Financial Management of Property, Plant and Equipment

Policy Statement

The University requires that amounts expended for facilities and equipment (in excess of certain thresholds and whether purchased, constructed or leased) be capitalized, depreciated and periodically reviewed for impairment or possible write-off in accordance with Generally Accepted Accounting Principles (GAAP) and regulatory requirements.  The University also requires a physical inventory of certain assets every two years.

This policy provides guidance for the management and control of capital equipment either that is owned by the University, titled to the University, under the custody of the University, or for which the University is accountable to the federal government or other sponsors.  Capital equipment is an asset of the University that should be safeguarded and used for University programs and purposes.  

Reason for Policy

This policy exists to ensure adherence with Generally Accepted Accounting Principles (GAAP) and other regulatory requirements, to promote consistent accounting treatment across the University, and to ensure the operating results of University units are not misstated as a result of transactions unrecorded or recorded improperly.

Who Must Comply

All Harvard University schools, tubs, local units, Affiliate Institutions, Allied Institutions and University-wide Initiatives must comply.   In the event that this policy differs from that of a unit or sponsoring agency, the more restrictive policy will apply.

Procedures

  1. Use Oracle Fixed Assets as the system of record for property, plant and equipment.  All Harvard units must input and maintain PPE assets in Oracle Fixed Assets.

  2. Follow Harvard’s general rules for capitalization.
    1.  Only capitalize expenditures that meet all three of the criteria listed below, otherwise expense the amount in the year incurred:
      1. The item must be acquired for use in operations, and not for investment or sale. 
      2. The item must have a useful life of one year or more. 
      3. The amount must meet the following materiality thresholds:  generally, $100,000 in project costs for land and buildings (excluding any movable furnishings and equipment [MFE] costs) and $5,000 for furnishings and equipment.  See Appendix B for further detail.

    2. When building or fabricating assets, acquiring land, land improvements, buildings or equipment, all significant expenditures that are necessary to obtain and prepare the asset for its intended use are generally capitalized.  In addition, costs such as freight, insurance, installation, and assembly are capitalizable. The capitalization guidelines differ for each type of asset (see Appendix B)

    3. Repair and maintenance expenses associated with recurring work required to preserve or immediately restore a facility to such condition that it can be effectively used for its designated purposes should be expensed as incurred.  For additional guidance, see the “Repairs and maintenance” section of Appendix B.

    4. Costs for assets are accumulated through accounts payable transactions (HCOM, Web Reimbursement and Corporate Card) or internal billing charges. The use of P-Cards for asset transactions is not recommended as they are outside of the Accounts Payable system. 

  3. Understand specific rules for capital equipment.
    1. Code capitalizable equipment, furnishings and vehicles costing greater than $5,000 to object codes 6800-6869.  Individual items (that are not part of multi-component equipment) costing less than $5,000, even if the total purchase exceeds $5,000, should not be capitalized but expensed as incurred; use object codes 6710-6789 to capture these acquisitions.  Local policies might require tracking of equipment below the capitalization threshold; for further guidance, contact your tub financial office or equipment manager. 

    2. Multi-component equipment comprises individual pieces of equipment or materials that are connected together to operate as a system (e.g., a CPU, computer monitor, keyboard, mouse, etc.).  Component parts of one piece of equipment must be accumulated and capitalized if, in total, the cost is greater than $5,000.  In addition, costs such as freight, insurance, installation, and assembly are capitalizable. See “Equipment” in Appendix B for additional information.
    3. A fabrication is equipment constructed from combining parts or materials into one identifiable unit.  Aggregate fabrication costs for constructed equipment (Work in Progress) by project in object codes 6811 and 6812.  Once completed, tubs can place the assets into service by notifying Financial Accounting and Reporting (FAR).  See “Equipment Work in Progress (WIP)” in Appendix B for additional information.

    4. Title transfers: if title to equipment transfers to Harvard with an incoming faculty member or as the result of a donation, contact FAR for guidance on accounting.  

    5. Equipment to which Harvard does not hold title:
      1. Government-titled equipment and government-furnished property: under some sponsored awards, the government keeps the title to certain equipment.  In cases where the government furnishes the equipment at no cost, Harvard does not own the equipment but must still record it for tracking purposes, and the assets should be recorded in Oracle Fixed Assets at zero value. Additional procedures apply in such cases; see Appendix A for more information.
      2. Faculty transfers:  occasionally, an incoming faculty member brings equipment to Harvard but does not transfer title to the equipment to Harvard.  In these cases, Harvard does not own the equipment but must still record it for tracking purposes, and the assets should be recorded in Oracle Fixed Assets at a net book value of zero. 

    6. Works of art, collections and books:
      1. Items purchased as part of a collection or held for exhibit should be expensed and not recorded as a capital asset.  In accordance with FASB guidelines, Harvard does not capitalize its collections, including works of art, historical treasures, and books.
      2. Works of art that are purchased for the sole purpose of furnishing an office should following the policies for purchasing office furniture and fixtures.  Purchases under $5,000 should be expensed and those over $5,000 should be capitalized.

  4. Place capital building assets in service. 
    1. If any one of the following conditions is met, a building project is considered complete and must be placed in service:
      1. A Certificate of Occupancy or Temporary Certificate of Occupancy has been issued.
      2. If a Certificate of Occupancy or Temporary Certificate of Occupancy is not necessary for the project, a Certificate of Substantial Completion has been received from the contractor, or municipal sign-offs on construction permits have been received that allow use of the space/asset.  

    2. Closing a project: When a project is complete, the CAPS system notifies FAR to place the asset into service.    All of the costs aggregated in the CIP object codes are placed in service either as a Facility Buildings PIS or Movable Furnishings & Equipment (MFE).  When placing a CIP project into service, FAR will use the date the Certificate of Occupancy was issued.  If no certificate is needed, FAR will use the date of the close request for the placed in service date.
      1. If the project is 100% complete, the CIP activity is closed.  No additional spending may be charged to the project and any remaining costs are expensed as incurred.  Depreciation starts in the month the asset is placed in service and debt service begins.
      2. If the project is not 100% completed (previously considered a partial close) but meets one of the two criteria in A above, the CIP activity will remain open and costs will continue to accrue to the CIP object codes until the project is 100% completed.  Depreciation starts in the month these costs are placed into service and debt service begins.  Upon final completion of the project, the additional accrued costs are placed in service, and the activity is closed.  The placed in service date for these additional costs will be the date the original costs were placed in service.  Depreciation will automatically catch up for the difference between the original placed in service date and the final close date. 

    3. Phased projects: Projects that have separate and distinct phases that are part of one overall project may be treated as separate CIP activities for accounting purposes.  These phases are independent of one another, i.e., one phase can be placed in service before other phases begin or end).  In phased projects, each phase can have a separate placed in service date. Once completed phases are placed into service, depreciation and debt service begin on those respective phases. 

  5. Place equipment assets in service.
    1. An equipment fabrication project should be placed in service when: 1) the asset has been sufficiently developed and is available for use or is producing science; AND 2) the aggregate project costs meet the capitalization threshold.  

    2. Tubs should review their WIPs for activity at least every 6 months.  Projects that haven’t incurred charges after 6 months should be placed into service or written off if impaired or abandoned.  The work-in-progress period for sponsor-funded equipment is generally set by the scope of the sponsored agreement and may exceed 6 months.  Exceptions for non-sponsored fabrications should be rare, but if there is a compelling reason to extend the WIP period, please notify FAR for review.  

    3. For non-debt financed WIP, tubs must notify FAR when projects are ready to be placed into service. For debt financed WIP, tubs must notify the Office of Treasury Management (OTM) when projects are ready to be placed into service.  For additional guidance, see the Equipment Work in Progress section of Appendix B.

  6. Depreciate assets.  Harvard begins depreciation in the month the asset was purchased and placed into service OR the date a project (CIP or WIP) is closed and placed into service.  A full month of depreciation will be recorded in the first month.  Depreciation is recorded each month as a part of the month end close process. 
    1. Harvard requires the use of standard useful lives for similar assets, which are detailed in Appendix C.
    2. Tubs may record depreciation expense to the tub-level org, to department orgs, or a combination of the two.

  7. Inventory and manage assets. Upon receipt of capital equipment, schools must track the location of equipment at Harvard or at an off-campus site.  Schools should maintain records of equipment that allow the equipment to be located in a reasonable amount of time.

    1. The University requires a full physical inventory on all equipment, sponsored and non-sponsored, that has an original purchase price over $25,000 every two years.  Equipment includes all equipment assets over $25,000 regardless of how acquired (fabrication or purchase).  It is the responsibility of the tubs to perform these inventories and maintain all inventory and equipment records within Oracle Fixed Assets. 

    2. In addition, federal regulations require any tub with sponsored capital equipment to perform a full physical inventory of the sponsored equipment every two years to verify both the accuracy of equipment records and the existence and current use of these assets.  Upon receipt of sponsored capital equipment, schools must maintain records that include a description of the equipment, a serial number or other identification number, the source of funding, who holds title,  the acquisition date and cost, the location, use and condition status, and any ultimate disposition data.  

    3. Individual MFE equipment assets costing over $25,000 that are purchased as part of a capital project require special treatment.  Equipment managers are required to identify these assets and create a separate asset in Oracle Fixed Assets for the purposes of tracking and inventory.

    4. Tagging equipment: to identify equipment effectively, schools must affix uniquely numbered identification tags to equipment.  Tags and tag numbers facilitate the schools' equipment inventory control by enabling individuals to match pieces of equipment to their associated information, as required by federal regulations.  If an item cannot be physically tagged (e.g., too small, temperature-sensitive, or in cases where the tag would interfere with use or operation), schools must keep a property record/tag and make it available for review upon request.

  8. Correct General Ledger coding properly:  tubs must use the AP Adjustment form to change the General Ledger coding for an asset (whether capital or equipment).  Do not use the journal entry process to change General Ledger coding as this breaks the audit trail in Oracle Fixed Assets.

  9. Account for disposals, dispositions, and impairments: When an asset has been sold, demolished, is no longer in service or its value has been permanently impaired, any remaining value of the asset(net of accumulated depreciation) less any salvage value must be written off or written down to its net realizable value.  This involves removing or writing down the asset in Oracle Fixed Assets.  The corresponding adjustment to accumulated depreciation and any realized loss will be recorded during the monthly Oracle Fixed Asset closing process.    Additionally, when assets are sold, FAR must manually transfer any remaining plant equity to operating net assets.  Any outstanding loans on debt-financed assets that are being written off must be settled.  For equipment, tubs should record disposals or impairments at time of inventory or when information about the state of equipment becomes known. For all other capital assets (buildings and capital leases), tubs must recognize impairments as they become known and record them in Oracle Fixed Assets by the quarter close of the quarter identified. 

    1. Impairment: If assets have been permanently impaired, whether by damage, neglect, obsolescence or a change in the economic landscape, such that future expected cash flows from the assets are less than their net book value on the balance sheet, the assets must be written down to their estimated remaining value or, in some cases, written off entirely.  This write-down or write-off is accounted for in the same manner described in the “Sales of assets” and “Demolition” sections of this document.  For additional guidance, see Appendix C, “Detailed Guidance on Disposals and Impairments.”

    2. Timing of recording:  account for disposals due to sale or demolition and transfers of assets in the month of the disposal or transfer, but not later than the quarter end. 

    3. Dispositions: remove disposals from inventory: items that have been written off or are no longer in use must also be revoked from inventory.  Disposals of sponsored equipment are often subject to sponsor-specific disposition restrictions and cannot be disposed without prior approval; see Appendix A for more information.

    4. Trade-ins: In some cases, a Tub may trade-in an existing piece of equipment for a new asset.  This results in the existing asset being written-off in Oracle Assets.  In order to reflect the actual value for the new asset (Payment + Trade-in Value) in Oracle Assets, the Tub must notify FAR so a journal entry can be processed to reclassify the loss on the disposal to the newly acquired asset.

  10. Comply with sponsored requirements.  Equipment purchased or fabricated with sponsored funding is often subject to additional requirements.  For a summary of procedures relating to sponsored equipment, see Appendix A.

Responsibilities and Contacts

Financial deans or equivalent tub financial officers are responsible for ensuring that local units abide by this policy and the accompanying procedures. Tub finance offices are responsible for implementing the policy and procedures, principally by ensuring that University assets are appropriately accounted for, valued and safeguarded.

Financial Accounting and Reporting (FAR), within the Office of the Controller, is responsible for maintaining the policy and for answering questions regarding the policy.  Facilities and equipment accounting is part of the General Accounting group in FAR.

Capital Project Services (CAPS) is responsible for supporting schools and units engaged in capital spending on facilities and equipment.  CAPS provides, for example, support for construction coordination, project approval, procurement initiatives and construction best practices.

Office for Sponsored Programs (OSP) is responsible for supporting University departments to ensure that sponsored funds are being used appropriately and in compliance with the sponsoring agency’s rules and regulations. OSP is also responsible for responding to requests for reports and information from sponsors, auditors and other parties.  OSP, on behalf of the schools, submits federal reports to the government including DoD form 1662 and NASA form 1018.

Risk Management and Audit Services (RMAS) is responsible for supporting University departments to ensure the appropriate safeguarding of University assets, integrity of financial transactions and compliance with policies, laws and regulations.

Definitions 

Acquisition Cost: is the cost of an asset including the cost to ready the asset for its intended use.  The acquisition cost of capital equipment includes the purchase price of the item, the cost of any modifications, attachments, accessories, or auxiliary apparatus necessary to make it usable for purpose for which it is required, costs necessary to obtain and prepare the asset for use, shipping costs, taxes, protective in transit insurance, and installation.  The acquisition cost of donated assets is the fair market value at the time of donation.   Acquisition cost does not include repairs, service contracts, or supplemental warranties.

Capital Equipment:  moveable, tangible personal property with a useful life of one  year or more and a per-unit acquisition cost of $5,000 or more.  Capital equipment includes scientific equipment, fabrications, software, and donated assets. 

Collections: defined by the FASB as works of art, historical and other treasures, or similar assets that meet all of the following criteria: (a) They are held for public exhibition, education, or research in furtherance of public service rather than financial gain, (b) they are protected, kept unencumbered, cared for, and preserved, and (c) They are subject to an organizational policy that requires the proceeds of items that are sold to be used to acquire other items for collections.

Componentized buildings: in research buildings, asset components are grouped and depreciated in separate categories with differing useful lives.  These components include the shell, roof, finishes, fixed equipment and services. 

Fabricated Equipment:  equipment constructed or developed by combining parts and/or materials into one identifiable unit.  The aggregate cost of all parts in the completed unit must meet the $5,000 capital equipment threshold and must have a useful life of one year or more.  Fabricated equipment is also known as “work in progress,” “WIP,” or a “fabrication.” 

Facilities and equipment: land, buildings, furniture, fixtures, machinery, equipment, vehicles, software (including internally developed software), and capital leases.  Facilities and equipment are also referred to as fixed assets, capital expenditures, or property, plant and equipment.

Fixed equipment: one of the asset categories of componentized buildings.  As the name suggests, fixed equipment includes assets that are bolted to and part of the operations of a building (i.e. elevators, coolers, boilers, etc.).  This is different from moveable furnishings and equipment (MFE), defined below.

Government-Furnished Property (GFP):  equipment purchased by the government and subsequently delivered to or made available to the University and where the government retains title.

Government-Titled Equipment:  equipment purchased by Harvard with federal funds and titled to the federal government.

Incurred: an expense is incurred when goods are received by or services are provided to the University.

Moveable furnishings and equipment (MFE): a type of equipment that is usually incorporated into a construction or renovation project, such as moveable walls, audio-visual equipment, etc.  While MFE follows the capitalization thresholds for equipment, CAPS records MFE in special object CIP codes during the capital project.  After the project is complete, MFE is moved out of the CIP object codes to regular equipment asset object codes.

Upgrades: (also known as betterments) capitalized additions to an item of capital equipment that adds new or additional functionality and extends the useful life by one year or more.  Replacement parts or repairs are not considered upgrades. 

Related Resources

 Accounting for Internally-Developed Software Policy

CAPS information, including forms, policies and procedures

Internal Transfers Policy

Accounting for Leases Policy

OSP Academic Service Centers Policy

OSP Fabrication Project Request Form

“Notification of Completion of Capital Equipment Fabrication or Debt-Financed Purchase” Form

OTM website and Loan Term Calculator

Revision History

7/1/2014: Updated format, updated procedures for new Oracle Fixed Asset system, changed to monthly depreciation charges from annual, required tubs inventory all assets with an original value of $25K or more every two years, recommendation to review WIP/fabrications at least every six months added, full list of federally-required equipment records added.

Appendices

Appendix A: Summary of Policy for Capital Equipment in Schools with Sponsored Research

Appendix B: Detailed Guidance on Capitalizing vs. Expensing Expenditures

Appendix C: Detailed Guidance on Depreciating Facilities and Equipment

Appendix D: Detailed Guidance on Disposals and Impairments

Appendix E: Detailed Guidance on Facilities and Equipment Funding

See also: Policy, Accounting