7-1301: Asset Capitalization

Purpose

To provide policy guidance related to accounting and controlling asset acquisition, movement, sale, disposal and retirement. This policy addresses additional areas including useful lives, minimum values for capitalization, and depreciation method.

Authority

• 2 CFR 200.1 – Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards
• California Government Code 24051
• State Controller’s Accounting Standards and Procedures for Counties Sacramento County Code Section 2.63010
• Governmental Accounting Standards Board (GASB) Statement No. 34, 42, 51, 62, 87, 94, & 96

Scope

This policy applies to all County departments and blended component units. It further applies to all outside special district and agencies that keep their accounting records in the County of Sacramento financial system, unless an alternate policy is adopted by their governing board and provided to the County Director of Finance.

Policy

Fixed assets include land, buildings and structures, equipment, infrastructure, intangible assets, leased assets, public-private and public-public partnerships (PPPs), and subscription-based information technology arrangements (SBITA), or any related capital lease.

The following establishes the definitions for each major capital asset class and establishes the corresponding minimum capitalization threshold. Assets not meeting the respective capitalization threshold shall be expensed in the fiscal year of acquisition.

A. Land.

a. Land includes all parcels purchased by any County entity or any improvements made to existing parcels of land. All landpurchases are capitalized regardless of cost with the exception of road beds, easements and right-of-ways which are included in other major asset classes (infrastructure and intangible assets).

B. Buildings, structures, and other related improvements.

a. Buildings, structures, and other related improvements includes all relatively permanent improvements (defined as having useful life

greater than one year) constructed or placed onto County-owned land, leased land or existing structures. Building alterations will

only be capitalized when they increase the value or life of the building.

b. Any buildings, structures, and improvements with a value greater than $25,000 shall be capitalized as fixed assets or lease-hold

improvements.ich are defined below). Examples of equipment are furniture, machines, tools, computer equipment, and vehicles. 

C. Equipment.

a. Equipment includes movable property of a relatively permanent nature and of significant value (examples of equipment are furniture, machines, tools, computer equipment, and vehicles). 

The cost of equipment includes: the purchase price less discounts received; freight charges; sales, use and transportation taxes; and installation charges. If extended warranties or maintenance agreements are bundled with the cost of the asset, then the incidental charges are considered part of the cost.

b. Relatively permanent nature shall be interpreted as having a useful life greater than one year.

c. Significant value shall be defined as all equipment acquisitions with a cost greater than $10,000, subject to the following exceptions:

i. All firearms shall be treated as fixed assets, regardless of cost;

ii. Grant-funded equipment that specifically requires tracking will be treated as fixed assets, regardless of costs.

D. Infrastructure.

a. Infrastructure is defined as long-lived capital assets that are normally stationary in nature and preserved for a significantly greater number of years than most capital assets (Examples include roads, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems).

b. Any infrastructure with a value greater than $100,000 shall be capitalized as a fixed asset.

c. Buildings that are an ancillary part of a network of infrastructure assets shall be considered infrastructure. Other items not an integral part of the infrastructure (example such as parking meters and portable traffic signals) are considered equipment.

E. Intangible assets.

a. Intangible assets include assets lacking physical substance that are non-financial in nature, with a relatively permanent nature and significant value. (Examples of intangible assets include easements, software, and water rights).

b. Relatively permanent nature shall be interpreted as having a useful life greater than one year.

c. Significant value shall be defined as all intangible assets acquisition with a cost greater than $25,000, subject to the following exceptions:

i. Permanent easements and right-of-ways will be treated as fixed assets, regardless of cost;

ii. Software includes software applications or internally generated software owned by the County where costs associated with the application development stage are greater than $100,000 will be capitalized.

iii. Intangible assets shall not include assets acquired or created primarily for obtaining income or profit, assets resulting from capital lease transactions reported by lessees, and goodwill created through the combination of a government and another entity.

F. Construction in Progress

a. Construction in progress (CIP) includes new construction or improvements to land, buildings, structures, infrastructure, or intangible assets that have not been physically completed or have not had all project costs processed by fiscal year-end. The final cost of CIP must be expected to be greater than $25,000, subject to the following exceptions:

i. Land and permanent easements will be treated as fixed assets, regardless of cost;

ii. Software projects will only be capitalized if the final cost is greater than $100,000;

iii. Infrastructure will only be capitalized if the final cost is greater than $100,000.

Capitalization Summary

a. Below is a summary of the capitalization requirements for the various classes of capital assets listed above:

Capital Leases

J. Capital leases (lease-purchase arrangements).

a. Capital leases include all arrangements to lease land, buildings and structures, or equipment with the County intending to assume ownership rights when the lease is paid off. If a purchase meets the fixed asset criteria of the corresponding asset above, it will be accounted for as a capital asset regardless of the financing procedure.

Depreciation and Useful Lives

K. Capital assets shall be depreciated over their estimated useful lives unless they are inexhaustible. Inexhaustible capital assets such as land, land improvements and permanent easements shall not be depreciated.

The County has elected the straight-line method of depreciation. Capital assets that become fully depreciated and are still in use must remain in the financial records until they are disposed of.

The County shall use the following useful lives in the table below. However, the Director of Finance is authorized to utilize useful lives outside the ranges below when required to meet accounting, legal, contractual or other requirements or when necessary to reflect the County’s actual experience of managing its assets. Use of useful lives outside of the range should be appropriately documented as to the reasons for the exception.

Asset Disposition

L. Capital assets may be sold, abandoned, scrapped, sold or traded in for new assets. Assets which have been retired must be removed from capital asset records including related accumulated depreciation at the time of disposition.

Departments shall report annually to the Director of Finance on any assets that are impaired or held for resale. Impairment means a significant unexpected decline in the service utility of a capital asset. Departments with assets held for resale or stored but not disposedof will remain on their capital asset records until sold, disposed, or transferred to another department.

Right-to-Use Assets

Certain Right-to-Use assets including lease assets (excluding lease-to-own), public provide partnerships, and subscription-based information technology arrangements are subject to review and analysis by the Department of Finance for capitalization due to their complexity. Department Directors on at minimum an annual basis shall submit information on each contract, agreement, or for the following classes of intangible assets to the Director of Finance on prescribed forms:

1. All lease contracts with a period of more than 12 months that are non- cancelable. Leases are defined as a contract that conveys control of the right to use another entity’s asset as specified in the contract for a period of time (Examples of assets include leasing of buildings, land, vehicles, and equipment.)
2. All public-private and public-public partnership arrangements (PPPs). PPPs are defined as an arrangement in which a government contracts with an operator to provide public services by conveying control of the right to operate or use an asset, such as a piece of infrastructure or capital asset for a period of time.
3. All subscription-based information technology arrangements (SBITAs) with period of more than 12 months that are non-cancelable. A SBITAis defined as an arrangement that includes a contract which conveys the right to use another party’s information technology software as specified in the contract for a period of time.

Inventory of Assets

In order to meet federal, state and local requirements to safeguard County assets, the Director of Finance shall initiate a department inventory of Capital Assets on a regular basis. That frequency of inventory shall be determined by the Director to meet applicable regulations. 

Department heads shall be required to timely report the results of their inventory, when requested, on prescribed forms provided by the Director of Finance. Physical inventory shall be performed no less than once every three years for all assets and once every two years for federally funded assets.