Plant Fund Definition
This fund group is used to account for the acquisition, construction, and maintenance of the University's physical plant and to control the resulting assets. The fund type categories of the Plant Fund include
- Investment in Plant—All long-lived assets in the service of the University, except those of endowments and similar funds.
- Renewal and Replacement—Funds transferred to finance maintenance and replacement of physical assets.
- Retirement of Indebtedness—Interest and principal payments and other debt service charges relating to plant fund indebtedness.
- Unexpended—Unexpended resources from various sources used to finance the acquisition of plant assets.
Capitalization of Plant Fund Assets Definition
Physical property acquired by the University by purchase, gift, trade, or fabrication and which take the form of land, buildings, equipment, improvements to land or buildings, and other tangible items are capitalized.
Financial Services and Operations is responsible for all accounting and budget control functions for plant fund (construction) projects, and preparation of financial reports.
Plant assets are stated at actual or estimated cost at date of acquisition. Construction is capitalized as expended and reflected in net investment in plant. Current fund expenditures of $50,000 or greater for renewals and replacements are capitalized only to the extent that such expenditures represent long-term improvements to properties or significant alterations, renovations, or structural changes that increase the usefulness of the building, enhance its efficiency, or prolong its useful life.
Equipment is capitalized when the unit acquisition cost is $5,000 or more, the estimated useful life is one year or longer, and it has the capacity to function without the assistance of another item
Straight-line depreciation is used when determining the useful life of the following:
- Land Improvement and Infrastructure—20 years
- Buildings—40 years
- Computer Equipment—5 years
- Equipment—7 years
- Library Books—5 years
New building construction is capitalized by building components and grouped into three general components of a building.
- Building Shell (including construction and design costs)
- Building Services Systems (e.g., elevators, HVAC, plumbing system, heating and air-conditioning system)
- Fixed Equipment/Fixtures (e.g., sterilizers, casework, fume hoods)
The same depreciation methods are used at Michigan Tech for F&A purposes and financial statements. Beginning in FY01, upon occupation of new construction, component analysis is completed by the Facilities project engineer. The useful life of each component is as follows:
|Banner Code||Class||Useful Life||Salvage Value|
|BD||Building Shell||40 years||10%|
|BC||Building Service Systems||20 years||10%|
|BF||Fixed Equipment / Fixtures||10 years||10%|
During the design phase of the project, the architect must furnish the University with an estimate broken down into the major architectural, mechanical, electrical divisions, site, furnishings, equipment, and professional fees. The state-required contingencies are also included. This estimate is updated until the project is out to bid.
After bids come in, the responsible low bidder is chosen with a purchase order for the construction work. The contractor must provide a breakdown detail of all major divisions and subdivisions of the work. All of the contractor’s invoices include this breakdown. Any change order must be estimated by the contractor with details of all costs.
Throughout the construction project, the University has complete knowledge of all costs and changes, which are summarized to assure that the project remains within budget. The state’s expenditure reports are reconciled quarterly with the University financial statements.
Final determination of capitalization will be made by the controller, using the following guidelines:
- Capitalize all cost of new buildings including architect fees.
- Capitalize all original furnishing, fixtures and equipment that are not capitalized through the equipment inventory system maintained by the Property Office.
- Capitalize all site (including any demolition costs) and utility costs as part of the building cost.
Other construction: Capitalize items such as flag poles, basketball courts, water wells, etc.
Buildings and other construction are first accounted for as construction in progress. When the construction is at least 90% complete or the construction has been certified as substantially complete, the construction is removed from construction in progress and accounted for as buildings or other.
Purchase of Existing Buildings
Capitalize the purchase price plus acquisition costs. The fair market value of the land should be recorded as such and the value of the building should be the difference between the total cost less the amount capitalized as land.
Building improvements are significant alterations, renovations, or structural changes that meet or exceed $50,000 and increase the usefulness of the building, enhance its efficiency, or prolong its useful life.
Building improvements may include interior or exterior construction of a building or building systems, such as electrical or plumbing systems. They may also include the completion of interior or exterior appointments or finishes, so long as they are done as part of a significant alteration or renovation.
Categories of building improvements include alterations, renovations, and betterment.
- Alterations - A change in the internal arrangement or other physical characteristics of an existing asset so that it may be effectively used for a newly designated purpose.
- Renovations - The total or partial upgrading of a facility to higher standards of quality or efficiency than originally existed.
- Betterment, Renewal, Replacement - The overhaul or replacement of major constituent parts that have deteriorated because of the elements or usage. The deterioration has not been corrected through ongoing or required maintenance. An example would be replacement of old or broken windows with a new thermal variety.
Costs that neither significantly add to the permanent value of a property nor prolong its intended useful life are expensed. The types of plant costs are expensed include maintenance, preservation/restoration, and project costs below the capitalization threshold.
- Maintenance - Recurring work that is required to preserve or immediately restore a facility to such condition that it can be effectively used for its designed purpose. Maintenance includes work done to prevent damage to a facility.
- Preservation/Restoration - Maintaining special assets in, or returning them to a level of quality as close to the original as possible.
- Costs Below Capitalization Thresholds - Projects that do not total $50,000 or more.
Roads, walks, curbs, plant material, etc. Capitalize only site work in substantially new areas (undeveloped parts of campus) unless the work is part of a new building.
Steam, electricity, and water. Generally, only utilities being extended to new areas (undeveloped parts of campus) or to new buildings should be capitalized. Major alterations to existing utilities to accommodate a new building should also be capitalized.
All purchased property should be capitalized at purchase price plus acquisition costs. If existing buildings on the property will be utilized, the fair market value should be capitalized as buildings and the amount recorded as land would then be the difference between the total cost less the amount capitalized as buildings. If buildings need to be razed for the land to be used for the purpose for which it was purchased, the cost of razing should also be capitalized as land.
Equipment items to which the University obtains title will be capitalized into the "Equipment" account if the items have a unit cost (or fair market value, for gifts) of $5,000 or more and a life expectancy of one or more years. Included in the cost of an equipment item are any freight charges paid, insurance charges and duty charges, when assessed.
Equipment items which are permanently attached (fixed equipment) to and are an integral part of any building, such as exhaust fans, transformers, cranes, ventilation systems, etc., are not capitalized in the "Equipment" account, but rather in the "Buildings" account.
Equipment items purchased from restricted grants, and title to which is vested in organizations other than the University, are not capitalized in the University records, however, such acquisitions must be reported to the Property Office of the University for accountability purposes. Equipment items purchased from restricted grants where title is vested to the University are to be capitalized in the University records, including Fabricated Equipment.
Equipment items purchased by the current funds (General, Designated, Auxiliary Activities and Expendable Restricted) of the University are considered to be expenditures of the funds from which purchased. Such items are capitalized in the Plant Fund.
Equipment items which are constructed from components in any department of the University must be reported to the Property Office so the items can be identified in the property records.
Component and Replacement Parts
A component part is defined as any item which cannot stand alone and considered a permanently installed integral part or enhancement to an existing piece of equipment.
Capitalized: Components or parts which cost at least $5,000 and permanently increase the value or increase the useful life of MTU-owned capital equipment (equipment which is not fully depreciated) are capitalized. The component must either upgrade the capability of the equipment, or extend its useful life.
Components or parts which cost less than $5,000, but acquired in the same fiscal year as the capital equipment item, can be added to the total capital equipment cost.
Expensed: Components or parts costing less than $5,000 when the capital equipment item was purchased in a prior fiscal year are not capitalized.
Components or parts which were previously purchased as supplies in a prior fiscal year (not as capital or fabricated equipment) cannot be “made” into capital equipment by adding additional parts in order to bring it above the $5,000 threshold.
In general, a replacement part – where a worn-out component is replaced with a near identical one in order to allow a machine to continue functioning – is expensed.
The cost of services for repairing a piece of equipment is not added to the capital net book value.
For capital computer units individually costing less than $5,000, but more than $5,000 when combined together as a cluster (single asset), all of the following criteria must be met:
- The combined units are interconnected and work together to serve a specific purpose.
- The combined units of a cluster are physically located together, rather than distributed throughout a building (i.e. they are not located in separate offices or labs.
- A clear reason for the use and acquisition as a cluster exists.
- The intent of the combined units/nodes is to operate as a cluster for a minimum of five years (the current useful life of a computer).
Accounting for leases is based on the understanding that a lease which transfers substantially all the risks and rewards of ownership should be capitalized like any other owned fixed asset. Whether or not to record a lease as a capital lease or an operating lease is determined by meeting certain criteria. A lease is a capital lease if at the inception of the lease, one or more of the following criteria are met:
- The lease transfers ownership of the property to the lessee by the end of the lease term. If at the end of the lease, the lessee owns the property, the lessee in effect has bought property that needs to be recorded on their books at the inception of the lease.
The lease contains a bargain purchase option. Often, a lease will include a provision that allows the lessee to purchase the property at the end of the lease for significantly less than the estimated fair market value. In general, it is assumed that most lessees will exercise this option.
If the lease meets criteria A or B, the capital asset is depreciated over its useful life.
- The lease term is equal to 75% or more of the estimated economic life of the leased property. If you lease a piece of manufacturing equipment that historically needs to be replaced every six years, and the lease is for five years, the lease is capitalized as most of the risks and rewards of ownership have transferred to you.
The present value of the minimum lease payments equals or exceeds 90% of the fair market value of the leased property. If the present value of the minimum lease payments is reasonably close to the fair market value of the property at the inception of the lease, the property is effectively being purchased.
If the lease meets criteria number C or D, the capital asset is depreciated over the lease term.
If the lease does not meet any of the above criteria, the lessee does not record anything on the balance sheet, but recognizes rent expense as the lease payments are made in most circumstances.
If a new lease does meet one of the above criteria, the lessee needs to determine the cost of the asset and the corresponding liability that will be recorded on the books. The first step is to calculate the present value of the minimum lease payments. The lessee computes the present value of the minimum lease payments using their current bank borrowing rate unless the lessee learns the implicit rate computed by the lessor and that rate is lower than the lessee's current bank borrowing rate. Once this is complete, the present value amount is compared with the current fair market value and the lower of the two is recorded as the asset and the liability.
When a previously capitalized asset is used as a trade-in on the purchase of a new asset, the new asset is recorded in the appropriate physical properties account of the Plant Fund at the list price without trade-in and the old asset is removed from the books at its original cost or valuation.
Losses and/or gains on the disposition of assets traded in on other assets are not recognized nor is accumulated depreciation figured on assets traded in when determining the cost of a new asset acquired.
Discounts taken on cost of capital asset purchases are recognized as a reduction of the cost of the assets acquired.
If a property asset is sold for cash, with no trade-in being received, the asset sold is removed from the books and property records with no recognition of gain or loss on the sale. Cash proceeds revert to the fund which supported the original purchase.
Gifts of land, buildings, and/or equipment - gifts of items that would normally be capitalized if purchased or constructed by the University should be capitalized at the fair market value at the time of the gift.
Books acquired by the University Library, regardless of source or cost, are capitalized in the physical properties section of the Plant Fund. All dispositions must be reported on a periodic basis so the costs thereof can be removed from the records.
Mineral specimens acquired by the A.E. Seaman Museum, regardless of source or cost, are capitalized in the physical properties section of the Plant Fund. All dispositions must be reported on a periodic basis so the costs thereof can be removed from the records.