Real Property Capital Assets
Policy Number: 142
Capitalization of real property
- Date Reviewed:
- March 2021
- Responsible Office:
- Finance and Business Services
- Responsible Executive:
- Senior Vice President, Finance and Business Services, and Chief Financial Officer
I. POLICY AND GENERAL STATEMENT
The University of Texas Health Science Center at Houston ("university") capitalizes real property that is purchased, constructed, or donated with an estimated life of greater than one year and that meets or exceeds the Texas Comptroller of Public Accounts’ established capitalization thresholds. The following standard capitalization thresholds are used for real property:
Class of Asset Threshold
|Land / land improvements||Capitalize All|
|Buildings / building improvements||$100,000|
|Facilities and other improvements||$100,000|
Requests for new construction or renovation are submitted to Facilities, Planning & Engineering Project Management. Project Management analyzes the scope of work and prepares an estimate of cost. At this point, a determination is made by Facilities, Planning & Engineering Project Management and Facilities, Planning & Engineering Finance whether the project meets the capitalization threshold for building improvements and advises accordingly.
A. Determining Capital Improvements versus Maintenance and Operation Expenses
Capital improvements should be distinguished from ordinary repairs. Ordinary repairs are expenses that maintain the existing asset in normal operating condition and should be expensed immediately. Ordinary repairs are recurring in nature and are normally small relative to the value of the asset; they do not materially add to the use value of the asset, and do not substantially extend its operational life. Examples of ordinary repairs include replacing minor parts, such as filters and other parts that should be replaced regularly, janitorial and utility services, and care of grounds.
For construction of new buildings and major improvements the amounts to be capitalized include (1) the cost of the original contract price of construction; (2) professional fees and services (e.g. architect and engineer fees); and (3) other costs incurred to place the asset into operation.
In addition to the net invoice price, the cost of a capital asset may include capitalized interest and ancillary charges necessary to place the asset into its intended location and condition for use. Ancillary charges include costs that are directly attributable to asset acquisition, such as freight and transportation charges, site preparation costs, and professional fees.
The value of the land should include land acquisition costs plus improvements such as site preparation and improvements (other than buildings) that ready the land for its intended use.
For building improvements to be capitalized, they must be part of a major repair or rehabilitation project that materially extends the useful life of the building and/or increases its value.
Replacements are substitutions of a part of an asset for another. For a replacement to be considered capital, it must be of significantly improved quality and higher value than the old item (e.g., replacement of an old shingle roof with a modern fireproof tile roof). Replacements or restorations of an item to its original utility level are not capitalized (e.g., replacing an old carpet with a new one).
At least annually, Facilities, Planning and Engineering reviews the list of completed jobs to ensure all job costs, including design costs, were properly classified to correct expense accounts. Any job costs not properly classified will be corrected in the financial management system.
B. Tracking Capitalization Costs
Facilities Planning and Engineering tracks the capitalized account cost(s) of property improvements and transfers any cost determined not to fall within the guidelines of this policy to a non-capital code to reflect correctly the cost as "Repair and Maintenance." At the close of each fiscal year, Facilities, Planning and Engineering and Capital Assets Management produce reports of annual property improvement expenditures. These reports are used as support for creating Annual Financial Report schedules that reflect the changes in Investment in Plant for Land, Buildings, Facilities and Other Improvements, Infrastructure, and Construction In Progress.
For Capitalization Policies on Software and Equipment, please reference the CAM website and handbook.
- Capital Assets Management
- Facilities, Planning and Engineering