Difference between revisions of "Capitalization Policy"

Latest revision as of 15:17, 23 April 2024

1. BACKGROUND

CAS 404 requires a written capitalization policy which designates particular economic and physical characteristics as described herein.

2. PURPOSE

The purpose of this policy is to define the accounting treatment applied to company-owned plant, property and equipment (PPE). PPE, fixed assets (FA) and tangible capital assets are used interchangeably throughout this policy.

3. DEFINITION

Asset Accountability Unit – A tangible fixed asset which is a component of plant and equipment that is capitalized when acquired or whose replacement is capitalized when the unit is removed, transferred, sold, abandoned, demolished, of otherwise disposed of. An Asset Accountability Unit is a Tangible Capital Asset, which is a component of a larger piece of a plant or equipment which is purchased separately and needs to have separate accounting and tracking from the plant or equipment to which it is a component of.

Capitalization – The cost of an asset is its purchased or manufactured cost, together with any expenditure necessary to make the item usable. Examples of associated expenditures include transportation and installation costs, testing, and purchase and use taxes.

Net Book Value (NBV) – The cost of an asset less accumulated depreciation to date.

Original Complement of Low Cost Equipment - A group of items acquired for the initial outfitting of a tangible capital asset or an operational unit, or a new addition to either. The items in the group individually cost less than the minimum amount established by the contractor for capitalization for the classes of assets acquired but in the aggregate they represent a material investment. The group, as a complement, is expected to be held for continued service beyond the current period. Initial outfitting of the unit is completed when the unit is ready and available for normal operations.

Residual Value – The proceeds, less removal and disposal costs, if any, realized upon disposition of a tangible capital asset. It is usually measured by the net proceeds from the sale or other disposition of the asset. The estimated residual value is current forecast of the residual value.

Self-Constructed Assets (SCA) – Assets that the company manufactures, fabricates or constructs (as opposed to purchases). SCA must include all indirect costs properly allocable to such assets, including G&A expenses and cost of money when such expenses are identifiable with the constructed asset and are material in amount.

Service Life (Useful Life) – The period of usefulness of a tangible capital asset (or group of assets) to its current owner. The estimated service life of a tangible capital asset (or group of assets) is a current forecast of its service life and is the period over which depreciation cost is to be assigned.

Tangible Capital Asset (Fixed Asset, or Plant, Property and Equipment) – An asset that has physical substance, more than minimal value, and is expected to be held by the company for continued use or possession beyond the current accounting period for the services it yields.

4. SCOPE

This policy describes GovC’s practices.

Any requests for exceptions to this policy are to be submitted to the Finance Director for approval.

5. POLICY

5.1 CATEGORIZATION

PPE in this policy include the following categories as recorded in the general ledger:

XXXXX (GL CODE) Land XXXXX (GL CODE) Buildings XXXXX (GL CODE) Leasehold Improvements XXXXX (GL CODE) Machinery & Equipment

PPE does not include items purchased for resale, or items that a customer shall take title to under a contract.

5.2 CAPITALIZATION CRITERIA

FA with an acquisition cost of $2,000 [or other BU capitalization threshold (not to exceed $5,000 per CAS 404)] or greater must be capitalized, if the item has a useful life of one year or more [or other BU requirement (not to exceed 2 years per CAS 404)], with the exception of leasehold improvements, which are depreciated over the remaining lease term, regardless of the length of the term. Property having a unit cost of less than $2,000 or a useful life of less than one year is expensed as incurred.

Betterments and improvements over $2,000 which increase the remaining useful life of the underlying asset by at least another year should be capitalized. If the remaining useful life is not increased by at least one year, then the expense should be charged to the Repairs & Maintenance account XXXXX. The expenditures are added to the original asset and the depreciation method and tag number assigned to the original asset are retained. The original asset’s useful life should be extended accordingly.

Similarly, when a leasehold improvement or building project includes a complement of individual low-cost equipment, each costing less than $2,000, but aggregating more than $2,000 in total, the entire complement of low-cost equipment should be capitalized and recorded in the FA register as an entity rather than separately accounting for each individual item. For example, workbenches/racks are purchased for $1,500 each for a new work cell. The estimated service life for an original complement of low-cost equipment is based on the expected consumption of services over the expected useful life of the complement as a whole and is not based on the individual items which form the complement

Any capital asset which is purchased to add on to, or complement a larger asset needs to be tracked separately from the original or base asset. A purchase such as this would meet the definition of an Asset Accountability Unit (See Definitions).

5.3 FIXED ASSET RECORDS

All FA should receive an asset tag once the asset has been received in house. In accordance with GovC's Finance Manual, a detailed FA register must be maintained containing sufficient detail to enable regular physical checks of existence.

The FA register should include the following information in regard to each separate asset, unit or project: a) Full description of the asset b) Location c) Inventory/tag number d) Acquisition date e) Supplier f) Original (capitalized) cost g) Residual value h) Accumulated depreciation i) Net book value (NBV) j) Dates or information regarding retirement or withdrawal from active use

Where a FA has been written down to zero NBV, it should nevertheless be retained in the FA register until sold or scrapped, to avoid it being overlooked, e.g. for accounting and insurance purposes.

5.4 DISPOSALS

When FA are sold or scrapped, the original cost or valuation and the accumulated depreciation are to be eliminated from the balance sheet.

Where a review of the FA register identifies items which have been scrapped or otherwise disposed of, these should be removed from the register and appropriate accounting entries made to remove the cost and accumulated depreciation from the accounting records.

Any gains and losses from the disposal of assets should be allocated in the same manner as the depreciation, and must be recognized in the cost accounting period in which the disposition occurs.

5.5 DEPRECIATION

The depreciable cost of a FA is its capitalized cost less its estimated residual value. Per CAS 409, if the estimated residual value is less than 10% of the capitalized cost, it does not need to be used in establishing depreciable costs.

Depreciation is computed on a monthly basis; the first month of depreciation is the month in which the item is placed into service.

FA will be depreciated under the straight-line method, for financial reporting and cost recovery purposes over the following useful lives:

For tax purposes, FA will be depreciated using the depreciation method provided in the Internal Revenue Code in effect as of the date that the assets are acquired.

The useful lives used for depreciation purposes should be reviewed on a periodic basis to support depreciation periods. If the useful lives experienced differ significantly from the useful lives used, they should be adjusted to reflect actual experienced lives.

6. RESPONSIBILITIES

The Director of Finance is responsible for implementing this policy and maintaining this document. As outlined in the Corporate Framework, approvals are required for capital expenditures based on current delegated authority limits.

An annual capital expenditure budget is developed as part of the annual budgeting process. The existence of a budget for capital does not guarantee that the purchase will be approved. A CER (Capital Expenditure Request) form must be submitted and approved before the company enters into a commitment for any capital expenditure. Cost overruns of 10% or more over the original authorized amount incurred on the CER will require submittal of an additional CER for the overrun amount.

Please use the table below for CER approval levels: Value in US Dollars Required Level of Authorization All CERs Department Manager, Finance Director, General Manager > $100,000 All of the above + Sector VP, Finance > $500,000 ?

A CER is also used to request the disposal, sale, or transfer of existing fixed assets.