Diocese of Madison. Policy for Recording Capital Assets. A. Definition of Capital Asset. B. Categories of Capital Assets

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1 Diocese of Madison Policy for Recording Capital Assets In accordance with GAAP and the USCCB, parishes and schools must account for the capital assets used in their operations. Capital Assets, sometimes referred to as long term assets, fixed assets, or buildings and equipment, represent assets that are generally held and benefit several accounting periods. A. Definition of Capital Asset 1. An asset is defined as a capital asset if it meets the following criteria: a. The asset is tangible in nature, complete in itself, and is not a component of another item. b. The asset is used in the operation of the parish/school/cemetery s activities. c. The asset has a useful life of three years or more and provides benefit throughout that period. d. The individual asset is of significant value. That is, it has a unit cost of $5, or more. 2. An item costing less than $5,000 should also be capitalized if: a. The item is an ancillary cost, such as freight, installation, or other costs incurred to acquire a capital item and prepare it for use. b. The item will be used with and become an essential part of a group, system, or configuration with a total value of $5, or more. (Note: This situation applies only to the initial acquisition of the system-generally all the components are purchased within the same fiscal year.) B. Categories of Capital Assets Once a parish has determined that an asset should be set up as a capital asset (capitalized), the parish then determines in which category the asset belongs. The Standard Chart of Accounts provides for the following categories: Land Land Improvements Building Building Improvements Furniture and Equipment Vehicles 13.1

2 C. Guidelines of Capital Asset Valuation and Categorization 1. The following guidelines are to be used to determine the value of and category to which the asset will be capitalized. a. Land: The cost of land acquired should include: i. The purchase price ii. Closing costs, such as title search costs, legal fees, and recording fees iii. Costs incurred in getting the land in condition for its intended use, such as grading, filling, draining, clearing, and surveying iv. Demolition costs v. Assumption of any liens or mortgages or encumbrances vi. Judgments levied through damage suits b. Land Improvements: The cost of land improvements should include: i. Constructed improvements such as culverts, fencing, flag poles, parking lots, roadways, sewer, water and electric lines, yard lighting, paving (roadways, walks, parking) ii. Landscaping improvements such as shrubs, lawns, and trees c. Buildings and Infrastructures: The cost of buildings and infrastructures should include all expenditures related directly to their acquisition and construction. The costs incurred include: i. Materials, labor (including design and supervision), and overhead ii. Legal and architectural fees iii. Building permits iv. Insurance premiums during the construction phase v. Materials and services furnished by other state agencies vi. Interest costs incurred during the construction of proprietary fund buildings and infrastructure d. Machinery and Equipment: This includes delivery equipment, office equipment, machinery, furniture and fixtures, and furnishings that exceed $5,000/unit. Costs that should be capitalized include: i. Purchase price ii. Freight and handling charges iii. Insurance while in transit iv. Assembling and installation costs 2. Record capital assets at acquisition or book value. While it may be customary to insure capital assets at replacement value, insurance value appreciation should not be recorded for fixed assets. 13.2

3 D. Capital Asset Records 1. Every parish, school, and cemetery must maintain permanent records of all capital assets. Each asset record should detail the following information: a. Description of asset b. Serial number if applicable c. Purchase date d. Vendor e. Purchase price f. Life of asset g. Physical location h. Person responsible for asset i. General ledger account charges j. Disposal date 2. A capital asset purchase requiring several disbursements to fully satisfy the obligation need only be documented on one asset record. Examples of this include separate invoices for computers and software or a construction project. E. Fully Depreciated Assets Assets that are still in use, but have been fully depreciated, will be reflected on capital asset records at historical cost and assigned a net book value (capital asset cost less accumulated depreciation) of zero to indicate the asset is still in use beyond its depreciable life. Assets must not be taken off the capital listing until disposal. F. Depreciation and Useful Life 1. Depreciation expense must be calculated for all capital assets. The straight-line depreciation method is to be used (an equal amount of the fixed assets acquisition cost is expensed each year of its useful life). The salvage value of all assets should be set at zero. The term Accumulated Depreciation is used to indicate the total depreciation expense that has accumulated from the time of acquisition to the present time. Depreciation will begin in the year a new asset is placed in service. 2. The facts and circumstances of the asset s use should determine useful lives. The following useful lives of capital assets are presented as a general guide: Type of Fixed Assets Useful Life: Land -- not depreciated Land Improvements years Buildings years Building Additions years Building Improvements years Furniture and Equipment -- 5 years Vehicles -- 5 years 13.3

4 G. Capitalization of Costs Subsequent to Asset Acquisition In general, if an expenditure improves the efficiency or materially extends the useful life of an asset, it should be capitalized. There are four categories of expenditures that may be incurred for an asset subsequent to its acquisition. These expenditures are additions, improvements and replacements, re-installations and rearrangements, and repairs. 1. Additions Extensions, enlargements, or expansions made to an existing asset a. Additions should present no major accounting problems. By definition, any addition to a capital asset is capitalized because a new asset has been created. If the addition is an item that could stand alone, i.e., a new building wing, it is a separate asset, and separate asset and depreciation records should be maintained. b. Examples of additions are as follows (coding of these transactions should be based on the work done): a. An elevator or dumbwaiter b. Fire alarm system c. Security windows d. Surveillance equipment e. Sprinkler system, Internal f. Acoustical treatment 2. Improvements and Replacements The distinguishing feature between an improvement and a replacement is that an improvement is the substitution of a better asset having superior performance capabilities (e.g., a concrete floor for a wooden floor) for the one currently used, whereas a replacement is the substitution of a similar asset (a wooden floor for a wooden floor). In both of these instances, organizations should determine whether the expenditure increases the future service potential of the capital assets or merely maintains the existing level of service. When the determination is made that the future level has been increased, the new cost is capitalized. If the cost is to be capitalized, the carrying amount of the old assets and associated accumulated depreciation, if applicable, should be removed, if the amount is known. If the original cost and accumulated depreciation are not known, capitalize the additional cost. 3. Reinstallations and Rearrangements Expenditures made to provide greater efficiency or reduce costs. If benefits from the reinstallation or rearrangement extend into future accounting periods, the expenditure should be capitalized. If the expenditure has no measurable future 13.4

5 benefit, it should be treated as a current period expenditure. These are costs that will benefit future periods but do not represent additions, replacements, or improvements. If the original installation cost can be estimated, along with the accumulated depreciation to date, the cost may be handled as a replacement and the procedures in paragraph 2 above should be followed. Where the original cost is not known, the reinstallation or rearrangement cost should be capitalized. 4. Repairs (Ordinary and Major) Repairs maintain the capital asset in its original condition. Ordinary repairs are expenditures that keep the asset in a state of good repair. Preventive maintenance, normal periodic repairs, replacement of parts, structural components, and other activities needed to maintain the asset so that it continues to provide normal service should not be capitalized but rather charged to an expense account. Ordinary repairs should not be capitalized. Major repairs are relatively large expenditures that benefit more than one operating cycle or period. If a major repair, e.g., an overhaul, occurs that benefits several periods and/or extends the useful life of the asset then the cost of the repair should be handled as an addition, improvement, or replacement depending upon the type of repair made. Examples of repair activities are as follows: Roof and/or flashing repairs Window repairs and glass replacement Tuck pointing Painting Masonry repairs Floor repairs H. The Accounting for Capital Assets 1. Sample Journal Entry for the Purchase of an Asset (assume building) Debit Building $400,000 Credit Cash $400, Sample Journal Entry for 1 st year of depreciation (40 years) Debit Depreciation Expense $ 10,000 Credit Accumulated Depreciation $ 10, Sample Calculation of Asset Value The asset value of a capital asset will always be the asset account (in this case, Building) less Accumulated Depreciation. For example: Building $400,000 Accumulated Depreciation ($ 10,000) Net Value $390,

6 I. The Write-down of Overstated Capital Assets 1. There currently exists a situation at many parishes in the Diocese of Madison whereby capital assets are grossly overstated. This situation has arisen due to one or both of the following situations: a. The parish has never depreciated the assets b. During a parish merger, capital assets were written up from historical cost to market value, excessively overstating their value (specifically parishes which merged prior to 2011). 2. In order to rectify the overstatement of capital assets and to accurately reflect the financial position of a parish, we recommend writing down the overstated capital assets. To accomplish this, we recommend setting up account #85500 Capital Asset Value Adjustment and charging the overstated fixed asset values to this account. a. For capital assets which were written up during the merging process: i. With the assistance of The Department of Parish Financial Services, calculate the overstated value (capital asset value posted to the merged books less the book value per the balance sheet prior to the merge). This information should be found in the parish merger files in the diocesan archives. ii. This total balance should be written off iii. The journal entry will consist of a debit to account #85500 and a credit to account #18XXX Capital Assets. b. For capital assets which were never depreciated: i. Obtain detailed list of assets including acquisition date and value of each asset. ii. Determine the original useful life of each capital asset iii. Calculate the proper book value what the book value should be for each asset, had depreciation been taken. (Please keep in mind that if a building is older than 40 years and if furniture and fixtures are older than 5 years, than it should be fully depreciated.) iv. Calculate the write-down. (Current book value less proper book value) v. If the asset is still in use and has a remaining useful life, the parish should begin to depreciate the capital asset for the remainder of its useful life. Example 1: A building built in 1970 for a value of $1,000,000 has never been depreciated and the building is still in use. Since the building is older than 40 years, the entire value of building should be written-down. The entry would be a $1,000,000 debit to account #85500 and credit to account #193XX Accumulated Depreciation. (Please note that if the asset is no longer in use, then the asset should be completely removed from the books. The entry would be a 13.6

7 $1,000,000 debit to account #85500 and a credit to account #183XX Capital Assets.) Example 2: A building built in 2000 for a value of $1,000,000 has never been depreciated. Since the building still has a remaining useful life of 25 years, the asset should be written down for the initial 15 years. The entry would be a $375,000 ( /40*15) debit to account #85500 and credit to account #193xx Accumulated Depreciation. Subsequent years depreciation should then be charged to depreciation expense, account #583XX. 13.7

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