Standard Operating Procedures

SUBJECT: Capitalization Rules
SOURCE: Capital Asset Management, Office of the Treasurer
ORIGINAL DATE OF ISSUE: November 2003
DATE OF LAST REVISION: April 2011
CSOP NO: 1.0
RATIONALE: To provide guidelines for the use of capital equipment object codes on procurement transactions and other financial documents. Procurement transactions that use a capital object code are a primary source used to create capital assets in the university asset database.
CSOP: Capitalization Rules:
  1. Art & Museum Objects
  2. Buildings
  3. Capital Lease
  4. Computer Software
  5. Infrastructure
  6. Land
  7. Land Improvements
  8. Leasehold Improvements
  9. Library Books
  10. Moveable Equipment
  11. Moveable Fabricated Equipment
  1. Art & Museum Objects

    Art and museum objects are non-depreciable pieces purchased or donated to the university. Art and museum pieces shall be capitalized if the value is $5,000 or greater. If a collection is greater than $5,000 then it will be capitalized as a collection.

    Following is a listing of capital art and museum object codes:
    Object Code Description
    7600 Art & Museum Objects
    7677 Art & Museum Objects Gifts

    Please contact your fiscal officer to determine the appropriate expense object code for purchases of art and museum objects below the capitalization threshold amount.
  2. Buildings

    Expenditures per building for new construction, alterations or renovations must be Seventy-five Thousand Dollars ($75,000) or greater to be capitalized.

    The costs per building project include expenditures related directly to their acquisition or construction. These costs include (1) materials, labor and overhead costs incurred during construction, (2) professional fees and building permits. All direct costs incurred from excavation to completion are considered part of the building project.

    Following is a listing of building capital object codes:
    Object Code Description
    7300 Building & Attached Fixtures
    7301 Building - Professional Fees
    7303 Building - Improvements
    7377 Building - Gifts

    See Repair & Maintenance object codes such as 4700 for new construction or renovations not meeting the capitalization threshold.

  3. Capital Lease

    A lease purchase is a contractual agreement conveying the right to use property, plant, or equipment usually for a stated period of time. A lease agreement involves at least two parties, a lessor and a lessee. The lessor agrees to allow the lessee to use the item for a specified period of time in return for periodic payments. There are two types of lease purchases available; an operating lease and a capital lease.

    An operating lease includes a lessor (vendor), who collects rent, and a lessee (the university), who uses the leased equipment and pays periodic rent for such use. The lessee (the university) merely uses the equipment; there is no transfer of ownership, or any risk of benefit of ownership.

    A capital lease transfers substantially all of the benefits and risk inherent in ownership to the equipment to the lessee (the university).

    A "Capital Lease" purchase is the act of acquiring assets by making periodic payments, which generally consist of principle and interest.

    Following is a listing of object codes for a capital lease agreement:
    Object Code Description
    7099 Capital Lease
    4400 Interest

    An operating lease should use a rental object code such as 4620.

  4. Computer Software

    For software to qualify for capitalization purposes, it needs to meet all of the following requirements:

    The acquisition cost is at least Five Hundred Thousand ($500,000).

    The software must have a useful life greater than one year.

    The department has the ability to sell, transfer, license, or rent the asset to another party OR the asset arises from a contractual or legal right.

    Costs that should be capitalized:
    The cost of the software and installation costs should be capitalized.

    Costs that should be expensed:
    Training and travel costs associated with capital purchased/licensed software should be expensed.

    Costs associated with purchased/licensed software that do not meet the university's capitalization threshold should be expensed to object code 4616.

    If the useful life is one year or less the costs associated with the software should be expensed to object code 4616.

    Modifications:
    Modifications to purchased/licensed software should be capitalized when the cost of the modification is at least Five Hundred Thousand ($500,000) AND any one of the following exists:

    • A substantial increase in the functionality of the computer software allowing the program to perform tasks it was previously incapable of performing.
    • A substantial increase in the efficiency of the computer software, that is, an increase in the level of service provided by the computer software without the ability to perform additional tasks.
    • An extension of the estimated useful life of the software. (GASBS51, Par. 15)

    If the modification does not meet both the dollar threshold and one of the three other criteria, the modification should be considered maintenance and the associated costs for the modification should be expensed.

    Renewals:
    Renewals are usually considered to be costs to continue the use of the software program. Renewals do not include any upgrades and should be expensed to object code 4616. If the renewal includes new software functionality please refer to the modification section above for capitalization requirements.

    Maintenance:
    If purchased/licensed software includes maintenance and/or technical support these costs should be indentified separately from the capitalized costs and expensed to object code 4776.

    Inventory Requirements:
    Units will be required, as part of their physical inventory, to inventory software to ensure that the software is still in use. When the software is no longer in use the asset should be retired.

    Following is a listing of object codes for computer software:
    Object Code Description
    7261 Intangibles University Funded
    7262 Intangibles Federally Funded
    7263 Intangibles Federally/Other Owned

    See CSOP 39.0 Computer Software

  5. Infrastructure

    Infrastructure assets are long lived assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets.

    The costs associated with infrastructure projects must be $75,000 or more per project to be capitalized. An infrastructure project could include cost for (1) street improvements such as traffic, street and walkway lights, street signage and guard rails, (2) road and waterway construction such as roads, streets, highways, alleys, sidewalks, curbs, culverts, and bridges, (3) underground distribution and collection systems and (4) telephone communication systems.

    Following is a listing of infrastructure capital object codes:
    Object Code Description
    7400 Infrastructure Improvements
    7402 Infrastructure Professional Fees
    7401 Infrastructure Wire Center Tele System
    7403 Infrastructure Wire Closet Tele Systems
    7404 Infrastructure Conduit Tele System
    7405 Infrastructure Switch Room Tele System
    7406 Infrastructure Contractual Tele System
    7408 Infrastructure - Street Improvements
    7409 Infrastructure - Road/Waterway Improvements
    7410 Infrastructure - Underground Dist & Collection Sys
    7411 Infrastructure - Telephone Communications

    See Repair & Maintenance object codes such as 4700 for infrastructure projects not meeting the capitalization threshold

  6. Land

    Land is non-depreciable property purchased by the university.

    There is no capitalization threshold as to the total cost spent for land.

    All costs incurred in acquiring land or getting the land ready for its intended use should be considered as part of the land cost. These expenditures shall include (1) the purchase price, (2) closing costs such as title to the land, attorney's fess and recording fees, (3) costs incurred in getting the land in condition for its intended use, such as grading, filling, draining, and clearing and (4) the assumption of any mortgages or liens. Any other land improvement shall also be considered a land capital expenditure if it increases the utility.

    If both a building and land are purchased the cost of the land should be capitalized separately from the building cost.

    Following is a listing of land capital object codes:
    Object Code Description
    7200 Land
    7201 Land Demolitions
    7277 Land Gifts

    Please contact your fiscal officer to determine the appropriate expense object code for purchases of land below the capitalization threshold amount.

  7. Land Improvements

    Capital land improvements are those items which have a life of their own exclusive of the land or building(s) and are considered betterments to the property.

    The cost of a land improvement project must be $75,000 or more to be capitalized. A land improvement project could include cost for (1) yard improvements such as yard lighting, exterior lighting, fencing, gates and parking barriers, and (2) landscaping improvements such as parking lot lights, paths, fountains, sculpture gardens and athletic fields.

    Following is a listing of land improvement capital object codes:
    Object Code Description
    7465 Land Improvements - Yard, Fencing & Barriers
    7466 Land Improvements - Landscapings
    7467 Land Improvements - Septic Systems
    7468 Land Improvements - Professional Fees
    7477 Land Improvements - Gifts

    See Repair & Maintenance object codes such as 4700 for land improvement projects not meeting the capitalization threshold.

  8. Leasehold Improvements

    Leasehold improvements can be made to property that is leased by the university. Leasehold improvements represent physical enhancements made to property by or on behalf of the university. The university does not own the property but has chosen to lease the property and to incur leasehold improvements. When improvements are made to the leased property and those improvements are permanently affixed to the property, the title to those improvements transfer to the owner of the property at the end of the lease term.

    To be capitalized as leasehold improvements the total cost of the improvements to the leased space must be $75,000 or more. The capitalized costs incurred by the university in constructing leasehold improvements to property that is leased represents an intangible asset or a license to use the improvements.

    Following is a listing of leasehold improvement capital object codes:
    Object Code Description
    7800 Leasehold Improvements
    7801 Leasehold Improvements Professional Fees

    See Repair & Maintenance object codes such as 4700 for leasehold improvements not meeting the capitalization threshold.

  9. Library Books

    All cataloged library acquisitions shall be capitalized. There is no capitalization threshold as to the total cost spent per unit. Departmental purchases of manuals or other professional guides not cataloged in the university library system will not be capitalized.

    Following is a listing of library book capital object codes:
    Object Code Description
    7100 Library Books
    7177 Library Books Gifts

    Note:  Electronic resources such as Ebooks, Ejournals, Databases, and Institutional Memberships will not be capitalized as IU does not retain ownership of this material, but instead is only purchasing the rights to access them.

  10. Moveable Equipment

    An item must meet two specific criteria in order to qualify as a capital purchase. It must have (1) an acquisition value of at least $5,000.00 and (2) a useful life expectancy of one year or greater.

    In some instances, purchases of components can be capitalized together as one asset under moveable equipment, referred to hereafter as system assets. System assets are defined as components that work together to perform one function. Each component is necessary for the system to function as a whole. Removal of any one component would result in the system not operating at the required capacity or for its intended purpose.

    Upgrades are capitalized when any one of the criteria listed below it met:

    • A substantial increase in the functionally of the equipment which allows it to function or perform tasks it was previously incapable of performing.
    • A substantial increase in the efficiency of the equipment, that is, an increase in the level of service provided by the equipment without the ability to perform additional tasks.
    • An extension of the estimated useful life of the equipment.

    Generally equipment that is attached to a building is capitalized as moveable equipment when removing the equipment does not cause structural damage to the building and will not destroy the equipment.

    The term "equipment" includes delivery equipment, office equipment, machinery, furnishings, factory equipment, and similar fixed assets1.

    Additional capitalized costs on moveable equipment:

    Service costs that can be capitalized with equipment purchases include:
    • Cost of assembling the asset
    • Cost of installation
    • Freight
    • In-transit Insurance
    • Preparing the site and asset for its intended use
    • Training

    When additional equipment is received on a purchase order at no cost, these items are considered gifts to the university. These gifts will be taken into consideration when assigning the unit cost of the line items on the purchase order. The total quantity (including gifts) will be divided by the invoice amount. If the gift takes the unit cost below the capitalization threshold the expenses will be reclassified to supplies and expensed.

    Assets are recorded net of cash, and other earned discounts. In addition, a trade-in allowance will result in the reduction of the acquisition value.

    The following are not considered capital equipment regardless of cost or useful life:
    • Repair or replacement parts. (Use object code 4700- Repair & Maintenance or 4776 -Service or Support Maintenance Contracts.)
    • An item or substance that has no shape or identity, or loses that shape or identify upon detachment or removal from its original location. (Use object code 5200- Expendable Equipment.)
    • Maintenance and Warranty agreements (Use object code 4776 - Service Maintenance Contracts.)
    • Purchased software and software license agreements are not capitalized unless ownership is indicated within the license agreement and the acquisition cost is $500,000 or more. Software and software license agreements not indicating ownership or having a value of less than $500,000 should be expensed to 4616-Computer Software Purchases.

    See CSOP 39.0 Computer Software

    The following table presents a listing of moveable equipment capital object codes:
    Object Code Description
    7000 Capital Equipment
    7015 Computer Equipment
    7030 Capital Equipment - Federally Funded
    7031 Capital Equipment - Federally Owned
    7032 Capital Equipment - Non-IU or Fed Owned
    7035 Computer Equipment - Federally Funded
    7036 Computer Equipment - Federally Owned
    7070 Trade-in Capital Equipment

    A federally funded object code should be used when a contract and grant account is coded with a federal sub-fund (FEDER).

    A federally owned object code should be used when the granting agency holds title to the asset.

    See CSOP 8.0 Capitalization of Moveable Equipment

  11. Moveable Fabricated Equipment

    The term "Fabrication" is used in conjunction with moveable equipment and should not be confused with building construction projects. The transaction type of "Fabrication" identifies payments as construction in progress. A fabrication is a moveable asset created (built) by a university organization. A Fabrication Request document generates the asset number that is required when the Fabrication "CAMS Tran Type" is selected. Therefore the organization must submit a Fabrication Request document prior to any purchases.

    Following is a listing of fabrication capital object codes:
    Object Code Description
    7500 Capital Equipment-University Constructed
    7530 Capital Equipment - Federally Funded
    7535 Capital Equipment Univ. Const. Computer Equip. Fed Fund
    7531 Capital Equipment-Univ. Construct-Fed Owned
    7532 Cap Equip-Univ Const Non IU or Fed Owned

    See CSOP 12.0 Fabricated Equipment
DEFINITIONS: Capital Assets must have an acquisition value of at least $5,000 and a useful life expectancy of one year or greater.

Depreciation - The periodic charge to income that results from a systematic and rational allocation of cost over the life of a tangible asset.

Equipment - The term "equipment" includes delivery equipment, office equipment, machinery, furniture and fixtures, factory equipment and similar fixed assets.
CROSS REFERENCE: CSOP 8.0 Capitalization of Moveable Equipment
CSOP 12.0 Capitalization Fabricated Equipment
CSOP 39.0 Computer Software
RESPONSIBLE ORGANIZATION: Office of the Treasurer