Capital Assets - Approval, Safeguarding & Accounting (Procedure)
Office of Origin: Finance
Date Adopted: 07-01-04
Date Reviewed: 08-26-14
Last Date Modified & Approved: 01-17-17
Lake Michigan College (the College) has a significant investment in capital assets such as land, buildings, and fixed and moveable equipment, which are used to carry on the College’s missions of instruction, research, and public service.
The purpose of this procedure is to ensure that the College’s capital assets are acquired, safeguarded, controlled, disposed of, and accounted for in accordance with state and federal regulations, audit requirements, and generally accepted accounting principles.
Capital Asset Criteria
Except for library materials, Capital Assets are items with a purchase price of $5,000 or more and an estimated useful life of greater than one year. In addition, regardless of the cost and estimated useful life, all library materials (e.g., books, journals, bound periodicals, microfilm, electronic media) are capitalized.
Capital Assets are included on the College’s balance sheet and depreciated over the estimated useful life of the related asset.
Purchases that have an estimated useful life of greater than one year but cost less than $5,000 are expensed on the College’s income statement as Minor Capital when purchased.
Capitalized Cost of Capital Assets
1. Purchased Assets – The capitalized cost (i.e., the amount recorded as the cost basis for the asset) includes purchase price, transportation costs, installation costs, value received from trade-in, and any other direct expenses incurred in obtaining the asset.
2. Assets Purchased with Grant / Contract Funds
- If additional components of an existing capital asset funded by grant or contract are purchased that are valued at less than the capital threshold, the asset may be capitalized if the components are specifically budgeted in the grant or contract.
- For grants and contracts that do not have specific budgets, the capitalization threshold defaults to the College criteria.
- Assets accounted for under grant or contract must comply with all contractual obligations in the agreement.
- An inventory of all equipment purchased must be maintained.
- Equipment must be kept a minimum of 5 years after the end of the contract.
- Grant programs for which equipment and computer software do not become College property or are not installed on College networks are an exception to this procedure and are not to be tagged or capitalized. The grant administrator must authorize such purchases and must maintain inventory records according to grant requirements.
3. Donated Assets – The capitalized cost is the fair market value of the asset on the date of transfer plus transportation costs, installation costs, and any other direct expenses incurred in obtaining the asset.
- Fair market value may be determined by appraisal price, selling price to educational institutions of an equivalent item, and/or information on IRS Form 8283.
- Upon acceptance of a donated capital asset, the Lake Michigan College Foundation must provide the following to the Finance Department:
- Organization code of the department with responsibility for the asset
- Account code (see Capital Asset Account Code section herein)
- Acquisition month and year
- Description of asset
- Fair market value
- Manufacturer name and manufacturer model number
- Serial number
- Condition of asset and location
4. Leased Assets – The capitalized cost is the fair market value excluding interest; if fair market value is not known, a present value calculation based on monthly payments should be used to determine the value less imputed interest.
- Assets purchased under a capital lease must be recorded when the asset is placed in use.
- Items acquired via operating lease are not capital assets and the related lease payments are considered rent.
5. Construction, Acquisition & Renovation – The capitalized cost includes amount paid for constructing, acquiring and/or improving an asset (labor, materials, architectural and design fees, building permits, inspections, filing costs, agent fees, etc.) plus costs of utilities and interest on debt during construction, certain landscaping, etc. These costs collectively are a “capital project.”
- If a vendors or contractor is bidding on more than one capital asset or capital project at a time, the vendor/contractor will be required to provide a bid breakout by individual capital asset and/or capital project. This will allow the College to allocate invoiced amounts by capital asset/capital project without separate vendor/contractor invoicing.
- Renovation of an existing facility will be capitalized if a) usable square footage increases regardless of cost or b) facility useful life increases and the cost is at least $100,000.
- For more information on capitalizable costs, specifically landscaping costs, refer to Generally Accepted Accounting Principles (GAAP).
Timing of Capitalization of Assets
Within 90 days of a capital asset being placed into service, all cost associated with the capital project must be identified, quantified, and communicated to Accounts Payable Department, who will in turn ensure that the asset is capitalized within 15 days. This timetable is aimed at preventing misstatement of the financial results from under-recorded depreciation associated with delayed capitalization of capital assets.
Those costs that are not communicated within 90 days may not be capitalized but rather charged against the appropriate operating budget.
Approval of Capital Assets / Projects – Minor Capital
The College has three (3) categories of capital asset spending – Minor Capital, Routine Capital and Major Capital.
Minor Capital is defined as those assets that have an estimated useful life of greater than one year but that cost less than $5,000. Minor Capital items are not capitalized but are expensed on the College’s income statement when purchased. Approval for purchase of Minor Capital comes through the annual operating budget process.
Approval of Capital Assets / Projects – Routine Capital
The College’s second category of capital spending is Routine Capital.
The Routine Capital budget is calculated annually using a standard methodology and is generally allocated between Information Technologies (IT), Facilities, Academics, and auxiliaries. This allocation is intended to provide for an outlay of cash primarily for maintenance, renewal and replacement as well as, as funding permits, to acquire or upgrade College assets in an attempt to constantly improve and advance College facilities, equipment, and operations.
Routine capital spending is intended to be funded by each fiscal year’s operating cash surplus; should no cash surplus be generated from operations, Routine Capital would be funded by College reserves, postponed, or funded through debt issuance, as determined by the College’s Board of Trustees (the Board.)
The Routine Capital budget is approved by the Board each year for the succeeding fiscal year; approval should ideally be sought in the third quarter of the preceding fiscal year (i.e., March) to allow time for planning and bidding activities to occur as needed before the state of the new fiscal year.
The projects that comprise the Routine Capital are at the discretion of the President once the overall Routine Capital budget allocation is approved by the Board.
If an individual Routine Capital project requires Board approval, once approved by the Board any contracts that are a component of the approved capital project that individually exceed the Cabinet member’s delegated signature authority may not require additional Board approval; see the Authority to Bind College to External Agreements policy.
Although a list of proposed capital projects and capital assets to be funded with Routine Capital is presented to the Board each year (typically in August or September of the current fiscal year),
Board approval of the individual projects is not required unless the amount exceeds the Cabinet member’s delegated signature authority.
Carryover of an unspent Routine Capital budget amount from one fiscal year to another requires approval of the Vice President, Finance. Budgets carried over may only be expended on the project or expenditure originally intended without further approval of the Vice President, Finance.
Routine capital budget overruns in total by division (i.e., IT, Academics, Facilities, auxiliaries) of 1% or less will be forgiven. Routine capital budget overruns in total by of more than 1% will result in a reduction in the following year's routine capital budget for that division of the total amount of the overrun.
Approval of Capital Assets / Projects – Major Capital
The College’s third category of capital spending is Major Capital. Major Capital is broadly defined as a capital asset or capital project (i.e., capitalized costs of construction, acquisition, and/or renovation) that meets the College’s capitalization threshold but that is not included in a Routine Capital budget.
All Major Capital expenditures require the approval of the President. As applicable, the information provided to the Board must include the following estimated annual incremental costs:
- operating (e.g., insurance, utilities, staffing, cleaning, security, etc.)
- maintenance (e.g., minor capital, repairs, upkeep, building supplies, etc.)
Furthermore, certain Major Capital expenditures require approval of the Board (per policy Authority to Bind College to External Agreements); specifically, those capital assets or capital projects that exceed the delegated signature authority of a Cabinet member to bind the College must be approved by the Board.
Major Capital budgets may include a contingency to cover unforeseen circumstances as outlined in the Major Capital policy.
Once a capital project as a whole is approved by the Board, contracts that are a component of the approved capital project that individually exceed the Cabinet member’s delegated signature authority may not require additional Board approval; see the Authority to Bind College to External Agreements policy.
Work on a project (e.g., change orders) that will increase the capitalizable cost of a project beyond the amount previously approved by the Board will require additional Board approval.
Savings (i.e., actual project expenditures less than budgeted project expenditures) may not be reallocated to or used for another capital asset or capital project without the approval of the President or the Board if greater than $100,000.
If an asset is received in the Receiving Department (Receiving), the asset should not leave Receiving until quantity is confirmed against packing list/bill of lading and asset is verified as free of damage; missing or damaged items must be addressed at Receiving.
Receiving will contact Finance Department when an asset is received that ultimately goes to another site (e.g., Bertrand.) The asset must be tagged before delivery off-site.
- Departments receiving assets outside of Receiving must contact Finance Department and provide the following:
1. Purchase order number, as applicable
2. Organization code of department with responsibility for the asset
3. Account code (see Capital Asset Account Code section herein)
4. Description of the asset
5. Purchase price or fair market value
6. Location Code of asset
7. Room number where asset is to reside (must agree with Location Code)
8. Model number (use manufacturer designation)
9. Serial number
- Invoice and packing slip copies will be sent to the Finance Department by the Accounts Payable Department for recordkeeping.
All Capital Assets other than the specific exceptions below must be assigned a Capital Asset Code and tagged with a bar code tag reading "Property of Lake Michigan College." When a capital asset is received at Receiving, it should not leave there without first being tagged.
In addition, Minor Capital assets with a value of $1,000-$4,999 and a useful life of greater than 1 year will also be assigned a Capital Asset Code and tagged, but will not be capitalized.
In addition, all IT assets (e.g., computers, servers, network devices, printers, projectors, peripherals) regardless of dollar amount will be assigned a Capital Asset Code and tagged. No IT asset should be sent into service without an asset tag.
In exception, artwork, sensitive technical equipment, or other items where tagging will affect function, value, or ability to return the item under warranty will not be tagged; however, an internal tag number will be assigned and maintained within the capital asset system.
Asset tags are to be placed in the following locations:
- Desktop computers – at top front most location by manufacturer serial number
- Laptop computers – on bottom on non-removable area by manufacturer serial number
- Other IT assets – at most visible location
- Other non-IT equipment – near manufacturer serial number
- Furniture – front, right-hand edge of mold/reveal
Assets purchased with grant funds require special tagging and tracking in addition to above. The Finance Department is responsible for tagging grant-funded assets with a special tag that includes grant name, year of grant, and any other identification required by the grant.
Safeguarding IT Assets
Specific steps around safeguarding IT assets include the following:
1. IT completes and retains an IT Asset Form that includes vendor, manufacturer, model and serial numbers, grant affiliation, location, and asset tag and purchase order numbers.
2. IT maintains the information on the IT Assets Form in a spreadsheet.
3. Location is important and will be included in the spreadsheet even if only a storage or temporary location.
4. IT will send this spreadsheet to the Finance Department on a monthly basis.
5. IT must update the location of the asset by updating or creating a new IT Assets Form and by updating the spreadsheet.
6. IT will notify Finance Department of any asset disposals using the spreadsheet.
7. IT will conduct a monthly inventory of assets located in staging areas and provide a report to the Chief Information Officer or designee.
8. Each May, IT will verify location and possession of all IT assets. Results will be provided to VP of Finance.
No IT asset should be sent into service without an asset tag.
Disposal and Transfer of Capital Assets
Procedures governing the disposal or transfer of capital assets are the same as general property disposals, which are documented in Sale/Disposal of College Property Policy & Procedure.
Physical Inventory of Capital Assets
A physical inventory of all Capital Assets should be conducted at least once every other fiscal year except when not financially feasible (i.e., in times of financial exigency.) A physical inventory of all IT assets must, however, be completed annually in May.
Within 45 days of a physical inventory, the results of the physical inventory will be reconciled to the capital asset records, and necessary adjustments made.
Depreciation of Capital Assets
The straight-line method of depreciation is used for all depreciable capital assets. Depreciation is recorded on a monthly basis beginning with the month the asset is placed in service.
Estimated useful life is assigned as follows by capital asset category:
Land improvements & infrastructure 15-20 years
Buildings 45 years
Equipment 7-15 years
Furniture & fixtures 5-7 years
Library materials 5 years
Capital Asset Account Codes
The following Account Codes must be used for Capital Assets (defined above) and for all IT assets regardless of value.
Land acquisitions 7805
Parking lot improvements 7804
Site improvements 7803
New construction 7811
Equipment replacements 7812
Computer hardware (IT use only) 7826
Computer software 7823
Conduit, cabling, fiber optics 7834
Concrete structures, asphalt 7831
Ditches, piping, drainage systems 7833
Lighting, signage 7832
Furniture & Fixtures:
Library Books 7855
Art Collections 7861
Responsibility: Director, Finance & Accounting
References: Governmental Accounting Standards Board; Generally Acceptable Accounting Principles; Lake Michigan College’s Major Capital policy; Lake Michigan College Authority to Bind College to External Agreements policy