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 (FY 2024)	Threshold (FY 2025)
Tangible Assets
Land and land improvements	$0	$0
Construction in progress	$0	$0
Buildings and building improvements	$100,000	$100,000
Facilities and other improvements	$100,000	$100,000
Infrastructure, depreciable	$500,000	$500,000
Infrastructure, non-depreciable	$0	$0
Furniture and equipment	$5,000	$10,000
Vehicles, boats and aircraft	$5,000	$10,000
Other capital assets Library books/materials (collections) Works of art and historical treasures Leasehold improvements Livestock	$0 $0 $100,000 $5,000	$0 $0 $100,000 $5,000
Intangible Assets
Land use rights – permanent life	$0	$0
Land use rights – term life	$100,000	$100,000
Computer software	$100,000	$100,000
Internally developed computer software	$1,000,000	$1,000,000
Other intangible capital assets	$100,000	$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.

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 personal property falls under the same reporting requirements as all other property. Leased property that is classified under one of the controlled class codes (such as laptops) and has an individual unit cost between $500 and $9,999 must be individually tagged, tracked, reported to SPA and included on the annual physical inventory. Leased assets must also follow the missing, stolen or damaged property reporting policies and procedures.

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 Liabilities: 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, 2024 (fiscal 2025) with a value of $11,000, and ancillary costs of $2,000 were added in Oct. 2024 (fiscal 2025), the value of the depreciable entity would be $13,000. This depreciable entity would exist for fiscal 2025 financial transactions for component 01 of property 123. If an additional $10,000 in value were added to component 01 of property 123 on Sept. 1, 2025 (fiscal 2026), a new depreciable entity for the amount of $10,000 would be created. SPA reports would reflect a 2025 balance of $13,000 and a 2026 balance of $10,000.

This new depreciable entity relates to the same component (01) of property 123, but represents the financial transactions of a different fiscal year (2026). 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 considers 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)	$10,000
	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 in any of the following circumstances:

• When the asset is sold by the agency, or
• When the asset is surplus sold through the TFC Surplus Process, or
• When the asset is used as a trade-in, or
• When the asset is lost/stolen/damaged and an insurance policy covers the loss

Proceeds from sale should be entered in SPA as follows:

• Sold items – Enter the net proceeds in the PROCEEDS FROM SALE field.
• Surplus Sold via TFC – Proceeds are automatically updated by the Texas Facilities Commission Surplus Process. The proceeds entered by TFC will be the total proceeds for the asset sale, including the TFC fee collected. See Recording Sale of Capital Assets for accounting system entry and Proceeds from the Sale of Surplus Property (FPP A.032) for deposit information.
• Trade-in – Enter the trade-in amount reflected on the invoice in the PROCEEDS FROM SALE field. Also include the proceeds received for the trade-in in the acquisition cost of the new asset.
• Lost/Stolen/Damaged – Use this when an insurance policy covers the loss of this property. Enter the amount of the insurance payment in the PROCEEDS FROM SALE field.

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 held by an agency on behalf of a non-state entity (such as art collections owned by families, estates and others) and under the temporary control of the agency must be accounted for in SPA. This includes all assets owned by the federal government that were loaned to the agency.

Assets held in trust must be reported to SPA using acquisition method 09. Capitalization thresholds do not apply to assets held in trust, therefore trust assets must be reported in SPA and included on the annual physical inventory regardless of value.

Refer to Assets Held in Trust in the AFR Reporting Requirements for the accounting treatment of assets held in trust.

Land and Land Improvements

Land Definition

Land is the surface or crust of the earth that can be used to support structures and may be used to grow crops, grass, shrubs and trees. Land is characterized as having an unlimited (indefinite) life.

Land Improvement Definition

Land improvements consist of site preparation and site improvements (other than buildings) that ready land for its intended use. The costs associated with improvements to land are added to the land value.

Acquisition of Land

According to Texas Government Code Section 2204.001–003:

• The governor may purchase land or the right to use land that is required by the state for any type of public service.
• A state agency, as defined by Chapter 658, Section 658.001 of the Texas Government Code, may not accept a gift or devise of real property or spend appropriated money to purchase real property without statutory authority or other legislative authorization.
• An institution of higher education, as defined by Education Code Section 61.003, may accept a gift or devise of real property from a private entity to establish scholarships or professorships or to hold in trust for other educational purposes only if done consistently with rules and regulations adopted by the Texas Higher Education Board.

Real Estate Transactions

If the legislature authorizes a real estate transaction involving real property owned or held in trust by the state, the General Land Office (GLO) takes possession and control of the property and negotiates and closes the real estate transaction on behalf of the state (Natural Resource Code Section 31.158).

The GLO may not take possession and control of property under Chapter 2201 of the Texas Government Code if the state agency is ineligible to benefit from the Texas capital trust fund.

Upon notification by the GLO, a state agency initiates the transfer of property in SPA to the GLO. Proceeds from the real estate transaction are entered by the GLO and deposited into the Texas capital trust fund unless the constitution dedicates the proceeds to another fund or the enabling legislation ordering the real estate transaction provides otherwise.

Depreciation Methodology

Land and land improvements are inexhaustible assets and do not depreciate over time.

Capitalization Threshold

All acquisitions of land and land improvements are capitalized.

Examples of Expenditures to Capitalize as Land and Land Improvements:

• Purchase price or fair market value at time of gift
• Commissions
• Professional fees (title searches, architect, legal, engineering, appraisal, surveying, environmental assessments, etc.)
• Land excavation, fill, grading, drainage
• Demolition of existing buildings and improvements (less salvage)
• Removal, relocation or reconstruction of property of others (railroad, telephone and power lines)
• Interest on mortgages accrued at date of purchase
• Accrued and unpaid taxes at date of purchase
• Other costs incurred in acquiring the land
• Water wells (includes initial cost for drilling, pumps and casings)
• Right of way

Buildings and Building Improvements

Building Definition

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.

Building Componentization

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

Building Construction

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).

Depreciation Methodology

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.

Capitalization Threshold

The capitalization threshold for buildings and building improvements is $100,000.

Examples of Expenditures to Capitalize as Buildings

Purchased 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

Constructed Buildings

• 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.

Facilities and Other Improvements

Facilities Definition

Facilities are assets (other than general use buildings) that are built, installed or established to enhance the quality or facilitate the use of land for a particular purpose.

Other Improvements Definition

Other Improvements are enhancements made to a facility or to land.

Depreciation Methodology

The straight-line depreciation method (historical cost minus residual value divided by useful life) is used for Facilities and Other Improvements.

Capitalization Threshold

The capitalization threshold for facilities and other improvements is $100,000.

Examples of expenditures to capitalize as facilities and other improvements

• Fencing and gates
• Landscaping
• Parking lots, driveways or parking barriers
• Outside sprinkler systems
• Recreation areas and athletic fields (including bleachers)
• Golf courses
• Paths and trails
• Septic systems
• Stadiums
• Swimming pools, tennis courts or basketball courts
• Fountains
• Plazas and pavilions
• Retaining walls

Infrastructure

Infrastructure Definition

Infrastructure is a long-lived capital asset that normally is stationary in nature and can be preserved for significantly more years than most capital assets. Infrastructure assets are often linear and continuous.

Note: Prospective reporting of general infrastructure assets was required beginning in fiscal 2002. Also required was the retroactive reporting of infrastructure assets purchased, constructed or donated in fiscal years ending after June 30, 1980, or infrastructure assets that received major renovations, restorations or improvements during that period. State entities are encouraged to report their entire infrastructure, if possible.

Infrastructure Improvements

Infrastructure Improvements are capital events that materially extend the useful life or increase the value of the infrastructure, or both. Infrastructure improvements should be capitalized and recorded as an addition of value to the infrastructure if the improvement or additional value meets the capitalization threshold.

Jointly Funded Infrastructure

If ownership cannot be determined for infrastructure paid for jointly by the state and other governmental entities, the entity responsible for future maintenance should capitalize it.

Modified Approach vs. Depreciation

The Modified Approach is an alternative to reporting depreciation for infrastructure assets that meet the following criteria:

• the assets are managed using a qualifying asset management system and
• documentation shows that the assets are being preserved at or above a condition level established by the government.

Depreciation is not reported for infrastructure assets reported using the modified approach. Only infrastructure assets that comprise a network or subsystem of a network can be reported using the modified approach.

Maintenance Costs

Maintenance Costs allow an asset to continue to be used during its originally established useful life. Maintenance costs are expensed in the period incurred.

Preservation Costs

Preservation Costs are generally considered to be outlays that extend the useful life of an asset beyond its original estimated useful life but do not increase its capacity or efficiency. Preservation costs are expensed under the modified approach and capitalized under the depreciation approach.

Additions and Improvements

Additions and Improvements are capital outlays that increase the capacity or efficiency of the asset. A change in capacity increases the level of service provided by an asset (i.e. more lanes can be added to a highway or the weight capacity of a bridge can be increased). A change in efficiency maintains the same service level, but at a reduced cost (i.e. a heating and cooling plant could be reengineered so that it produces the same temperature changes at reduced cost). The cost of additions and improvements are capitalized and reported under both the modified and depreciation approaches.

Depreciation Methodology

The straight-line depreciation method (historical cost minus residual value, divided by useful life) is used for infrastructure assets.

Capitalization Threshold

The capitalization threshold for depreciable infrastructure is $500,000 and non-depreciable infrastructure is $0. Infrastructure already capitalized remains capitalized.

Examples of Expenditures to Capitalize as Infrastructure

• Highway and rest areas
• Roads, streets, curbs, gutters, sidewalks, fire hydrants
• Bridges, railroads, trestles
• Canals, waterways, wharf, docks, sea walls, bulkheads, boardwalks
• Dam, drainage facility
• Radio or television transmitting tower
• Electric, water and gas (main lines and distribution lines, tunnels, etc.)
• Fiber optic and telephone distribution systems (between buildings)
• Light system (traffic, outdoor, street, etc.)
• Signage
• Airport runway, strip, taxiway or apron

Furniture and Equipment

Furniture and Equipment Definition

Furniture and equipment placed into service for operations with benefits extending beyond one year from date of acquisition. Improvements or additions made (to existing furniture or equipment) is capitalized if they meet the capitalization threshold.

Jointly Funded Furniture and Equipment

Furniture and equipment paid for jointly by the state and other governmental entities should be capitalized by the entity responsible for future maintenance if ownership cannot be determined.

Modular Furniture

Agencies should capitalize modular furniture for which individual items cost $10,000 or more and report these items to the SPA System.

Personal Computers

Include the following elements when calculating the total unit cost of a personal computer:

• CPU case with motherboard; memory chips; internal drives, including CD ROMs; various boards such as a network, modem, sound cards, etc.
• Monitor (if less than $10,000), keyboard, mouse (or other pointing device), PMICA cards
• Pre-installed operating system software (Windows, UNIX, Macintosh operating system, etc.) and pre-installed application software
• Based on management decision, docking stations may or may not be considered part of the unit cost

Items which will not be considered for inclusion when calculating the total cost include external drives, scanners, external modems, printers and plotters.

The method of purchase is not a factor in determining the initial cost of a personal computer.

Depreciation Methodology

The straight-line depreciation method (historical cost minus residual value, divided by useful life) is used for furniture and equipment.

Capitalization Threshold

The capitalization threshold for furniture and equipment is $10,000.

Examples of expenditures to capitalize as furniture and equipment:

• Original contract or invoice price
• Freight charges and Import duties
• Handling and storage charges
• In-transit insurance charges
• Sales, use and other taxes imposed on the acquisition
• Installation charges
• Charges for testing and preparation for use
• Costs of reconditioning used items when purchased
• Parts and labor associated with the construction of equipment

Note: If incidental items, such as extended warranties or maintenance agreements, are included with the capital asset upon receipt and are not listed as a line item on the purchase order or on the invoice, then the incidental charges are considered a part of the capital asset.

Vehicles, Boats and Aircraft

Vehicles, Boats and Aircraft Definition

Vehicles, boats and aircraft placed into service for operations with benefits extending beyond one year from date of acquisition. Improvements or additions made (to existing vehicles, boats or aircraft) is capitalized if they meet the capitalization threshold.

Jointly Funded Vehicles, Boats and Aircraft

Vehicles, boats and aircraft paid for jointly by the state and other governmental entities should be capitalized by the entity responsible for future maintenance if ownership cannot be determined.

Depreciation Methodology

The straight-line depreciation method (historical cost minus residual value, divided by useful life) is used for vehicles, boats and aircraft.

Capitalization Threshold

The capitalization threshold for vehicles, boats and aircraft is $10,000.

Examples of expenditures to capitalize as vehicles, boats and aircraft:

• Original contract or invoice price
• Freight charges and Import duties
• Handling and storage charges
• In-transit insurance charges
• Sales, use and other taxes imposed on the acquisition
• Installation charges
• Charges for testing and preparation for use
• Costs of reconditioning used items when purchased
• Parts and labor associated with the construction of vehicles, boats or aircraft

Note: If incidental items, such as extended warranties or maintenance agreements, are included with the capital asset upon receipt and are not listed as a line item on the purchase order or on the invoice, then the incidental charges are considered a part of the capital asset.

Other Capital Assets

Library Books and Reference Materials Definition

Library books are generally a literary composition bound into a separate volume and identifiable as a separate copyrighted unit. Library Reference Materials are information sources other than books (i.e. journals, microforms, audio/visual media, computer-based information, manuscripts, maps, documents and similar items) that provide information essential to learning or that enhance the quality of academic, professional or research libraries.

Library Characteristics

A professional, academic or research library normally has one or more of the following characteristics:

• Internal controls are in place in lieu of central property management.
• Information is housed in a centralized location.
• Physical security measures are in place to protect the assets.
• Checkout procedures and policies exist and are used.
• Individual item costs and supplemental information are contained in a supplemental database.
• Volumes assigned to the library are typically available to employees, students and other individuals to checkout or use.
• The library helps the entity fulfill its mission.
• The library’s value is material to the organization.
• Equipment assigned to libraries typically remains under central security for on-premises use.
• Maintains records of all books and other library items. These records suffice as detailed inventory.

Additions to a library should be reported in total as a separate component (layer) in SPA. Disposals should be made using the FIFO method. That is, exhaust the component value in the earliest fiscal year before posting disposals to the next fiscal year component.

Disposals should be made using an average cost per item (ending balance of library books divided by number of volumes held).

Depreciation Methodology

Professional, academic and research library books and materials should be depreciated.

The straight-line depreciation method (historical cost minus residual value, divided by useful life) is used for professional, academic and research books and materials.

Capitalization Threshold

All purchases of books and materials for a professional, academic or research library should be capitalized if the annual purchase meets the $5,000 threshold.

Periodicals and subscriptions should be expensed. Books and other materials purchased (not for the library) should be expensed.

Examples of Expenditures to Capitalize as Library Books and Materials

• Invoice price
• Freight charges
• Handling
• In-transit insurance charges
• Binding
• Electronic access charges
• Reproduction and like costs required to place assets in service, with the exception of library salaries

Works of Art and Historical Treasures Definition

Works of Art and Historical Treasures are collections or significant individual items that are owned by a state agency and are not held for financial gain but rather for public exhibition, education or research as part of a public service. Collections or individual items that are protected and cared for or preserved are subject to an organizational policy that requires the proceeds from their sales to be used to acquire similar items.

Exhaustible collections or items are items whose useful lives are diminished by display or educational or research applications.

Inexhaustible collection or items are items whose economic benefit or service potential is used up so slowly that the estimated useful lives are extraordinarily long. Because of their cultural, aesthetic or historical value, holders protect and preserve these assets more than they do for similar assets without such value.

Depreciation Methodology

The straight-line depreciation method (historical cost minus residual value, divided by useful life) is used for exhaustible collections. Inexhaustible items are not depreciated.

Capitalization Threshold

All works of art and historical treasures acquired or donated are capitalized unless held for financial gain.

If a collection is held for financial gain and is not capitalized, disclosures must be made in the notes that describe the collection and the reasons these assets are not capitalized. Agencies should recognize program expense equal to the amount of revenues when donated collection items are added to noncapitalized collections.

Examples of Expenditures to Capitalize as Works of Art and Historical Treasures

• Collection of rare books and manuscripts
• Maps, documents and recordings
• Works of art such as paintings, sculptures and designs
• Artifacts, memorabilia and exhibits
• Unique or significant structures

Leasehold Improvements Definition

Leasehold Improvements are improvements made by a lessee (i.e. new buildings or improvements to existing structures, etc.) The lessee has the right to use the improvements over the term of the lease. The improvements revert to the lessor upon lease expiration. Moveable equipment or office furniture that is not attached to the leased property is not a leasehold improvement.

Improvements made in lieu of rent should be expensed in the period incurred.

Depreciation Methodology

Leasehold improvements are capitalized by the lessee and are amortized over the remaining lease term or the useful life of the improvement, whichever expires first. Leasehold improvements do not have a residual value.

If the lease contains an option to renew and the likelihood of renewal is uncertain, the leasehold improvement should be written off over the life of the initial lease term or useful life of the improvement, whichever expires first.

Once a leasehold improvement involving a third party (i.e. not a state agency) has been fully amortized, the improvement must be removed from the financial records using disposal method 25 (Leasehold Improvements).

Once a leasehold improvement involving a state agency has been fully amortized, the improvement must be transferred by the lessee state agency to the lessor state agency.

Contact your SPA analyst for the proper procedures required before initiating the property transfer.

Capitalization Threshold

The capitalization threshold for leasehold improvements is $100,000.

Livestock

Agencies should capitalize animals that individually cost $5,000 or greater and have a useful life of more than one year.

Agencies should assign a unit cost to animals that are produced or acquired by a means other than by purchase and document that assigned cost and the methodology used to determine that cost.

Agencies will continue to internally control and protect non-capitalized animals from potential loss and may choose to account for animals at a more detailed level.

Depreciation Methodology

The straight-line depreciation method (historical cost minus residual value, divided by useful life) is used.

Capitalization Threshold

The capitalization threshold for livestock is $5,000.

Construction in Progress

Construction in Progress Definition

Construction in Progress reflects the cost of all projects for construction of buildings, other improvements, equipment and intangible assets that are in progress (under way) at a particular point in time.

Depreciation Methodology

Depreciation is not applicable while assets are accounted for as construction in progress.

Capitalization Threshold

Construction in progress assets are capitalized to the appropriate capital asset categories at the earliest occurrence of:

• substantial completion contract documents are executed,
• occupancy or
• when the asset is placed into service.

Chapter 4 explains how to report construction in progress in SPA.

Intangible Assets

GASB 51 defines an intangible asset as one that lacks physical substance, is nonfinancial in nature and has an initial useful life extending beyond a single reporting period. All identifiable intangible assets subject to the provisions of GASB 51 should be classified as capital assets and be reported on the government-wide statement of net assets.

An intangible asset is identifiable when either of the following conditions is met:

• Separable (capable of being separated or divided from the government)
• Arises from contractual or legal rights

Land Use Rights

Land Use Rights Definition

Land use rights should include but not be limited to easements, mineral rights, timber rights, development rights or water rights. Land use rights should not be reported as separate intangible capital assets if the state/agency already owns the real property capital asset. The ownership of real property inherently includes a “bundle of rights.” Although these rights are separate and intangible in nature, they collectively represent the ownership of the real property tangible asset.

• Easements – An easement gives one party the right to use the land of another party for a particular or stated purpose.
• Mineral rights – Mineral rights represent ownership interest in natural resources such as coal, oil, natural gas, and other precious and non-precious metals that are normally extracted from the ground.
• Timber rights – Timber rights permit one party to cut and remove trees from the property of another party.
• Development rights – Development rights represent legal entitlement and ability to develop and improve a parcel of land.
• Water rights – Water rights usually confer upon the owner of riverfront or shorefront property the right to access and use the adjacent water.

Amortization Methodology

Land Use Rights – Permanent are inexhaustible assets and do not amortize over time. The straight-line amortization method is used for Land Use Rights – Term.

Capitalization Threshold

• All acquisitions of Land Use Rights – Permanent are capitalized.
• The capitalization threshold for Land Use Rights – Term is $100,000.

Computer Software

Computer Software Definition

Computer software is the most widely owned type of intangible capital asset. There are two primary types of computer software:

• Purchased (commercial “off the shelf”)
• Internally generated

Purchased Software

Purchased software is commercial software that is purchased “off the shelf” and then placed into service with minimal modification.

The commercial software must have:

• An estimated useful life of one year or greater
• A cost that meets or exceeds the capitalization threshold of $100,000.

When purchasing computer software licenses or similar assets, the capitalization threshold is based on the aggregate or total cost of the purchase. Do not divide the cost by the number of licenses. The cost can include:

• Purchase software license
• License fees
• Testing fees
• Set-up fees
• Delivery cost

Record purchased software that meets the above requirements as:

• SPA class code 307 – Purchased Software
• Comptroller object 7395 – Computer Software – Capitalized

If the software requires more than minimal modification before placing it into service, evaluate the total initial purchase cost plus the budgeted application development cost to determine if the total initial cost meets or exceeds the $100,000. threshold. If the threshold is met or exceeded, the software must be recorded as:

• Capitalized Computer Software using SPA class code 310 – Customized Software
• Comptroller object 7395 – Computer Software – Capitalized

Do not capitalize additional development costs unless the cost exceeds the state’s $1 million capitalization threshold for internally generated software.

Internally Generated Computer Software

Intangible computer software assets are considered internally generated if they are:

• Created or produced by the government’s employees or a third party contractor on the behalf of the state and local government.

  –OR–

• Purchased off-the-shelf software that requires substantial modification before being placed into service.

Internally generated computer software must have:

• An estimated useful life of one year or greater
• A cost of the application development stage activities that meets or exceeds the capitalization threshold of $1 million.

  Note: Application development stage activities include designing the chosen path (including software configuration and interfaces), coding, installation and testing (including parallel processing).

Costs incurred that relate to the development of internally generated computer software are only capitalized if ALL of the following are met:

1. Determined the specific objective of the project and the service capacity expected upon the completion of the project
2. Completion at expected capacity is anticipated and feasible
3. Demonstrated the intention, ability and presence of effort to complete
4. Preliminary project stage activities have been completed
5. Management authorizes and commits to funding the project (for at least the current year in the case of multi-year projects)

GASB 51 presents three stages of development for internally generated computer software projects. The activities listed below are not comprehensive:

1. Preliminary Stage — Expense
   • Conceptual evaluation of alternatives
   • Demonstration of intent to complete the project
   • Final selection of alternatives for development of the software
2. Application Development — Capitalize
   • Design of the chosen path
   • Software is coded, installed and tested (including parallel processing phase)
3. Operational — Expense
   • Operational software
   • Application training
   • Regular maintenance

The capitalized value of internally generated computer software includes the direct costs incurred during the application development stage. These direct costs include direct labor comprised of wages and benefits. Physical hardware is capitalized separately according to capital asset guidelines. The direct labor benefits allocation may be based on actual payroll/benefit costs or a reasonable estimation method. Agencies must maintain support for any such calculation.

Capitalization threshold decisions for internally generated computer software projects are based on the total estimated application development stage costs. Capitalizable activities may occur in different sequences. Apply recognition guidance based on the nature of the activity — not the timing of its occurrence. Capitalize data conversion costs only to the extent determined necessary to make the computer software operational. Otherwise, expense data conversion costs as incurred.

The costs associated with training, project management or business process reengineering are expensed as incurred. These activities do not further the development of the software and do not contribute to placing the software into service.

Document capitalization decisions for internally generated computer software projects as follows:

1. Develop a project budget. Do not forget to include an allocation for direct costs and cost overruns.
2. Isolate activities that will qualify for application development stage capitalization. Do not include hardware purchase costs.
3. Begin CIP process for capitalizable activities if total estimated capitalizable costs exceed or are near $1 million.

Internally generated computer software that is completed and placed into service in a single fiscal year should be recorded as:

• SPA Class Code 308 – Internally Developed Software
• Comptroller Object 7395 – Computer Software – Capitalized.

For multi-year computer software projects, capitalization costs are tracked in a construction in progress (CIP) account while the software project is ongoing and recorded as:

• SPA Class Code 090 – Construction in Progress
• Comptroller Object 7390 – Computer Software – Int Dev – Capitalized.

Upon completion, the software is converted to an internally generated computer software (SPA class code 308) capital asset.

Software Updates and Upgrades

Costs associated with the minor modification of computer software are generally considered maintenance and are expensed as incurred. Evaluate computer software modifications for capitalization separately from the original software purchase. The modification is identified as either purchased or internally generated software. Use the same thresholds applied to purchased software and internally developed software to evaluate if the modification is capitalized.

A software modification is capitalized if it meets the $1 million capitalization threshold requirement and any of the following apply:

• Functionality of the computer software increased — performs tasks it was previously incapable of performing
• Efficiency of the computer software increased — the level of service provided increased without performing additional tasks
• Extended the estimated useful life of the software

Cloud Computing Computer Software

Cloud computing installment agreements that are greater than one year are considered intangible capital assets if the total cost meets or exceeds the $100,000 threshold for purchased software (for example — a five-year licensing agreement to use the cloud service software).

A monthly subscription or fee is NOT considered an installment agreement and is expensed.

SBITA

Under GASB 96, a subscription-based information technology arrangement (SBITA) is a contract that recognizes a right-to-use (RTU) subscription asset and a corresponding subscription liability. 

• The subscription asset is NOT recorded in SPA. 
• The subscription asset is recorded in Capital Asset Note Submission System (CANSS) as an RTU asset.
• The subscription liability is recorded in Long-Term Liability Note (LTLN) and the related lease debt service is reported in Lease Note Submission System (LNSS).  

For more information see, Leases/SBITAs.

Other Intangible Capital Assets

Other Intangible Capital Assets Definition

Other intangible capital assets include purchased or internally generated patents, copyrights and trademarks. These types of intangible assets should be classified as capital assets if they are acquired or developed for the specific purpose of improving or adding service capacity to operations. To qualify for capitalization, the other intangible capital asset must also have an estimated useful life of one year or greater.

• A patent is a set of exclusive rights granted by a state or national government to an inventor or an assignee for a limited period of time in exchange for a public disclosure of an invention.
• A copyright is an exclusive right granted to the owner of a creative work such as a book, movie, photograph, design, computer software or architecture. These rights include the right to make copies, authorized others to make copies, sell and market the work, and perform the work.
• A trademark is a distinctive sign or indicator used by a business organization or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or services from those of other entities.

Amortization Methodology

The straight-line amortization method is used for Other Intangible Capital Assets.

Capitalization Threshold

The capitalization threshold for Other Intangible Capital Assets is $100,000.