Plant Fund
Contents
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Plant Fund Definition
Capitalization
of Plant Fund Assets
Componentization
Capitalization Guidelines:
New Construction
Purchase of
Existing Buildings
Building Improvements
Site Work
Utilities
Land
Equipment
Capital Leases
Property Trade-In
Gifts
Library Books
Mineral Specimens
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Plant
Fund Definition
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This fund group is used to account for the acquisition, construction,
and maintenance of the University's physical plant and to control the resulting
assets. The fund type categories of the Plant Fund include:
- Investment in Plant - All long-lived assets in the service
of the University except those of endowments
and similar funds.
- Renewal and Replacement - Funds transferred to finance
maintenance and replacement of physical
assets.
- Retirement of Indebtedness - Interest and principal payments
and other debt service charges relating
to plant fund indebtedness.
- Unexpended - Unexpended resources from various sources
used to finance the acquisition of plant
assets.
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Capitalization of Plant Fund
Assets
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Definition
Physical property acquired by the University by purchase, gift, trade, or
fabrication and which take the form of land, buildings, equipment, improvements
to land or buildings, and other tangible items are capitalized.
The Accounting Office is responsible for all accounting and budget control
functions for plant fund (construction) projects, and preparation of financial
reports.
Plant assets are stated at actual or estimated cost at date of acquisition.
Construction is capitalized as expended and reflected in net investment in
plant. Current fund expenditures of $50,000 or greater for renewals
and replacements are capitalized only to the extent that such expenditures
represent long-term improvements to properties or significant alterations,
renovations, or structural changes that increase the usefulness of the building,
enhance its efficiency, or prolong its useful life.
Equipment is capitalized when the unit acquisition cost is $5,000 or more,
the estimated useful life is one year or longer, and has the capacity to
function without the assistance of another item
Straight line depreciation is used when determining the useful life of the
following:
Land Improvement and Infrastructure – 20 years
Buildings – 40 years
Computer Equipment – 5 years
Equipment – 7 years
Library Books – 5 years
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Componentization
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New building construction is capitalized by
Building components and are grouped into three general components of a building.
- Building Shell (including construction and design costs)
- Building Services Systems (e.g., elevators, HVAC, plumbing
system and heating and air-conditioning system)
- Fixed Equipment / Fixtures (e.g., sterilizers, casework,
fumehoods, etc)
The same depreciation methods are used at MTU for F&A purposes and
financial statements.
Beginning in FY01, upon occupation of new construction, component analysis
is completed by the Facilities project engineer. The useful life of
each component is as follows:
Banner Code
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Class
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Useful Life
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Salvage Value
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BD
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Building Shell
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40 years
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10%
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BC
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Building Service Systems
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20 years
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10%
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BF
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Fixed Equipment / Fixtures
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10 years
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10%
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During the design phase of the project, the Architect must furnish the University
with an estimate broken down into the major architectural, mechanical, electrical
divisions, site, furnishings, equipment, and professional fees. The
state required contingencies are also included. This estimate is updated
until the project is out to bid.
After bids come in, the responsible low bidder is chosen with a purchase
order for the construction work. The Contractor must provide a breakdown
detail of all major divisions and subdivisions of the work. All of
the Contractor’s invoices include this breakdown. Any change order must be
estimated by the Contractor with details of all costs.
Throughout the construction project, the University has complete knowledge
of all costs and changes which are summarized to assure that the project remains
in budget.
Throughout the construction project, the University has complete knowledge of all costs
and changes which are summarized to assure that the project remains in budget. The State
expenditure reports are reconciled quarterly with the University financial statements.
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Capitalization
Guidelines
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Final determination of capitalization will
be made by the controller, using the following guidelines:
- New Construction
Buildings
- Capitalize all cost of new buildings including architect
fees.
- Capitalize all original furnishing, fixtures and equipment
that are not capitalized through the equipment inventory system maintained
by the Property Office.
- Capitalize all site (including any demolition costs)
and utility costs as part of the building cost.
Other construction: Capitalize items such as
flag poles, basketball courts, water wells, etc.
Buildings and other construction are first accounted for as construction
in progress. When the construction is at least 90% complete or the construction
has been certified as substantially complete, the construction is removed
from construction in progress and accounted for as buildings or other.
- Purchase of
Existing Buildings
Capitalize the purchase price plus acquisition costs.
The fair market value of the land should be recorded as such and the value
of the building should be the difference between the total cost less the
amount capitalized as land.
- Building Improvements
Building improvements are significant alterations,
renovations, or structural changes that meet or exceed $50,000 and increase
the usefulness of the building, enhance its efficiency, or prolong its useful
life.
Building improvements may include interior or exterior construction of a
building or building systems, such as electrical or plumbing systems. They
may also include the completion of interior or exterior appointments or finishes,
so long as they are done as part of a significant alteration or renovation.
Capital Improvements
Categories of building improvements include alterations, renovations, and
betterment.
- Alterations - A change in the internal arrangement
or other physical characteristics of an existing asset so that it may be
effectively used for a newly designated purpose.
- Renovations - The total or partial upgrading of a facility
to higher standards of quality or efficiency than originally existed.
- Betterment, Renewal, Replacement - The overhaul or
replacement of major constituent parts that have deteriorated because of
the elements or usage. The deterioration has not been corrected through ongoing
or required maintenance. An example would be replacement of old or
broken windows with a new thermal variety.
Expensed Improvements
Costs that neither significantly add to the permanent value of a property
nor prolong its intended useful life are expensed. The types of plant costs
are expensed include maintenance, preservation/restoration, and project costs
below the capitalization threshold.
- Maintenance - Recurring work that is required to preserve
or immediately restore a facility to such condition that it can be effectively
used for its designed purpose. Maintenance includes work done to prevent
damage to a facility.
- Preservation/Restoration - Maintaining special assets
in, or returning them to a level of quality as close to the original as possible.
- Costs Below Capitalization Thresholds - Projects that
do not total $50,000 or more.
- Site Work
Roads, walks, curbs, plant material, etc. Capitalize
only site work in substantially new areas (undeveloped parts of campus) unless
the work is part of a new building.
- Utilities
Steam, electricity, and water. Generally, only utilities
being extended to new areas (undeveloped parts of campus) or to new buildings
should be capitalized. Major alterations to existing utilities to accommodate
a new building should also be capitalized.
- Land
All purchased property should be capitalized at purchase
price plus acquisition costs. If existing buildings on the property will
be utilized, the fair market value should be capitalized as buildings and
the amount recorded as land would then be the difference between the total
cost less the amount capitalized as buildings. If buildings need to be razed
for the land to be used for the purpose for which it was purchased, the cost
of razing should also be capitalized as land.
- Equipment
Equipment items to which the University obtains title will be capitalized into the "Equipment" account if the items have a unit cost (or fair market value, for gifts) of $5,000 or more and a life expectancy of one or more years. Included in the cost of an equipment item are any freight charges paid, insurance charges and duty charges, when assessed.
Equipment items which are permanently attached (fixed equipment) to and are an integral part of any building, such as exhaust fans, transformers, cranes, ventilation systems, etc., are not capitalized in the "Equipment" account, but rather in the "Buildings" account.
Equipment items purchased from restricted grants, and title to which is vested in organizations other than the University, are not capitalized in the University records, however, such acquisitions must be reported to the Property Office of the University for accountability purposes. Equipment items purchased from restricted grants where title is vested to the University are to be capitalized in the University records, including Fabricated Equipment.
Equipment items purchased by the current funds (General, Designated, Auxiliary Activities and Expendable Restricted) of the University are considered to be expenditures of the funds from which purchased. Such items are capitalized in the Plant Fund.
Equipment items which are constructed from components in any department of the University must be reported to the Property Office so the items can be identified in the property records.
Component and Replacement Parts
Capitalized: Components or parts which cost at least $5,000 and permanently increase the value or the useful life of MTU-owned capital equipment (not fully depreciated) are capitalized. The component must either upgrade the capability of the equipment, or extend its useful life.
Components or parts which cost less than $5,000, but purchased in the same fiscal year as the capital equipment item, can be added to the total capital equipment cost.
Expensed: Components which were previously purchased (not capital or fabricated equipment) cannot be “made” into capital equipment by adding additional parts in order to bring it above the $5,000 threshold.
In general, a replacement part – where a worn-out component is replaced with a near identical one in order to allow a machine to continue functioning – is expensed. The cost of repairing a piece of equipment also is not added to the capital net book value.
- Capital Leases
Accounting for leases is based on the understanding
that a lease which transfers substantially all the risks and rewards of ownership
should be capitalized like any other owned fixed asset. Whether or not to
record a lease as a capital lease or an operating lease is determined by
meeting certain criteria. A lease is a capital lease if at the inception
of the lease, one or more of the following criteria are met:
- The lease transfers ownership of the property to the
lessee by the end of the lease term. If at the end of the lease, the lessee
owns the property, the lessee in effect has bought property that needs to
be recorded on their books at the inception of the lease.
- The lease contains a bargain purchase option. Often,
a lease will include a provision that allows the lessee to purchase the property
at the end of the lease for significantly less than the estimated fair market
value. In general, it is assumed that most lessees will exercise this option.I
If the lease meets criteria A or B, the capital
asset is depreciated over its useful life.
- The lease term is equal to 75% or more of the estimated
economic life of the leased property. If you lease a piece of manufacturing
equipment that historically needs to be replaced every six years, and the
lease is for five years, the lease is capitalized as most of the risks and
rewards of ownership have transferred to you.
- The present value of the minimum lease payments equals
or exceeds 90% of the fair market value of the leased property. If the present
value of the minimum lease payments is reasonably close to the fair market
value of the property at the inception of the lease, the property is effectively
being purchased.
If the lease meets criteria number C or D, the
capital asset is depreciated over the lease term.
If the lease does not meet any of the above criteria, the lessee does not
record anything on the balance sheet, but recognizes rent expense as the
lease payments are made in most circumstances.
If a new lease does meet one of the above criteria, the lessee needs to determine
the cost of the asset and the corresponding liability that will be recorded
on the books. The first step is to calculate the present value of the minimum
lease payments. The lessee computes the present value of the minimum lease
payments using their current bank borrowing rate unless the lessee learns
the implicit rate computed by the lessor and that rate is lower than the
lessee's current bank borrowing rate. Once this is complete, the present
value amount is compared with the current fair market value and the lower
of the two is recorded as the asset and the liability.
- Property Trade-In
When a previously capitalized asset is used as a
trade-in on the purchase of a new asset, the new asset is recorded in the
appropriate physical properties account of the Plant Fund at the list price
without trade-in and the old asset is removed from the books at its original
cost or valuation.
Losses and/or gains on the disposition of assets traded in on other assets
are not recognized nor is accumulated depreciation figured on assets traded
in when determining the cost of a new asset acquired.
Discounts taken on cost of capital asset purchases are recognized as a reduction
of the cost of the assets acquired.
If a property asset is sold for cash, with no trade-in being received, the
asset sold is removed from the books and property records with no recognition
of gain or loss on the sale. Cash proceeds revert to the fund which supported
the original purchase.
- Gifts
Gifts of land, buildings, and/or equipment - gifts
of items that would normally be capitalized if purchased or constructed by
the University should be capitalized at the fair market value at the time
of the gift.
- Library Books
Books acquired by the University Library, regardless
of source or cost, are capitalized in the physical properties section of
the Plant Fund. All dispositions must be reported on a periodic basis so
the costs thereof can be removed from the records.
- Mineral Specimens
Mineral specimens acquired by the A.E. Seaman Museum,
regardless of source or cost, are capitalized in the physical properties
section of the Plant Fund. All dispositions must be reported on a periodic
basis so the costs thereof can be removed from the records.
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