SPA Process User’s Guide –
Chapter 1 – Introduction to Capital Assets
Buildings and Building Improvements
A building is a structure that is permanently attached to the land, has a roof, is partially or completely enclosed by walls and is not intended to be transportable or moveable. Buildings that are ancillary to the state’s highway network, such as rest area facilities and toll buildings, are reported as infrastructure rather than as buildings.
Building Improvement Definition
Building improvements are capital events that materially extend the useful life of a building or increase its value, or both. A building improvement should be capitalized and recorded as an addition of value to the existing building if the expenditure meets the capitalization threshold.
Componentization is the process of separately calculating the depreciation of major building structural components, subsystems and equipment.
Effective Sept. 1, 2001 (as required by Texas Government Code Section 2101.015), state agencies that receive federal funds to implement federal or joint federal and state programs and own a building with a fair market value of at least $1 million componentize on a prospective basis. As each building component is replaced, it is separately depreciated based on its individual useful life. At a minimum, the agency should use the following component categories and suggested useful lives or refer to the SPA class codes for buildings in Appendix A:
- Building shell, 30 years
- Electrical and lighting systems, 20 years
- Plumbing systems, 20 years
- Fire protection systems, 20 years
- Elevator systems, 20 years
- Fixed equipment assets, 20 years
- Heating, ventilation and cooling systems, 15 years
- Floor coverings, 15 years,
- Interior finish, 15 years
- Miscellaneous construction features, 15 years
- Roof coverings, 10 years
Several state statutes address the construction of new buildings:
- The Texas Public Finance Authority may issue and sell bonds in the name of the authority to finance the acquisition or construction of buildings (Texas Government Code Section 1232.102).
- The Texas Facilities Commission cannot acquire or approve construction of a building, including a building where acquisition or construction is financed under Texas Government Code Section 1232, to serve the needs of a single health and human services agency unless the agency can provide a reason for not sharing space in the building with one or more other health and human services agencies (Texas Government Code Section 2166.553).
The straight-line depreciation method (historical cost minus residual value divided by useful life) is used for buildings, building improvements and their components. Subsequent improvements that change the use or function of the building are depreciated.
Buildings designated as “historical” by the Texas Historical Commission are not depreciated unless they are used in the operations of the state. However, any improvements not deemed “historical” by the Texas Historical Commission are depreciated like any other improvements made to a building.
The capitalization threshold for buildings and building improvements is $100,000.
Examples of Expenditures to Capitalize as Buildings
- Original purchase price
- Expenses for remodeling, reconditioning or altering a purchased building to make it ready to use for the purpose for which it was acquired
- Environmental compliance (i.e., asbestos abatement)
- Professional fees (legal, architect, inspections, title searches, etc.)
- Payment of unpaid or accrued taxes on the building to date of purchase
- Cancellation or buyout of existing leases
- Other costs required to place or render the asset into operation
- Completed project costs
- Interest accrued during construction
- Cost of excavation or grading or filling of land for a specific building
- Expenses incurred for the preparation of plans (i.e. specifications, blueprints, etc.)
- Cost of building permits
- Professional fees (architect, engineer, management fees for design and supervision, legal, etc.)
Note: Architect fees are expensed if a decision is made to not proceed with the construction of the building.
- Costs of temporary buildings used during construction
- Unanticipated costs (i.e. rock blasting, piling, relocation of the channel of an underground stream, etc.)
- Permanently attached fixtures or machinery that cannot be removed without impairing the use of the building
- Additions to buildings (i.e. expansions, extensions, enlargements, etc.)
Examples of Expenditures to Capitalize as Improvements to Buildings
Note: For a replacement to be capitalized, it must be a part of a major repair or rehabilitation project that increases the value and/or useful life of the building (such as renovation of a student center) and meets the capitalization threshold. A replacement may also be capitalized if the new item or part is of significantly improved quality and higher value compared to the old item or part (such as replacement of an old shingle roof with a new fireproof tile roof). Replacement or restoration of an item to its original utility level is not capitalized. Determinations must be made on a case-by-case basis.
- Conversion of attics, basements, etc., to usable office, clinic, research or classroom space
- Structures attached to the building (i.e. covered patios, sunrooms, garages, carports, enclosed stairwells, etc.)
- Installation or upgrade of heating and cooling systems, including ceiling fans and attic vents
- Original installation/upgrade of wall or ceiling covering (i.e. carpeting, tiles, paneling, parquet, etc.)
- Structural changes (i.e. reinforcement of floors or walls, installation or replacement of beams, rafters, joists, steel grids, other interior framing, etc.)
- Installation or upgrade of window or door frame, upgrading of windows or doors, built-in closet and cabinets
- Interior renovation associated with casings, baseboards, light fixtures, ceiling trim, etc.
- Exterior renovation (i.e. installation or replacement of siding, roofing, masonry, etc.)
- Installation or upgrade of plumbing and electrical wiring
- Installation or upgrade of phone or closed circuit television systems, networks, fiber optic cable or wiring required for the installation of equipment that remain in the building
- Other costs associated with capitalized improvements
Building Maintenance Expense
These are examples of expenditures not to capitalize as improvements to buildings. Instead, the following items should be recorded as maintenance expense.
- Adding, removing and/or moving walls relating to renovation projects that are not major rehabilitation projects and do not increase the value of the building
- Improvement projects of minimal or no added life expectancy and/or value to the building
- Plumbing or electrical repairs
- Cleaning, pest extermination or other periodic maintenance
- Interior decoration (i.e. draperies, blinds, curtain rods, wallpaper, etc.)
- Exterior decoration (i.e. detachable awnings, uncovered porches, decorative fences, etc.)
- Maintenance-type interior renovation (i.e. repainting, touch-up plastering, sink and fixture refinishing, replacement of carpet, tile or panel sections, etc.)
- Maintenance-type exterior renovation (i.e. repainting, replacement of deteriorated siding, roof, masonry sections, etc.)
- Replacement of a part or component of a building with a new part of the same type and performance capabilities (i.e. replacement of an old boiler with a new one of the same type and performance capabilities, etc.)
- Any other maintenance-related expenditure that does not increase the value of the building
Building Demolition Costs
The Governmental Accounting Standards Board (GASB) has determined that demolition costs shall be capitalized or expensed depending on the following situations:
- If land and building are purchased with the initial intent to use the land and demolish the building, the cost to demolish the building shall be capitalized as land improvement.
- If land and building are purchased with the initial intent to use the land, demolish the building and build a new building, the cost to demolish the building shall be capitalized as part of the cost of the new building if the demolition occurs soon thereafter.
- If land and building are purchased with the initial intent to use the land and the building, the costs to demolish the existing building at a later date shall be expensed. The demolition costs are an expense associated with the cost of using the existing asset and should not be capitalized in the cost of the new asset.