5.3. ERMUSR 01-13-2004 - Laserfiche WebLink

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For financial statement purposes, the straight-line method will be used to calculate depreciation for each capital asset recorded. Under the straight-line depreciation method, the basis of the asset is written off evenly over the useful life of the asset. The same amount of depreciation is taken each year. In general, the amount of annual depreciation is determined by dividing an asset's depreciable cost by its estimated life. The total amount depreciated can never exceed the asset's historic cost less salvage value. At the end of the asset's estimated life, the salvage value will remain. Improvements vs. Repairs/maintenance A significant issue when recording capital assets is the question of when is an expenditure capitalized as an improvement versus recorded as repairs or maintenance expense. Generally, the driving factors behind capitalizing cost are those related to significantly extending the useful life, increasing capacity, or improving the efficiency of capital assets. Capital asset improvement costs should be capitalized if: 1. The costs exceed the capitalization thresholds, and 2. One of the following criteria is met: a) The value of the asset or estimated life is increased by 25% of the original cost or life period b) The cost results in an increase in the capacity of the asset, or c) The efficiency of the asset is increased by more than 10% Otherwise, the cost should be recorded as a repair and maintenance expense within the appropriate expense function. The criteria are meant as a matter of policy and to be applied as guidance, not absolutes. It is likely that any of the above parameters could be adjusted based on the professional judgment of a qualified individual making the decision of whether to capitalize or expense a given cost. Determinations must be made on a case by case basis. Capital Asset Definitions and Categories Land/Land Improvements Land is the surface or crust of the earth, which can be used to support structures, and may be used to grow crops, grass, shrubs, and trees. Land is characterized as having an unlimited life (indefinite). Land improvements consist of betterments, site preparation, and site improvements that ready land for its intended use. The cost associated with land improvements is added to the cost of the land. 4