Accounting and Financial Reporting for Capital Assets

II. Capital Asset Guidelines

• System of Record and Tracking

  Initial purchases are first recorded via vendor invoice entry into the District’s designated software system for disbursements, then compiled by location and project and recorded for capital asset financial reporting purposes. Donated assets and other non-monetary transactions will be recorded directly in the financial reporting software. In addition to the data elements identified in the “Policy on Asset Management,” capital asset records should include the following:

  • In service date
  • Useful life
  • Depreciation method

• Capitalization Thresholds and Useful Lives

  Capitalization thresholds and useful lives for each asset class are as follows

  Class of Asset	Threshold	Useful Lives
  Land	Capitalize All	N/A
  Buildings	Capitalize All	50 years
  Building improvements	Capitalize All	25 years
  Leasehold improvements	Capitalize All	Remaining term of lease
  Personal property (including Equipment)	$25,000	5 years
  Works of art/historical treasures	Capitalize All	N/A
  Intangible assets
  Major software	$25,000	20 year
  Minor software	$75,000	3 year
  Construction in progress	Capitalize All	N/A

• Capital Asset Acquisition Cost

  Capital assets are recorded at historical cost or estimated historical cost if purchased or constructed. Historical cost includes the vendor's invoice plus the value of any trade-in or educational allowance, initial installation cost, modifications, attachments, accessories or apparatus necessary to make the asset usable and render it into service. Historical cost also includes ancillary charges such as freight and transportation charges, site preparation costs and professional fees.

  The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized.

  Capitalization of computer software includes software license fees if the total dollar amount of the fee divided by the number of units served (terminal or user count) meets the criteria to capitalize the purchase.

  Internally developed software costs associated with the preliminary project and the post-implementation/operating phases should be expensed as incurred. Capitalization of costs should begin when the preliminary project phase is complete and management has explicitly authorized or commits to funding the software project with the intent it will be completed and used to perform its planned functions. Capitalization should cease no later than the time at which substantial testing is complete and the software is ready for its intended purpose or rendered in service.

  During the application development phase, internal and external costs should be capitalized, including costs to develop or obtain software that allows for access or conversion of old data by new information systems. General and administrative costs and overhead expenditures associated with software development should not be capitalized as costs of internal use software.

• Leased Assets

  Per GASB Statement No. 62, assets should be capitalized if the lease agreement meets any one of the following criteria:

  • The lease transfers ownership of the property to the lessee by the end of the lease term.
  • The lease contains a bargain purchase option.
  • The lease term is equal to 75 percent or more of the estimated economic life of the leased property.
  • The present value of the minimum lease payments at the inception of the lease, excluding executory costs, equals at least 90 percent of the fair market value of the leased property.

  Leases that do not meet any of the above requirements should be recorded as operating leases.

• Depreciation Method

  Capital asset costs are depreciated over their estimated useful lives. The straight-line depreciation method (historical cost divided by useful life) will be used. Depreciation expense and accumulated depreciation will be calculated in the system of record and posted to the accounting general ledger on a monthly basis.

  Land and works of art and historical treasures are deemed inexhaustible and are not depreciated.

  Depreciation is not applicable while assets are accounted for as Construction in Progress.

  Buildings designated as "historical" by the City of Chicago will not be depreciated unless used in the operations of CPS. However, building improvements not deemed "historical" by the City of Chicago will be depreciated the same as any other building improvements.

  Leasehold improvements are amortized over the shorter of (1) the remaining lease term, or (2) the useful life of the improvement. If the lease contains an option to renew and the likelihood of renewal is uncertain, the leasehold improvement is amortized over the life of the initial lease term or useful life of the improvement, whichever is shorter.

• Impairments

  Per Statement No. 42 of the Governmental Accounting Standards Board, “governments are required to evaluate prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred. Such events or changes in circumstances that may be indicative of impairment include evidence of physical damage, enactment or approval of laws or regulations or other changes in environmental factors, technological changes or evidence of obsolescence, changes in the manner or duration of use of a capital asset, and construction stoppage. A capital asset generally should be considered impaired if both (a) the decline in service utility of the capital asset is large in magnitude and (b) the event or change in circumstance is outside the normal life cycle of the capital asset.”

  The general ledger and fixed asset subledger book value of impaired assets will be reduced to reflect the impairment amount. Impaired assets will not be retired from the general ledger and fixed asset subledger until disposal.

• Disposals and Retirements

  Disposal of capital assets purchased with grant funds must be coordinated with the appropriate grant administrator. Disposal of capital assets purchased with bond funds must be coordinated with the CPS Treasury Department.

  Upon disposal, capital assets and their related accumulated depreciation are removed from the general ledger and fixed asset subledger. The use of proceeds from the sale of capital assets may be restricted, depending on the funding source used to purchase the assets.