Capitlization Policy II

1. BACKGROUND

The acquisition cost of tangible capital assets requires capitalization if they meet certain criteria under Cost Accounting Standard 404 – Capitalization of Tangible Assets.

2. PURPOSE

The purpose of this policy is to define the accounting treatment for tangible capital assets.

3. DEFINITIONS

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 capitalization practices.

5. POLICY

5.1. CATEGORIZATION – Homogenous Grouping of Assets

PPE in this policy include the following categories: • Buildings • Leasehold Improvements • Machinery & Equipment • Office Equipment • Vehicles

5.2. Estimated Useful Life

Assets having a useful life to exceed 1 year are capitalized. Betterments and improvements over $2,500 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 cost should be expensed.

5.3. Acquisition Costs to be Capitalized – Thresholds

On February 27,1973 the minimum threshold for capitalization was $500. CAS 404 Preamble D, dated March 3, 1980, increased that threshold to $1000. Today, there is no minimum threshold, however CAS 404 limits the maximum capitalization threshold to $5000. GovC has chosen a minimum capitalization threshold of $2500.

5.4. Original Complement of Low Cost Items

When a purchase includes multiple items, each low-cost (less than $2,500), but aggregating more than $2,500 in total, the entire complement of low-cost equipment should be capitalized. For example, 10 rack are purchased for $1,500 each and have an estimated useful life of 5 years, these items would be capitalized. 5.5. Fixed Asset Records All Fixed Assets should receive an asset tag once the asset has been received in house. The FA register should include the following information in regard to each separate asset: a) Full description of the asset b) Location c) Inventory/tag number d) Acquisition date e) Supplier f) (f) Original (capitalized) cost g) Residual value h) (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 until sold or scrapped. 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:

Asset Category Useful Life Buildings 20 Years Leasehold Improvements Up to Lease Term Machinery & Equipment 10 Years Office Equipment Vehicles

Estimated Service Lives The expected actual periods of usefulness shall be those periods which are supported by records of either past retirement or, where available, withdrawal from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. The factors which can be used to modify past experience include: • (i) Changes in expected physical usefulness from that which has been experienced such as changes in the quantity and quality of expected output. • (ii) Changes in expected economic usefulness, such as changes in expected technical or economic obsolescence of the asset (or group of assets), or of the product or service produced.

Supporting records shall be maintained which are adequate to show the age at retirement or, if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service life shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used.

Estimated service lives for tangible capital assets for which the contractor has no available data or no prior experience for similar assets shall be established based on a projection of the expected actual period of usefulness, but shall not be less than asset guideline periods (mid-range) established for asset guideline classes under Internal Revenue Procedures which are in effect as of the first day of the cost accounting period in which the assets are acquired. Use of this alternative procedure shall cease as soon as the contractor is able to develop estimates which are appropriately supported by his own experience. 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. Approvals are required for capital expenditures based on current delegated authority limits. Value Required Level of Authorization >100K Department Manager >500K Finance Director >1M CFO