Capital Process Management

Overview

It is Harvard University’s policy to maintain accurate and complete records of property, plant, and equipment held and to capitalize and depreciate them according to appropriate accounting, tax, and regulatory requirements.  All departments must have internal procedures that will comply with Harvard University’s Capital Asset Policy that provides:

• Uniform guidelines for the collection of information necessary to properly capitalize the cost of assets.
• Consistent and accurate capitalization of all assets held by Harvard University as required for internal, external (GAAP), and regulatory reporting required for Federal sponsors and agencies.

These procedures include, but are not limited to, the determination and recording of a capital asset, the calculation and recording of deprecation, loan management, and the interaction with other Central Administration groups.  Additionally, as an IT organization providing services to University departments, it is essential that UIS/OAS management understand these procedures as well as the resources and tools available to assist them in this process.

What Is a Capital Asset

Definition of Capitalization

From time to time, UIS/OAS acquires or constructs tangible personal property including computer equipment, telephone or network infrastructure, office equipment, software and renovation of its facilities. University policy requires that the purchasing cost or construction of these items be capitalized as an asset as part of property plant and equipment if the following two criteria are met:

1.        The individual item has a useful life of at least two years and

2.        The combined purchase cost and/or cost of construction/installation is at least $5,000

The UIS/OAS business group is then required to record the transaction as an asset on the balance sheet and record depreciation expense over the multiple periods that are benefited (i.e. 4 or 7 yrs).  If the above criteria are not met, the item is considered a current period operating expense when incurred.  Additionally, purchases for items less than $5,000 may still be capitalized if they are part of a larger asset and the total expenditures for the asset exceed $5,000.

Capitalized Costs

Capitalized costs of tangible personal property (equipment, furniture, fixtures, and vehicles) are those costs associated with the acquisition or construction of the tangible property to make the property usable for its intended purpose. Examples of acquisition costs include: vendor payments for product, transportation, installation, freight and in-transit insurance.  Interest incurred between the time invoices are paid and the asset is created is also added to the total cost of the tangible property.

Note: Training expenses, license fees (for licenses which may have to be renewed annually) and annual maintenance costs should not be capitalized.  

Below are two examples that demonstrate when an item must be capitalized as an asset. 

Example 1: Capital Asset

A business installs a new billing system for use in business operations. The cost of the asset is as follows:

Hardware $2,500

Software $2,000 

Installation $1,000

Total Asset Cost $5,500

Although each of the asset components is less than $5,000, in order to make the billing system operational, the total cost outlay is greater than $5,000 and the costs must be capitalized and depreciated.

Example 2: Non-Capital Asset

Assuming the same scenario above, however, the business must also upgrade all the personal computers in the department. The additional cost of the PCs is as follows:

Hardware (5 PCs @ $2,500 ea) $12,500 

Software (5 PCs @ $500 ea) $2,500 

Total Cost $15,000 

Although the total cost for all the PCs is greater than $5,000, each PC as a stand-alone item only costs $3,000 and, therefore, cannot be capitalized according to University policy and must be expensed when the cost is incurred.

Even though the new PCs may be necessary in order to access the new billing system, they are not considered a component of the billing system asset, and therefore cannot be grouped as part of the capitalized asset in Example 1.

Depreciation

Definition of Depreciation

Depreciation is the annual operating expense recorded by UIS/OAS business groups that commences the year the item is placed into service or use, and ends when the asset costs have been fully depreciated or when the asset is no longer in use by the business group.  A full year’s depreciation is recorded as an operating expense the first year the item is placed into service, regardless of the month this occurs. 

How to Determine Useful Life

Annual depreciation is calculated using the Straight-Line Method, which takes the cost of the asset and divides it by the asset’s useful life. The University has defined the useful life of assets by category and has provided the following annual depreciation percentages using the straight-line method: 

Loss of Useful Life

Under certain circumstances, the asset’s useful life may be accelerated. This is an especially important concept in the Information Technology environment, where growth in demand or rapidly developing technologies can often result in assets becoming obsolete sooner than expected.

There are usually two reasons why an asset loses its useful value:

• Physical Depreciation - deterioration from age or from wear and tear
• Functional Depreciation – a loss of useful value because of inadequacy or obsolescence

These situations are unusual and must be approved by UIS/OAS Financial Services and the Office of Treasury Management (OTM).

Recording/Tracking Depreciation

Depreciation is recorded monthly once an asset is placed in service. However, because University guidelines require a full year of depreciation expense in the year the asset is placed in service, the initial month's depreciation expense will include an adjustment or a catch-up amount so that the correct year-to-date depreciation amount will be recorded in the general ledger.

Debt Financing 

Obtaining Debt Financing

Service Center policy requires debt financed capital purchases to be financed by external debt only, while Core funded groups may choose an internal source for funding assets. When an asset is debt financed by the University, a loan for the amount of the purchase is recorded on the department’s balance sheet (object code 3030) using a designated Activity value and unique Sub-activity value assigned to each loan.  Principal and interest payments are posted monthly by OTM with the principal payment reducing the value of the loan and interest recorded as an operating expense.

Amortization of Loan

When a loan is created, the amortization schedule is prepared by OTM using the asset’s useful life or a shorter time period, if selected by the financial partner (in years e.g.; 3 years or 6 years). A shorter loan life may be chosen by the financial partner to better align the loan end date with the fiscal year the asset will be fully depreciated. Interest incurred between the time the invoices are paid and the loan is created will be added to the value of the loan.  All UIS/OAS loans are assigned the pooled interest rate that is established annually.

How to Purchase a Capital Asset

All capital asset purchases and loan requests originate from a UIS/OAS project manager, business manager or group director. All capital asset purchases that require a University loan must first be reviewed and approved by UIS/OAS senior management. The summary below outlines the roles of both the business managers and financial partners in this process.

Capital Asset Purchase/Approval Process (for Business Mgrs.)

In order to purchase a capital asset, UIS/OAS managers must do the following:

1.        Complete Form 1 Capital Project Approval Request with the assistance of your Financial Partner

2.        Provide documentation (e.g., vendor P.O., quote) supporting the financial information on Form 1

3.        If the asset > $10,000 (>$5,000 for OAS) the Financial Partner will send Form 1 to the Executive Director for approval before requesting account coding

4.        Your Financial Partner will then contact you with the proper balance sheet account coding

5.        After receiving the account coding, which indicates management/director approval, the manager may proceed to purchase the asset

Invoices to be capitalized should be debited to the proper account coding as provided by your Financial Partner. If the equipment is debt financed by the University, the account coding will include a unique activity value, for each fiscal year and loan type, and a unique sub-activity value for each loan describing the capital asset being purchased.

Note: Approval from OTM to capitalize an asset may be denied even after the asset has been purchased, which could result in the asset being expensed in the current period. 

G/L Account Coding Process (for Financial Partners)

In order to open a loan account in the general ledger, the financial staff must do the following:

1.        The Financial Partner completes the Chart Value Request Form and submits an email to the department Chart of Accounts (COA) Administrator.

2.        The COA Administrator opens an account in the General Ledger (GL) forwards a copy of the impending Chart Value Request to the Financial Partner.

3.        The Financial Partner completes  Form 2 - Request for Debt Financing, and indicates the loan amortization time period and forwards the form on to OTM for approval.

4.        The Financial Partner communicates the proper account coding to the purchaser, if this has not been done previously.

Invoices to be capitalized should be debited to the proper account coding, which will include a unique activity value for each fiscal year and loan type and a unique sub-activity value for each loan.

What Account Code to Use

All UIS/OAS capital assets should be charged to object code 1140 (Equip in Progress – Nonsponsored) and will have a unique combination of activity and sub-activity codes.  Annually, UIS creates two activities to categorize the capital assets by its useful life (4-year or 7-year life).  Sub-activities are then created for each loan request made to OTM that describes the capital asset loan being requested.

Below is an example of a 33-digit code and how the activity and sub-activity are utilized in the capital process.

Example: 175-11030-1140-000000- 118169-0021 -00000

The activity refers to the fiscal year the asset was created.  In this example, the Activity 118169 is the value for a 4-year asset for fiscal year 2005. The Activity 118170 was created for a 7-year asset in fiscal year 2005. Also in this example, the sub-activity 0021 provides a description for the capital asset

Invoice Processing

Once the manager receives the account coding that should be used from their Financial Partner, they may proceed with the capital asset purchase of the products and/or services.  Invoice processing of capital asset transactions varies slightly, depending on whether a purchase order system is used and if the product or services are purchased from another Harvard department.  Below is a summary of the steps to be taken with or without a purchase order system, as well as when another Harvard department is involved in the process.

Process using a P.O. System

If a Purchase Order system is used, the following steps should be taken:

1.        The manager provides an account coding on the P.O. (if applicable) and submits it for normal processing.

2.        UIS/OAS Accounting receives vendor invoice, purchase order, and receiving report.

3.        UIS/OAS Accounting pays and sends the invoice to Central University A/P.

4.        The Financial Partner obtains a copy of the invoice from UIS/OAS Accounting.

Process when a P.O. System is not used

If there is no Purchase Order system, the following steps should be taken

1.        The manager receives and codes the invoice directly, forwards for additional review and then sends it to UIS/OAS Accounting with any other appropriate documentation.

2.        UIS/OAS Accounting pays and sends the invoice to Central University A/P.

3.        The Financial Partner obtains a copy of the invoice from UIS/OAS Accounting.

Process using Interdepartmental Transaction

If the purchase is from another Harvard department:

1.        The manager provides proper coding to sales staff.

2.        The manager requests confirmation or sales quote and forwards it to the Financial Partner.

3.        The manager reviews invoice/statement to ensure that proper coding was used and forwards it to the financial partner.

Capital Asset and Loan Establishment

The steps required to establish a capital asset on the general ledger must be done individually for each capital request made by management.  It is prudent to monitor all capital asset requests, since interest will be incurred on invoices processed on the capital project until the asset has been established.  It is the responsibility of management to notify their financial partner when all the capital asset invoices have been processed and the individual capital asset is working and operational. Once this has occurred, the following steps should be taken to establish an asset on the University general ledger:

1.        The Financial Partner completes and signs Form 3 Notification of Completion of Capital Equipment, once all transactions have been posted to the GL, and sends it to OTM along with a copy of all invoices.

2.        The Financial Partner confirms the loan amortization time period (e.g. 3 years or 6 years) on Form 3 in order to better align the loan end date with the fiscal year in which the asset is fully depreciated

3.        OTM signs and returns Form 3 to the Financial Partner.

Note: When ever possible, a copy of the invoices should be sent with Form 3 to OTM unless the volume of invoices is significant and time consuming.

For those capital assets that will be recorded on the balance sheet of Tub 175, the following additional steps must be taken:

1.        OTM prepares a journal entry to move the capital asset to an asset object code, and create the loan on the general ledger of Tub 175.

2.        OTM communicates the loan information, including the amortization schedule, to the financial partner.

3.        The financial partner forwards the information to UIS/OAS Accounting, who enters the asset and loan information into the UIS/OAS capital asset/debt management databases.

UIS/OAS Capital Asset and Loan Databases

UIS/OAS Accounting, in conjunction with the Financial Partners, maintain both an internal capital asset database and an internal loan database, which tracks historical capital asset cost (including invoice detail), useful life, date placed in service, annual depreciation expense, loan interest rate and the loan amortization schedule provided by OTM.  The databases allow the financial partners to input capital planning estimates needed for year-end forecasting, budgeting and multi-year financial modeling. Reports from the capital asset database are used to support the monthly depreciation journal that is prepared by UIS Accounting.  Both the capital asset and loan databases are reconciled to the general ledger on a regular basis during the fiscal year.

Sale, Disposal or Transfer of Capital Assets

The sale or any manner of disposal or transfer of business assets must have business manager/director approval. Assets are sold, disposed of, or transferred for many reasons, including:

• Obsolescence due to:
• Technology changes
• Ability to obtain replacement parts
• No longer required in the business
• Replacement of asset before or at the end of its useful life
• Closing or discontinuation of a business
• Transfer to another internal Harvard Department

Prior to the sale, disposal or transfer of an asset, business managers should confirm the remaining book value, existing loan balance or net equity balance on the University books with their Financial Partner.

External Sale or Disposal of a Capital Asset with a Loan Balance

If an asset to be sold or disposed has an outstanding loan balance:

1. The Financial Partner should notify the Office of Treasury Management (OTM) and the Office of Fixed Asset Accounting (OFAA) via email of the proposed sale, and subsequently complete and forward the Notification of Significant External Sale of Capital Equipment Form in order to ensure the sale/disposal of the equipment is recorded correctly in the general ledger.
2. All proceeds received from the sale of the asset should be credited to object code 5770 (Miscellaneous External, Income, General).
3. OFAA/OTM will forward a copy of the journal entry to record the asset sale/disposal to the Financial Partner for review. OFAA/OTM's journal entry will include the following:

·         Removal of outstanding debt Recognition of gain or loss, if any, on sale of asset (OFAA/OTM will transfer proceeds out of object code 5770 and into 5772, Gain on Sale. Capital Assets^Misc. Income External)

·         Removal of the original value of the asset

·         Removal of the accumulated depreciation

·         Removal of asset equity, if any

4. When OFAA/OTM's entry has been reviewed and confirmed with the UIS/OAS Capital Asset & Loan Databases, UIS/OAS General Accounting will change the status of the asset and loan to inactive and record the last depreciation date for the asset
5. UIS/OAS General Accounting will discontinue depreciation of the asset

External Sale of an Capital Asset with No Loan Balance

If an asset has no outstanding loan balance, and it is fully depreciated, it may be:

• Donated for a possible business tax deduction/write-off
• Properly removed if there is no intrinsic value (DLS should be notified for pick-up and disposal of all computer hardware equipment) OR
• Sold for a determined price (proceeds should be coded to object code 5770)

Similar to the Sale/Disposal of a depreciating asset with a remaining loan balance (see above), the following steps should be taken:

1. The Financial Partner should notify the Office of Treasury Management (OFAA/OTM) via email of the proposed sale, and subsequently complete and forward the Notification of Significant External Sale of Capital Equipment Form in order to ensure the sale/disposal of the equipment is recorded correctly in the general ledger.
2. All proceeds received from the sale of the asset should be credited to object code 5770 (Miscellaneous External, Income, General).
3. OFAA/OTM will forward a copy of the journal entry to record the asset disposal to the Financial Partner for review. OFAA/OTM's journal entry will include the following:

·         Recognition of gain, if any, on sale of asset (OFAA/OTM will transfer proceeds out of object code 5770 and into 5772, Gain on Sale. Capital Assets^Misc. Income External)

·         Removal of the original value of the asset

·         Removal of the accumulated depreciation

4. When OFAA/OTM's entry has been reviewed and confirmed with the UIS/OAS Capital Asset & Loan Databases, UIS/OAS General Accounting will change the status of the asset and loan to inactive and record the last depreciation date for the asset

Internal Transfer of a Capital Asset within Harvard

Occasionally, assets are not sold, but, rather transferred between Harvard Departments.  One University Department cannot realize a gain or loss upon transferring an asset to or receiving an asset from another University Department. OFAA/OTM should be notified via email of the proposed asset transfer. OFAA/OTM will, in turn, process an entry to transfer the following, after verifying with UIS Finance:

• Original capital asset value
• Accumulated Depreciation
• Loan balance remaining, if any
• Net Equity balance, if any

Any transfer of a capital asset will require the appropriate update to the UIS/OAS databases. 

Capitalization Forms

Below is  a list of the forms used in the capital management process:

Form 1 - Capital Project Approval Request

Form 2 - Request for Debt Financing

Form 3 - Notification of Completion of Capital Equipment

External Sale of Asset - Significant External Sale of Asset

For More Information

For more information, please contact your Financial Partner