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SPA Process User’s Guide – Chapter 1 – Introduction to Capital Assets

Overview of Capital Assets

This chapter provides capital asset category definitions, capitalization thresholds, depreciation methodologies and examples of expenditures for each class of assets as defined by State Property Accounting (SPA). Also included are guidelines for leasehold improvements and construction in progress.

Capital Asset Definitions

Capital assets are real or personal property that have an estimated life of greater than one year. Capital assets may or may not be capitalized for financial reporting purposes.

A capitalized asset is a capital asset that has a value equal to or greater than the capitalization threshold established for that asset type. Capitalized assets are reported in an agency’s annual financial report.

A Comptroller’s controlled asset is a capital asset that has a value less than the capitalization threshold established for that asset type, however due to its high-risk nature, is required to be reported to SPA. Controlled assets are not reported in an agency’s annual financial report. See the Comptroller’s controlled assets list online.

A locally controlled asset is a capital asset that is not capitalized or on the Comptroller’s controlled asset list, but is tracked and accounted for as mandated by agency management.

The state has invested in a broad range of capital assets that are used in the state’s operations which include:

Real Property

  • Land and land improvements
  • Buildings and building improvements
  • Facilities and other improvements
  • Infrastructure
  • Construction in progress (real property)

Personal Property

  • Furniture and equipment
  • Vehicles, boats and aircraft
  • Other capital assets
    • Library books and materials
    • Works of art and historical treasures
    • Intangible assets
    • Leasehold improvements
    • Livestock
  • Intangible capital assets
    • Land use rights
    • Computer software
    • Other intangible capital assets
  • Construction in progress (personal property)

Capital Asset Classification

Capital assets purchased, constructed or donated that meet or exceed the Comptroller’s established capitalization thresholds or minimum reporting requirements must be uniformly classified using the SPA class code structure. Appendix A lists current class code structures for personal and real property. Included in the SPA class code structure are codes that can be used to componentize buildings as required by Texas Government Code Section 2101.015.

Each class code in the SPA system contains a default value for both residual value (expressed as a percentage of historical cost) and estimated useful life (expressed in months). The default values are based on statewide historical data for each class of asset. Agencies must follow set Comptroller accounting standards for establishing the historical cost for each asset. Agencies may substitute information for residual value and/or estimated life based on individual experience for each class of asset. Any substitutions must be substantiated and auditable.

Capitalization Thresholds

Standard capitalization thresholds for capitalizing assets have been established for each major class of assets. All state entities are required to use these thresholds.

Class of Asset Threshold
Tangible Assets
Land and land improvements $0
Construction in progress $0
Buildings and building improvements $100,000
Facilities and other improvements $100,000
Infrastructure, depreciable $500,000
Infrastructure, non-depreciable $0
Furniture and equipment $5,000
Vehicles, boats and aircraft $5,000
Other capital assets
  • Library books/materials (collections)
  • Works of art and historical treasures
  • Leasehold improvements
  • Livestock
Intangible Assets
Land use rights – permanent life $0
Land use rights – term life $100,000
Computer software $100,000
Internally developed computer software $1,000,000
Other intangible capital assets $100,000

Capital Asset Acquisition Cost

Capital assets should be recorded and reported in both the Uniform Statewide Accounting System (USAS) and SPA at their historical costs, which include the vendor’s invoice (plus the value of any trade-in), plus sales tax, initial installation cost (excluding in-house labor), modifications, attachments, accessories or apparatus necessary to make the asset usable and render it into service. See Capital Asset Object Codes.

Note: Incidental charges, such as extended warranties or maintenance agreements, additional parts or consumable items are no longer considered part of the capital asset cost. Now these charges must be broken out (itemized) and expensed separately. However:
If… then…
incidental items are included with the capital asset upon receipt and are not listed as a line item on the purchase order or on the invoice, the incidental charges are considered a part of the capital asset.

Historical costs also include ancillary charges such as freight and transportation charges, site preparation costs and professional fees. The costs of capital assets for governmental funds do not include capitalized interest. However, interest is capitalized on:

  • Assets that are constructed or otherwise produced for an enterprise’s own use (including assets constructed or produced for the enterprise by others for which deposits or progress payments have been made)
  • Assets intended for sale or lease that are constructed or otherwise produced as discrete projects (for example, ships or real estate developments)

Assets that do not qualify for capitalization of interest include:

  • Assets acquired for governmental funds (interest will be reported in the statement of activities as a separate line item)
  • Assets that are in use or ready for their intended use in the earning activities of the enterprise
  • Assets that are not being used in the earning activities of the enterprise and that are not undergoing the activities necessary to get them ready
  • Assets acquired with gifts and grants where donors or grantors limit acquisition to specific assets to the extent that funds are available

Capital Asset Donations

Governmental Accounting Standards Board (GASB) Statement No. 33, Accounting and Financial Reporting for Non-Exchange Transactions, defines a donation as a voluntary nonexchange transaction entered into willingly by two or more parties. Both parties may be governments or one party may be a nongovernmental entity, including an individual. A voluntary contribution of resources between state agencies is not a donation.

For agencies with... USAS 33 was effective... recognize…
governmental funds fiscal 2002 the asset and related revenue in the government-wide financial statements.
proprietary or fiduciary funds fiscal 2001 business-type activities in the fund financial statements.
If an asset has been... and the eligibility requirements... then...
donated and received have not been met, debit capital assets and credit deferred revenue.
donated and received have been met, debit capital assets and credit revenue.
donated and not received have been met, debit a receivable and credit revenue. However, proprietary and fiduciary funds should record the receivable net of estimated uncollectible amounts.
promised have been met and the promise is verifiable, the resources are measurable1 and collection is probable2, debit a receivable and credit revenue (revenue = net of estimated uncollectible amounts).

1Measurable – Reasonable estimable

2Probable – The future event or events are likely to occur

Appraisal of Assets (Gifts and Donations)

Donated property must be recorded at its estimated fair market value on the date of acquisition, using a reasonable market study.

The method used to appraise the value computed for gifts and donations should be based on a reasonable assessment. This method must be fully documented, maintained on file and reported to SPA.

Sale of a Capital Asset Donation

Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements — and Management’s Discussion and Analysis — for State and Local Governments requires governmental fund statements to be used to report spendable assets and not capital assets. However, a government may receive a gift of a capital asset that it intends to sell. In such cases, the donation is reported as revenue on the governmental fund statements if the asset is either:

  • Sold prior to the end of the fiscal period and the proceeds of the sale are considered available,3 or
  • The asset is sold (or the government has entered into a contract to sell the asset) before financial statements are issued and the proceeds of the sale are considered available.

If the proceeds of the sale are not considered available, then the related receivable should be offset by a liability for deferred revenue on the fund financial statements.

3Available – Collected within the current period or expected to be collected soon enough thereafter to be used to pay liabilities of the current period.

Leased Property

Leased property should be capitalized if the lease agreement meets any one of the following criteria:

  • The lease transfers ownership of the property to the lessee by the end of the lease term.
  • The lease contains a bargain purchase option.
  • The lease term equals 75 percent or more of the estimated economic life of the leased property.
  • The present value of the minimum lease payments at the inception of the lease, excluding executory costs, equals at least 90 percent of the fair value of the leased property.

Leases that do not meet any of the proceeding criteria should be recorded as an operating lease and reported in the notes of the financial statements.

USAS Entries for Capital Leases SPA Entries for Capital Leases
Expenditures (Lease object codes):
  • Debt Service – Principal – Capital Leases.
  • Interest (all other GLTD)
Noncurrent Assets:
  • Capital Asset AFR Category
  • Capital Leases Payable
Acquisition Method – 08 (Other Debt Instruments)
Debt Finance Method – 01 (Capital Lease), 02 (MLPP Lease)
Paid-Off Flag – N (Default Value)
Note: Upon liquidation of lease obligations, the agency should change the PAID-OFF flag to Y.

Master Lease Purchase Program

Capital assets acquired under the Master Lease Purchase Program (MLPP) should be treated as capital leases if the asset meets the capitalization threshold. These assets are reported on agency annual financial statements (AFRs) and are no longer reported by the Texas Public Finance Authority.

Depreciating Capitalized Assets

Capitalized assets should be depreciated over their estimated useful lives unless they are inexhaustible. For a definition of an “inexhaustible asset,” see the Works of Art and Historical Treasures. The straight-line depreciation method (historical cost less residual value, divided by useful life) is used by all state entities. Depreciation data is calculated and stored in SPA by the Comptroller’s office for each eligible asset. Agencies that already calculate depreciation expense may use that information for their AFRs in lieu of SPA’s centralized calculation.

Depreciable Entity

Agencies should be aware of the definition used by the Comptroller’s office for a capitalized asset and the logic used to evaluate the depreciable entity with capitalization thresholds in the SPA system. For purposes of depreciation calculations within SPA, the depreciable entity is defined as:

The sum of financial expenditures related to all components of a unique property number within a single fiscal year.

Each depreciable entity exists as a “fiscal year layer” of the component so depreciation can be correctly charged to the component.

Each fiscal expenditure year constitutes a separate record on the Depreciable Entity table in SPA. The fiscal expenditure entity represents the level where the depreciable factors are stored, including:

  • Capitalization indicator
  • Useful life
  • Historical indicator
  • Residual percentage
  • Depreciation indicator

Depreciation is calculated at the depreciable entity level and allocated between all funds of a component based on each fund’s percentage of the component’s value.

For example, if component 01 of property 123 was initially added to the SPA system on Sept. 1, 2014 (fiscal 2015) with a value of $6,000, and ancillary costs of $2,000 were added in Oct. 2014 (fiscal 2015), the value of the depreciable entity would be $8,000. This depreciable entity would exist for fiscal 2015 financial transactions for component 01 of property 123. If an additional $5,000 in value were added to component 01 of property 123 on Sept. 1, 2015 (fiscal 2016), a new depreciable entity for the amount of $5000 would be created. SPA reports would reflect a 2015 balance of $8000 and a 2016 balance of $5000.

This new depreciable entity relates to the same component (01) of property 123, but represents the financial transactions of a different fiscal year (2016). Each depreciable entity may have most of the same depreciable factors, but different beginning dates for depreciation calculations. Therefore, for a single component, one depreciable entity (“layer”) may be fully depreciated, while another depreciable entity (representing a later fiscal year) may still be depreciating.

Determining when or when not to capitalize depreciable entities

Depreciable entities may or may not be capitalized based on criteria established by the Comptroller’s office. For all components, property will be evaluated against capitalization thresholds using the sum of all financial transactions that have effective dates within the same fiscal year and are within a unique property number.

The Capitalized/Inventoried (C/I) Indicator

SPA indicates a depreciable entity is capitalized by assigning a C/I Indicator of C when the depreciable entity meets the capitalization criteria.

When a financial transaction is entered, SPA sums all current depreciable entities for a property number across all components that exist for the fiscal year the financial transaction affects. This sum is compared to the capitalization threshold of the assigned class code:

  • If the sum of expenditures for all components related to a unique property number for the fiscal year meets/exceeds the capitalization threshold, SPA assigns all fiscal components a C for capitalized.
  • SPA assigns all other components an I for inventoried (this is the default value). Assets that are assigned an I do not appear on the SPA financial reports.

How property numbers are assigned impacts the C/I Indicator

How an agency numbers its property can impact the C/I Indicator assigned by SPA. For example, a monitor, CPU, keyboard and mouse could be numbered as:

  • One property number with one single component (with a description of computer)
  • One property number with components for each item, or
  • Multiple property numbers with one component each.

If multiple property numbers are used, it is less likely that each item would meet the capitalization threshold. Agencies should therefore consider how they number their property and the impact it will have on the C/I indicator.

Timing of transactions entered impacts the C/I Indicator

The timing of transactions entered into SPA can also impact the C/I Indicator. If all of the transactions related to a capital asset purchase have different effective dates but are within the same fiscal year, those transactions will be part of the same depreciable entity.

However, if transactions such as vouchers, credit memos, purchase returns and upgrades have effective dates that are not within the same fiscal year, then the transactions must meet or exceed the threshold independently to be capitalized.

Decreasing the value of depreciable entities

If a financial transaction decreases the total value of depreciable entities with the same fiscal year for a property, one of two situations can occur:

  1. When the decrease occurs in the same fiscal year as the initial creation of the depreciable entity, SPA will sum all existing depreciable entities for a property number across all components that exist for the fiscal year that the financial transaction affects:
    • If the sum does not meet the capitalization thresholds, all depreciable entities in the summation will be inventoried and not capitalized.
    • If the sum meets the capitalization thresholds, all depreciable entities in the summation will be capitalized.
  2. Decreases in value that occur outside the first fiscal year that the depreciable entity was created will not change the capitalization indicator from capitalized to inventoried. Therefore, if a capitalized depreciable entity was created in a prior fiscal year, it will be capitalized over its remaining life, regardless of whether subsequent decreases in value cause the asset’s value to fall below capitalization thresholds.

Manual overrides of the C/I Indicator

On a restricted basis, it is possible for the Comptroller’s office to manually override the SPA C/I Indicator at the agency’s request.

Overrides are only used to change an I to a C (inventoried to capitalized). The Comptroller’s office does not change a C to an I (capitalized to inventoried).

Overrides requested by agencies are evaluated by the Comptroller’s office on a property-by-property basis. Factors the Comptroller’s office takes into account when determining use of a manual override include:

  • Expense must be related to the original asset purchase.
  • Transactions related to an asset purchase should be completed with one year of the original asset purchase.

Requests for C/I Indicator manual overrides

Requests for manual overrides of the C/I indicator should be submitted to your SPA analyst.

Contact your SPA analyst if you need to discuss the matter further and possibly request an override.

Residual Value

To calculate depreciation for an asset, first declare the estimated residual value. Historical sales information is invaluable when estimating residual value. Proceeds from sale of assets must be netted against residual value in computing net gain or loss from sale.

Reporting Gains and Losses

When an asset is sold, a gain or loss must be reported in the annual report when:

  • cash is exchanged and the amount paid does not equal the net book value of the asset or
  • cash is not exchanged and the asset is not fully depreciated or has a residual value.

A gain or loss is not reported when:

  • cash is exchanged and equals the net book value and the asset does not have a residual value or
  • cash is not exchanged and the asset is fully depreciated and has no residual value.

Computation of Gain and Loss from Sale of Assets

To compute a gain or loss, proceeds received must be subtracted from the asset’s net book value.4

Example: Asset’s Historical Cost $10,000
Less Accumulated Depreciation 7,000
Net book value 3,000
Subtract Proceeds Received 2,000
Loss from Sale of Asset $ 1,000

If the asset has been fully depreciated and has a residual value, then the proceeds must be subtracted from the residual value to compute the gain or loss.

Example: Asset’s Historical Cost
(residual value = $1,000)

Less Accumulated Depreciation 9,000
Residual value 1,000
Subtract Proceeds Received 2,000
Gain from Sale of Asset $ 1,000

When the sale is between state entities, the selling agency’s historical cost of the asset and the accumulated depreciation will carry in SPA to the agency buying/receiving the asset. A gain or loss is not recognized. Instead, the following entries are made:

4Net Book Value – asset’s historical cost less the accumulated depreciation

Comp Obj. Description Governmental GAAP Source Proprietary GAAP Source
3843 Increase Net Assets – Interagency Transfers for Capital Assets Backout – N/A Revenue Interagency Capital Asset Increase
7858 Decrease Net Assets – Interagency Transfers for Capital Assets Backout – N/A Expenditure Interagency Capital Asset Decrease

Proceeds Received From a Sale, a Trade-in or Insurance

An agency may receive proceeds for an asset when the asset is:

  • sold,
  • used as a trade-in or
  • stolen or lost and an insurance policy covers the loss.

For items sold, enter only the net proceeds (gross proceeds minus auctioneer fees and disposal fees) in the PROCEEDS FROM SALE field. For a trade-in, enter the trade-in amount reflected on the invoice in the PROCEEDS FROM SALE field. For stolen or lost property in which the employee is held liable, enter the amount of the employee payment in the PROCEEDS FROM SALE field. For stolen or lost property in which an insurance policy covers the loss, enter the amount of the insurance payment in the PROCEEDS FROM SALE field.

House Bill 3042, 78th Legislature, Regular Session, states all proceeds from sale of surplus property must be deposited to general revenue (GR) in appropriation 99908. Proceeds include the sale of surplus property, equipment and commodities.

This applies to:

  • sales made by the Texas Facilities Commission (TFC) and
  • sales that TFC authorizes other agencies to make per Texas Government Code Section 2175.181.

(This does not apply to surplus property purchased from trust funds, bond funds, funds held outside the treasury and federal funds prohibited per federal fund agreement.)

Senate Bill 1, 79th Legislature, Regular Session, Article IX, Section 8.04 allows an agency to re-appropriate receipts from the sale of surplus property for expenditure. Contact your appropriation control officer for the procedure.

Proceeds from the sale of seized property will be appropriated to the agency for expenditure per SB 1, 79th Legislature, Regular Session, Article IX, Section 8.03 (b)–(d).

Assets Acquired by the Exchange of Other Assets

Similar assets — To record an exchange of similar assets, agencies must use a book value basis for the assets surrendered or acquired when:

  • assets are exchanged and no monetary consideration is paid or received, the cost of the asset acquired is recorded at the book value of the asset surrendered.
  • monetary consideration is paid, the new asset must be recorded at the sum of the cash paid plus the book value of the asset surrendered.

Dissimilar assets — To record an exchange of dissimilar assets:

  • Record the fair value of the asset being traded and the resulting transaction for acquiring the new asset.
  • If the asset is being purchased with cash, record the transaction for the new asset as cash paid plus the fair value of the asset surrendered.

Assets Held in Trust

Capital assets an agency holds on behalf of a non-state entity, controls temporarily and does not use in agency operations (such as art collections owned by families or estates) should be accounted for in SPA. Assets held in trust must be reported to SPA using acquisition method 09. Capitalization thresholds do not apply to assets held in trust. Refer to the Reporting Requirements for Annual Financial Reports of State Agencies and Universities manual for the accounting treatment of assets held in trust.

Glenn Hegar
Texas Comptroller of Public Accounts
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