Accounting - Fixed Assets Procedure

Accounting Department Procedure on Fixed Asset

I. Introduction

The purpose of this document is to set forth Hudson County Community College’s Procedures and Guidelines with respect to the College’s Fixed Asset Policy, including compliance with the requirements of Generally Accepted Accounting Principles (GAAP) rules and the Governmental Accounting Standards Board, the source of GAAP. It is also intended to assist management for the purpose of maintaining accurate records of fixed assets. 
The College prepares financial statements pursuant to GAAP rules. In addition, government regulations require the College to record and maintain records of assets including acquisition cost, depreciation and disposal of fixed assets. All assets that meet the requirement of fixed assets shall be considered long term assets and will be treated as such as per GAAP rules.

II.  Objectives

1. To comply with GAAP and all governmental requirements regarding the recording and treatment of fixed assets.
2. To provide accurate record of the College’s fixed assets and establish definitions, method of valuation of fixed assets, useful life and method of depreciation.
3. To ensure that records are restricted to authorized personnel and all transactions related to fixed assets including purchase, disposal and depreciation are approved by delegated authorities.

III. Fixed/Capital Asset Definition

Assets which are acquired for the day-to-day operation of the College and from which the College can gain benefits from over a period of at least one fiscal year. Assets purchased for sale will not be counted as fixed assets, such as inventory. 

Fixed/Capital Assets can be classified into two categories:

1. Tangible Assets
2. Intangible Assets

A. TANGIBLE ASSETS 

Tangible Assets are assets that possess physical substance, meaning assets that can be touched and felt. 
Under GAAP, fixed (tangible) assets have three primary characteristics:
       1. Acquired and held for use in operations, (e.g., not held for sale);
       2. Long-term in nature (greater than 1 year); and
       3. Possess physical substance.

The College’s Tangible Assets include the following, which may be modified from time to time:
       1. Land 
       2. Buildings and Improvements
       3. Leasehold Improvements
       4. Equipment
       5. Library Books 
       6. Construction in Progress

1) LAND 
Under GAAP, Land is defined as the earth’s surface, which can be used to support a structure or to grow grass and trees. Land has an indefinite lifespan. As such it is not depreciable under GAAP rules. Expenditures made to acquire land are considered as a part of its cost. The following expenditures can be included in determining the land cost: 

a) Purchase price (fair market value if donated)
b) Any Commissions paid
c) Any professional fees paid, including, without limitation, legal fees, Surveyor fees, architect and title search fees
d) Amounts paid for removing any construction from land (salvage value for such demolition should be subtracted), land clearing
e) Accrued or unpaid taxes up to the date of acquisition

2) BUILDINGS AND IMPROVEMENTS 

Building is defined as permanent structure, attached to land, which has a roof and is enclosed by walls. The following expenses are considered in determining the cost of a building:

a) Purchase price (fair market value if donated)
b) Expenses to make the building ready to use for the purpose for which is was acquired
c) Construction costs
d) Professional fees paid, including, without limitations, sales commission, brokerage fees, inspection fees, building permit, legal fees, architectural fees, engineering fees, etc.

Building Improvement is defined as a capital event that enhances the useful life of a building, value of a building, or both. For example, the conversion of a basement or attic into an office, upgrading walls or flooring, interior or exterior renovations, etc.

All costs incurred in improving the building are considered to be costs of improvements.

Building Maintenance costs are costs that allow an asset to continue to be used during its original useful life. For example, repairs to the building or its systems (plumbing, heating, HVAC, cleaning, pest controlling etc.). These costs are considered building maintenance costs and are treated as expenses under GAAP, and shall not be capitalized. They are to be recorded as repair and maintenance costs. Attention should be paid to whether these costs should be treated as building maintenance costs versus building improvement costs. 

3) LEASEHOLD IMPROVEMENTS 

Leasehold improvements are defined as improvements made to leased property that must revert to the lessor at the time of expiration of the lease. The useful life of such improvement is the estimated life of service or the remaining term of the lease, whichever is shorter.

4) EQUIPMENT

Equipment is tangible assets to be used for operations. All costs involved in putting equipment into a condition ready for use should be included in the asset value. The following expenses are considered in determining the cost of equipment: 

a) Contract or invoice price
b) Duties paid 
c) Freight expenses
d) Installation charges
e) Insurance charges for transit 
f) Charges paid for testing and preparation for use

The College’s list of equipment includes the following items, which may be modified from time to time:
    
a) Computers
b) Printers
c) Phones
d) Office furniture
e) Air conditioners
f) Projectors
g) Kitchen appliances
h) Refrigerators
i) Dish washers
j) Software (owned only)

5) CONSTRUCTION IN PROGRESS (CIP)

A CIP asset is valued as the cost of construction work started but not yet finished. For CIP assets, depreciation is not recorded until the asset is placed in service. When construction is finished, a CIP asset becomes classified as a fixed asset under the applicable heading (e.g., building, building improvement, land improvement) with all costs associated with the CIP up to the date of shifting to fixed assets. Once it is categorized as a fixed asset, depreciation shall be counted (note: as set forth earlier, depreciation is counted once an asset is placed in service).

6) TRANSFERRING CIP TO FIXED ASSETS

After an asset is placed in service, all costs associated with it that are stored in the CIP account are shifted into the applicable fixed asset account. For Example:

B. INTANGIBLE ASSETS 

Intangible Assets are assets that do not possess physical substance.

GASB Statement No. 51 provides guidance for the accounting and financial reporting of intangible assets and lists the following characteristics of intangible assets: 

1. Lack of physical substance. 
2. Nonfinancial nature (receivables or prepayments are not intangible assets). 
3. Initial useful life extends beyond a single reporting period. 

C. FIXED ASSET ACQUISITION COST

GAAP standards generally require fixed assets to be recorded at their historical cost, including all normal expenditures to bring the asset to a location and condition for its intended use.

Acquisition costs include installation costs, assembly, freight, warehousing, insurance, taxes, etc.

If a fixed asset is not purchased, but is acquired through donation, then its acquisition cost is the fair market value of that asset plus all direct expenses made in connection with putting that asset into operation for its intended purpose.

Once the value of a fixed asset is recorded, it cannot be changed under any circumstances.

For the purpose of capitalization there is a per asset individual threshold. However, if there is an ongoing project, the combined total of all fixed assets involved in the project should be taken into account for the purpose of determining capitalization costs. The College’s capitalization cost threshold for fixed assets is as follows:

D. DEPRECIATION

Depreciation is defined as the accounting process of allocating the cost of tangible assets to current expense in a systematic and rational manner in those periods expected to benefit from the use of the asset. Depreciation is an occupancy or usage cost, and, therefore, should begin the month following the date the asset is placed into production. It can be calculated on straight line method or declining balance method. The College follows the straight line depreciation method. Assets are depreciated over their estimated useful lives.
The College currently calculates depreciation on a monthly basis using the straight line depreciation method. Periods of estimated life for consideration in determining the depreciation of the College’s fixed assets are as follows:

The following facts are considered while calculating depreciation:

1) Date of purchase;
2) Total cost of an asset;
3) Useful life of an asset;
4) Depreciation method (straight line); and
5) Salvage or residual value (selling value at the end of useful life of an asset), if any.

Generally, at the end of an asset’s useful life, the total accumulated depreciation is equal to the total cost of the asset minus any salvage value.
For example, assume the College purchased a fixed asset for $110,000. The asset useful life is estimated to be ten (10) years using the straight line method. At the end of the 10 years, the asset has a salvage value of $10,000. 

Depreciation each year = (cost - salvage value)/estimated life
                                      = ($110,000-$10,000)/10
                                      = $100,000/10
                                      = $10,000 per year
After 10 years, the total depreciation of the asset is $100,000 (10 years’ x $10,000). As noted above, the total depreciation also equals the total cost minus the salvage value. 
($110,000-$10,000=$100,000).

E. IMPAIRMENT OF FIXED ASSETS 

The College follows Statement No. 42 of GASB relating to impairment of fixed assets. Statement No. 42 contains guidance for measuring impairment losses on capital assets.
An asset is considered impaired when its usefulness for service decreases significantly and unexpectedly; that is, something occurs that is not within the normal life cycle of the asset.
The effect of impairment is required to be reported when it occurs rather than through a depreciation expense or when the asset is disposed.

F. DISPOSAL OF ASSETS 

Disposal of a fixed asset takes place when a company needs to sell its asset for any reason (whether its useful life ended or exchange of assets). In short, it is selling of a fixed asset.
Possible ways of disposing an asset are as follows:

1) It can be sold to a third party
2) It can be sold as scrap
3) It can be donated
4) It can be sold to any employee of an organization
5) It can be traded in while buying a new asset
6) It can be transferred to another department

Regardless of the process used to dispose of an asset, all asset disposals must be authorized by the Controller. Disposed assets should be sold at market value of the asset at the time of the sale.
Once disposed, the asset is then eliminated from the balance sheet and the gain/loss is recorded using a journal entry. 
For example, assume a company bought an asset for $10,000. At the present time, its accumulated depreciation is $8,000. The company wants to dispose of the asset. The market value of the asset is $3,000. The following entries should be made in the financial statement:

                                 If market value of the asset is $1,500, then the following entry should be made:

If there is no gain or loss on the sale of the asset, meaning that the market value is equal to the remaining balance of the asset ($2000 for this example), then the following entry should be recorded:

If the company is writing off an asset, meaning that after useful life there is no salvage value, then the following entry should be made:

The main objective behind disposing of assets and recording them in an accurate way is to present a clean balance sheet of an organization so that it reflects actual assets on hand.

G. RESPONSIBILITIES

It is the responsibility of all staff members of the College to protect the fixed assets and ensure that these assets are used for their authorized purpose only and not for personal use.

The Controller is also responsible for ensuring that all fixed asset records are maintained in an accurate manner, including considering all the factors that are important at the time of valuation and the calculation of depreciation of fixed assets. The asset register must be maintained in a timely manner.

Records of fixed assets should be circulated to all heads of departments for review and recommendations, if any. If there are any proposed changes, the Controller should be informed and the appropriate corrections made.

The Accounting department is also responsible for maintaining accurate records of the following:

1. 1. 1. 1. Date of purchase
         2. Date asset is put into service
         3. Manufacturer’s and vendor’s details
         4. Model number (if any)
         5. Detailed description of asset
         6. Location of asset
         7. Funding and its sources for acquiring an asset
         8. Warranty (if any)
         9. Insurance details (if any)
         10. General ledger account number

The Accounting Department is also responsible for maintaining hard and soft copies of invoices and all supporting documentation so that they are readily available when required for audit purposes or as otherwise needed.

Approved by Cabinet: July 2021
Related Board Policy: Accounting, Fixed Assets

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