Financial Administration

Account Definitions Appendix 2

Guidelines for Determining Capital Expenses

CONSTRUCTED AND FABRICATED EQUIPMENT

Constructed equipment shall be capitalized if the cost of material and labor incurred by the UW institution is $5,000 or more and its useful life is one or more years. Labor costs should be included only when these costs are documented by an external source or in-house shop. Documentation normally would include internal or external requisitions.

DONATED CAPITAL EQUIPMENT

Donated equipment shall be capitalized if the fair market value on the date of gift is $5,000 or more and its useful life is one or more years.

COMPONENT PARTS

Component parts which individually cost less than the capitalization level but, when combined, exceed the capitalization level, shall be capitalized when purchased as a functional unit. Capital Account codes should be used. For example, when purchasing a monitor, keyboard, printer and CPU and each part costs less than $5,000, but the functional unit exceeds $5,000, the purchase should be capitalized. Conversely, when purchasing a keyboard and printer only, the purchase need not be capitalized unless each component exceeded $5,000.

REPLACEMENT PARTS

Subsequent replacements or enhancements made to the unit shall be capitalized if they have an acquisition cost of $5,000 or more and a useful life of two or more years. Replacement parts that are acquired as part of normal repair and maintenance are not capitalized.

CAPITAL LEASE

A lease is defined as an agreement conveying the right to use property or equipment for a specified period of time. Actual title to the property is not transferred to the lessee. A lease agreement must be evaluated to determine whether the transaction should be treated as a capital lease, an operating lease or a rental expense. If at its inception a noncancelable lease meets one or more of the following four criteria, the lease must be classified and accounted for as a capital lease:

  1. The lease transfers ownership to the lessee by the end of the lease term.

  2. The lease contains a bargain purchase option (a provision allowing the University, at its option, to purchase the leased property for a price which is sufficiently lower than the expected fair value of the property at the date the option becomes exercisable).

  3. The lease term is equal to 75% or more of the estimated economic life of the leased property. However, if the beginning of the lease term falls within the last 25% of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease.

  4. At the inception of the lease, the present value of the minimum lease payments, excluding executory costs, to be paid by the lessor, including any profit, equals or exceeds 90% of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor and expected to be realized by him. However, if the beginning of the lease falls within the last 25% of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease.

All lease payments, including the interest portion, entered into with the University as the lessee which meet any one of the four criteria for classifying leases should be coded as a Capital Lease. Leases which do not meet any of the four capital lease criteria should be coded as an Operating Lease.

Rental expenditure codes should be used when the minimum lease payments over the term of the lease agreement are $5,000 or less or when the term of the agreement is one year or less. The term specified on the underlying agreement is to be used when making this determination, not the term specified on a purchase order. All rental/lease payment to agencies within state government are considered rentals.

SITE LICENSES

A special license allowing unlimited distribution of designated software to a closed environment such as the campus. Site licenses require special record keeping to document the number of copies issued and their locations.

CONCURRENT LICENSES

A special license allowing a specific number of users in a closed environment such as a network. Once the user limit is reached,additional users are not allowed access until a current user quits.