Fixed Asset General Accounting Procedures

Overview

Capitalization Policy

Capitalization is the process of recording an expenditure that will benefit a future period as an asset rather than treating the expenditure as an expense of the period in which it occurs. Any asset that meets the capitalization criteria described below should be capitalized and tagged.

Criteria

• Asset cost of $5000 or more (effective 07/01/2001, previously $1000) - The cost of an asset includes the purchase price, less any applicable discounts, plus all normal expenditures related to preparing an asset for use. Such incidental expenditures may include freight and installation costs. Asset cost also includes any necessary component parts acquired to be used with the asset. A necessary component costing over $5000, acquired at a later date, should be added to the cost of the original asset.
• Useful life of two or more years - Useful life is the time factor associated with the limited usefulness of an asset including both physical factors (i.e. wear and tear, deterioration and decay, and damage or destruction) and functional factors (i.e. inadequacy and obsolescence).
• Ownership - All assets acquired by, or on behalf of Millersville University, are considered to be owned by the University. Any property owned by the Commonwealth of Pennsylvania but made available for the use of the University is not considered to be University-owned and should not be recorded in the Fixed Assets System. Additionally, any asset that may be on loan to the University should not be reported on the University's financial statements. However, assuming it can be readily identified as a non-University owned asset, for tracking purposes, such an asset could be recorded in the Fixed Assets System.

Classification of Fixed Assets and Useful Lives

Fixed asset classifications are established for depreciation purposes, based upon similar characteristics and useful lives. The following are guidelines for asset classifications and their estimated useful lives:

Types of Fixed Assets

Fixed assets are classified into two categories: real and personal property.

Personal Property

Personal property encompasses all fixed assets that are not real property. Examples of personal property include equipment, furniture, fixtures, art collections, and library books. Personal property meeting the capitalization criteria must be tagged and recorded in the Fixed Assets System (FFX). The following general guidelines should be observed:

• The tag should be located in a conspicuous or accessible place, preferably toward the front of the asset.
• Individual items assembled into a system having a group cost greater than $5,000, and a useful life of at least two years, must be capitalized, with the major and most valuable unit being tagged. For instance, in the case of a personal computer system, the costs of the central processing unit (CPU), keyboard, and monitor should be combined into one value and the tag should be placed on the front of the CPU.
• In cases of modular furniture purchases, each assembled unit of furniture should be given one tag, which should be placed on the one piece having the highest value.
• Movable furniture, constructed by University personnel, should be capitalized and tagged. The cost of the asset should include all labor and materials.
• Donated asset should be recorded at fair market or appraised value, whichever is available at the time the gift is received, and tagged.
• Normal repair and maintenance expenditures are not capitalized, as they neither add to the value of the property nor materially prolong its useful life.
• Assets that cannot be tagged, such as software, should be given a tag number from a block of numbers assigned for that purpose (W - Equipment, Y - Vehicles, or Z - Furniture).
• Freight charges associated with an asset should be included in the asset's cost and charged to the same object code as the asset.
• Any equipment purchased by a grant program should follow the same capitalization procedures as University-purchased assets. However, this equipment is subject to the provisions of the specific grant program and should be easily identifiable.

The following are major classifications of personal property, and their related class codes, included in the Fixed Assets System:

• Office Equipment (OE) - typewriters, adding machines, telephones, facsimile equipment, calculators, check-writers, copiers, duplicating equipment, printing presses, shredding machines, answering machines, and postage meters.
• Furniture and Furnishings (FU) - desks, chairs, file cabinets, sofas, tables, beds, dressers, credenzas, work stations, lamps, grandfather clocks, showcases, and other fixtures.
• Carpeting (CA) - all types of floor coverings, such as carpeting, tile, and gym flooring.
• Draperies (DR) - all types of window treatments, including draperies, blinds, and stage curtains.
• Appliances (AP) - stoves, ovens, refrigerators, freezers, washing machines, dishwashers, dryers, microwave ovens, unit air conditioners, vending machines, commercial mixers, dispensers, coffee makers, and ice makers.
• Laboratory and Audio/Visual Equipment (LE and AV) - televisions, stereos, radios, video cassette recorders, projectors, cameras, tape recorders, microfiche & microfilm readers and printers, broadcasting equipment, satellite dishes, antennas, sound system microscopes, spectrometers, oscilloscopes, telescopes, scales, meters, incubators, chromatographies, analyzers, testing equipment, kilns, looms, x-ray machines, and clinical equipment.
• Shop Maintenance Equipment (VM) - drills, saws, grinders, battery chargers, lathes, hydraulic presses, and welding equipment.
• Housekeeping Equipment (VM) - buffers, carpet cleaners, vacuums, clothes dryers, pressure cleaners, sewing machines, and washing machines.
• Grounds Keeping Equipment (VM) - aerators, leaf vacuums, lawn mowers, spreaders, roto-tillers, mulchers, snow blowers, and irrigating equipment.
• EDP Equipment (CT) - mainframe, micro and mini computers, word processing equipment, card readers, card punches, magnetic tape feeds, printers, optical scanners, data entry devices, terminals, tape drives, disc drives, modems, mainframe software, and all other computer hardware, switchboards, and other related equipment.
• Lighting & Heating Equipment (MI) - air compressors, air conditioners, boilers, chandeliers, generators, boilers, heat pumps, ice machines, transformers, and water softeners.
• Musical Equipment (MI) - clarinets, pianos, saxophones, flutes, bassoons, drums, organs, and other musical instruments.
• Athletic Equipment (MI) - exercise bikes, soccer goals, backboards, athletic mats, billiard tables, bleachers, dumbbells, stairmasters, weight machines, and other related athletic equipment.
• Other Equipment (MI) - all items that cannot be classified in any other categories, such as musical instruments or athletic equipment.
• Vehicles and Light Maintenance Equipment (VM) - cars, vans, light trucks, motorcycles, jeeps, boats, buses, mobile homes, campers, lawn mowers, lawn tractors, snow blowers, swimming pool equipment, small generators, fork lifts, machine shop equipment, drilling equipment, custodial equipment, and small motorized vehicles.
• Heavy Maintenance Equipment (HM) - large trucks, bulldozers, backhoes, large tractors, concrete mixers, large generators, and trailers.
• Printing & Binding Equipment (OE) - binding machines, check signers, bundling machines, copiers, laminators, printing presses, staplers, and other related equipment.
• Capitalized Leases (CL) - a lease that transfers, to the lessee, most of the benefits and risks inherent to ownership of the property. See section on "Capital Leases" for more information.
• Leasehold Improvements (LI) - capitalizable improvements and extraordinary repairs made to fixed assets recorded as operating leases (leases that do not meet capital lease criteria).
• Works of Art (WA) - paintings, sculptures, drawings, prints, statues and jewelry. Note that rare works of art or historical treasures need not be depreciated, as stated in FASB 93.
• Library Books (LB) - physical bound volumes (books and periodicals), and bibliographic unit equivalents (media, maps, microfilm reels, microfiche, and sound recordings).

The Office of the Director of Library Services maintains all inventory records for library books. A Library Statistics report is periodically (annually) forwarded to the Accounting Office for processing. Library books are recorded within the Net Investment in Plant account.

• For financial statement purposes, library books are valued as follows:
• Books: valued at $10 per volume and include monographs, reference, juvenile, catalog titles, PA documents, theses, textbooks, and special collections
• Bound Periodicals: valued at $10 per volume.
• Non-Books: valued at $10 per volume and include maps, non-prints, abstracts and indexes, periodicals, government documents, newspaper subscriptions, pamphlets, university papers, manuscripts, broadslides, photographs, newspaper clippings, MU articles, name collections, etc.
• Microfilm: valued at $10 per reel.
• Micro cards, Prints, Fiche: valued at $1 per unit.

The total value of the library holdings is computed at the end of a given fiscal year, utilizing the Library Statistics Report. The figure representing an increase or decrease in total library holdings value will be posted in the Net Investment In Plant fund in BFS as follows:

Real Property

Real property includes land, buildings, building improvements, and other non-structural improvements such as streets, roads, bridges, pavements, landscaping, etc. Real property cannot be tagged but, for tracking purposes, is assigned an asset number in the Fixed Assets System.

The following are major classifications of real property included in the Fixed Assets System and their related class codes as defined within the system:

• Land (LA) - Land is recorded on a facility (excluding buildings) or parcel basis and is not subject to depreciation. The cost includes negotiated purchase price, broker's commissions, legal fees, title fees, recording fees, escrow fees, surveying fees, any existing unpaid taxes or other liens on the property that are assumed by the buyer, and all other costs related to the acquisition.
• Land/Non-Structural Improvements (NI) - Land and non-structural improvements are physical changes or additions to the land of such proportion as to increase the utility of the land (excluding structures). Land improvements include landscaping, paving, curbing, roads, sidewalks, fences, retaining walls, sewers, bridges, drainage facilities, running tracks, basketball courts, tennis courts, artificial turf, parking lots, outdoor lighting and utility distribution systems.
• Buildings (BD) - Buildings are structures erected to stand more or less permanently, and are designed for human use and occupancy or as shelter for animals or goods. Each structure is comprised of such components as framing, interior finish, roof structure and cover, and building service systems (plumbing, sewerage, heating, ventilating, air conditioning, lighting, power, elevators, fire protection, public address systems, emergency power systems) which are all included in the asset cost. A purchase involving the acquisition of both land and buildings requires that the cost be allocated between the assets. A major addition to a building, such as the construction of an additional wing, should be classified as a building rather than as a building improvement.
• Building Improvements (BI) - Building improvements are enhancements that extend the useful life of a building. This includes minor additions, roof replacement, installation of elevators, replacement of central air conditioning or heating systems, installation of fire protection systems, replacement of plumbing and wiring, and other major renovations.
• Construction in Progress - Construction in progress is the cost of on-going construction of an asset that, upon completion, will satisfy the established criteria and definitions of a capital asset. It is reflected as a capital asset in the Net Investment in Plant Fund, but is not depreciated or recorded in the Fixed Assets System until construction is completed.

Capital Leases

All leases should be accounted for according to the provisions of FASB Accounting Standard #13, "Accounting for Leases", which provides for the distinction between capital and operating leases.

Leased equipment should be classified as a capital lease if it meets one or more of the following criteria at its inception:

1. The lease transfers ownership of the property to the lessee by the end of the lease term.
2. The lease contains a Bargain Purchase Option. A Bargain Purchase Option is an option to purchase the leased property at a price substantially lower than the fair value of the property at the date the option becomes exercisable, which makes the exercise of the option almost certain.
3. The lease term is equal to or greater than 75% of the estimated economic life of the leased property. Estimated Economic Life is the estimated remaining useful life of the property for the purpose it was intended, regardless of the term of the lease
4. The present value of the Minimum Lease Payments is equal to or greater than 90% of the fair value of the leased property. (This criterion is not used to evaluate a lease that begins with the last 25% of the original estimated economic life of the leased property). Minimum Lease Payments are the minimum rental payments due during the lease term plus any payments or guarantees that the lessee must make concerning the leased property at the end of the lease term (excluding a lessee's obligation to pay executory costs apart from the rental payments). Fair value is the price for which the leased property could be sold between unrelated parties in an arm's length transaction.

The lessee records a capital lease as an asset, along with a corresponding liability, in the Investment in Plant Fund. The value of the lease is the lesser of the fair value of the leased property or the present value of the minimum lease payments. Fair value is determined at the inception of the lease. The present value of the minimum lease payments is computed at the beginning of the lease term. The discount rate used by the lessee to determine the present value is the lower of the lessee's incremental borrowing rate or the interest rate implicit in the lease (if known).

Departmental Responsibility

Custodian Department

The custodian or using department is responsible for the requisition and maintenance of any personal property in its possession. The department head must ensure that the requisition for a fixed asset clearly describes the item, quantity, custodian, location, and departmental account. In order to facilitate the determination of the capitalization cost, any components necessary to place the property into service should be included on the same requisition.

The department head is also responsible for safeguarding all fixed assets in the department's possession and is required to notify the Receiving/Inventory Control Department if any type of change with respect to capital equipment inventory occurs. The department is responsible for completing annual physical inventory verification, as well as assisting the Receiving/Inventory Control Department when a physical inventory is conducted.

Purchasing Office

The Purchasing Office, in conjunction with the Budget Office, is responsible for reviewing requisitions to determine the availability of funds, as well as to ensure correct item descriptions, quantity, estimated cost, and all necessary components and accessories. The Purchasing staff ensures that the account number paying for the asset and the custodian departmental account number, if different, are clearly indicated on the requisition. The necessary funds are encumbered and the purchase order is forwarded to the vendor.

The Accounts Payable Clerk receives and verifies invoices, and processes vouchers into the Purchasing System. All amounts vouchered for capitalized property will be fed extracted, when running the asset extract process, and transferred to the Fixed Assets System with an origination tag. These O-tags are reviewed and approved as permanent assets as appropriate.

Receiving/Inventory Control Department

The Receiving/Inventory Control Department is responsible for receiving and physically examining the property acquired from the vendor, ensuring that it is in good condition, and delivering the property to the appropriate department. The Receiving/Inventory Control staff verifies the packing slip, designates the item as "Received" in the Purchasing System, and forwards any invoice to the Accounts Payable Clerk for payment.

The Receiving/Inventory Control Department is also responsible for assigning tag numbers to each item received, updating the master inventory files, maintaining all property records, conducting physical inventories on a periodic and consistent basis, and sending yearly inventory reports to the custodian departments.

Accounting Office

The Accounting Office is responsible for reviewing the coding of purchased property, confirming payment and pricing of fixed assets purchased, reviewing and maintaining the Fixed Assets System files, processing deletions, verifying depreciation expense and accumulated depreciation, reconciling property acquired to property recorded, reporting property value in the financial statements as required, and conducting periodic compliance and substantive audit tests. The Accounting Office ensures that the acquisition of an asset, by any method, is properly recorded in the Accounting System and reconciled to the accounting records.

Automated Fixed Assets System

Disposals

Although ownership of an asset rests with the University, an individual department may transfer, trade in, or surplus an asset, following proper department procedures. However, a department may not dispose of assets on its own. Any time an asset is disposed of, the Receiving/Inventory Control Department must be notified in writing by the department head responsible for the asset. A disposal can be defined as one of the following:

• Lost or Stolen: Any lost or stolen equipment must be reported to the Receiving/Inventory Control Department, the Director of Purchasing, and University Security. If applicable, insurance claims will be promptly initiated by the Director of Purchasing. If the asset is not recovered within 90 days, it should be removed from the Fixed Assets System. If the asset is subsequently recovered, the appropriate departments must be notified in a timely fashion.
• Unserviceable: Property that is worn out, obsolete, or damaged beyond repair must be reported to the Receiving/Inventory Control Department, which will inspect the asset and determine if the asset is of no value.
• Destroyed: Any destruction of assets must be reported, in writing, to the Receiving/Inventory Control department for verification.
• Serviceable: All serviceable assets should be reported to the Receiving/Inventory Control Department for surplus, repair, or reassignment.

Upon notification of an asset disposal, the Receiving/Inventory Control Department prepares a "Capital Equipment Inventory Deletion" form and routes the form to the Accounting Office for processing. This pre-numbered form includes such information as the date of the disposal, the reason for the deletion, the authorized person, department name, department cost center, asset tag number, asset description, and total asset cost.

Upon receipt of the deletion form, the Financial Accountant is responsible for reviewing the deletion for appropriateness, assigning a deletion code, calculating any current year depreciation, and processing the disposal into the Fixed Asset System, using Banner’s Fixed Asset Adjustment Form (FFAADJF). Current year depreciation is calculated by taking the full year depreciation amount for the asset and dividing in half. Currently, the following deletion codes are defined in the Fixed Assets System:

For reconciliation purposes, when processing the disposal into the system, the number on the top of the deletion form is used as the transaction reference. Once a deletion has been processed, the source document is filed in a binder and held in the Accounting Office for a period of three years.

Transfers

Occasionally, changes to custodian names and numbers, as well as locations, will need to be changed for asset records. When an asset is transferred to a different location, the Receiving/Inventory Control Department should be notified immediately so the asset record can be updated. Transfers are recorded Banner’s Fixed Asset Transfer Form (FFATRAN) and can be processed for changes in custodian name and/or number, building location, and room number. Most transfers are processed by the Receiving/Inventory Control Department, although the Accounting Office also has the capability to process transfer transactions.

Adjustments

Any errors discovered that are non-dollar in nature can be corrected by the Receiving/Inventory Control Department, while adjustments related to dollar values or depreciation methods must be processed by the Accounting Office.

When an error related to total cost is discovered by the Receiving/Inventory Control Department, an "Approved Asset Cost Adjustment" form should be completed and forwarded to the Accounting Office for verification and processing. This form should contain as much information as possible relating to the cost adjustment. After the error has been confirmed, the Accounting Office will post an adjusting entry and file the supporting documentation for future reference.

If an error that is non-dollar related is discovered, such as an incorrect custodian name or number, the Receiving/Inventory Control Department will post any necessary entries to correct the inaccuracy.

Reconciliations

The Accounting Office reconciles the General Ledger accounts in the NIP fund (8702) to the detail transactions within the Fixed Asset System weekly to insure the two systems are in balance. The Fixed asset details are produced by the Brio query report that is used to compare to the account balances in the NIP fund. Variance must be researched and explained.

For year-end reconciliation purposes, the following format may be used:

Physical Inventory of Equipment

On an annual basis, a departmental inventory listing is sent to each department head. The department head is required to verify that any equipment in the department's possession is on the list. Any discrepancies discovered should be noted directly on the inventory sheet. Once the department has completed its annual inventory, the department chairperson should sign the inventory verification sheet and return it to the Receiving/Inventory Control Department in a prompt fashion.

An on-going physical inventory is conducted by the Receiving/Inventory Control Department so that the entire campus is generally inventoried within a cycle of no more than seven years. The statistical sampling method of inventory verification performed for an interval of two years may also be adopted to comply with grant and contract requirements.

Depreciation Policy

All capitalized assets, with the exception of land, library books, and "inexhaustible collections", must be depreciated. The University currently depreciates all assets annually, using the Straight Line Method, with a half-year convention. This is a depreciation method based on the passage of time, recognizing equal periodic charges over the estimated useful life of an asset. The calculation is as follows:

The half-year convention means that during the first year, one-half of the above calculation is recorded as the depreciation expense. The other half of this expense will be recorded in the final year of depreciation for the asset.

Salvage value is the estimate of the amount that will be realized at the end of the useful life of a depreciable asset. Frequently, depreciable assets have little or no salvage value at the end of their estimated useful life and, if immaterial, the amount may be ignored. Salvage value for assets with a cost in excess of $50,000 should be evaluated individually.

The current year depreciation expense, and the accumulated depreciation, is reported in the financial statements as required by FASB Statement #93. Currently, the University is not transferring the required funding to the Renewal and Replacement Fund.