs are determined based on particularized spend categories maintained by the Office of Capital Accounting.  For more information, contact Capital Accounting at capitalmgnt@yale.edu.  Ineligible costs, all those not authorized by the spend categories, must be expensed as incurred.

Facilities Management shall notify the Controller’s Office when a PPE project reaches the In Service date.  The Controller’s Office then performs the transactions necessary to move the costs from construction in progress to PPE.

The Office of Capital Accounting, in consultation with the Controller’s Office and Financial Reporting, maintains a list of estimated useful lives for various types of fixed assets.  The Office of Capital Accounting is responsible for assigning the appropriate useful life to business assets based on the list of estimated useful lives.  All exceptions must be approved by the Controller’s Office.

Depreciation of business assets shall be calculated and recorded by the Controller’s Office.

Disposal of business assets must be approved by the Controller.  The Office of Capital Accounting shall be notified of the specific asset being disposed, the date of the disposal, and any proceeds resulting from any sale related to the transaction.

University Controller
Approves disposal of business assets.

Controller’s Office
Interprets policy regarding business assets.  Oversees accounting and reporting of business assets.  Moves capital project costs from construction in progress to PPE.  Calculates and records depreciation.  Determines gain or loss resulting from disposal of business assets.  Removes disposed assets from the Fixed Asset Detail.

Capital Accounting
Initiates planned capital projects, identifies funding, and obtains approvals.  Ensures that costs charged to capital projects are accurate and reported properly in the University’s financial statements.

Facilities Management
Manages capital projects and monitors costs charged to these projects.