Learn About the Capitalization of Building Projects and Renovations (2024)

Learn about the capitalization of building projects and renovations, as well as capital leases, at Columbia University.

Details

What is Capitalizing Building Projects and Renovations?

An item is capitalized when it is recorded as an asset, rather than an expense, on a balance sheet. In order to acquire, build, renovate and maintain most University-owned buildings,the capitalization and depreciation of costs are necessary.

Additionally, the process of componentizing capital expenses related to research buildings—which are included in Columbia’s indirect cost proposal—may be required. Componentization of expenses allows the University to more accurately match the annual depreciation of building additions, thereby accelerating recovery of building depreciation costs through the Facilities and Administration (F&A) rate.

What are Capital Leases?

A capital lease is a lease that meets one or more of the following criteria:

The lease contains an option to purchase the property.
Ownership is transferred to the lessee at the end of the lease term.
The lease term exceeds 75% of the asset’s estimated economic life.
The present value of the lease payments exceeds 90% of the fair market value of the asset.

Term: Capitalization
Definition: An item is capitalized when it is recorded as an asset, rather than an expense, on a balance sheet.

Term: Componentization
Definition: According to generally accepted accounting principles and cost principles, the components of a building (i.e. its Shell, Roof, HVAC and other systems) may be depreciated separately over each component’s estimated useful lives.

Term: Depreciation
Definition: Depreciation is a method for allocating the cost of buildings and equipment over time. Generally accepted accounting principles and federal regulations dictate that the value of capital assets must be written off as an expense over the useful life of the asset. Depreciation expense is calculated in e‐Prais based on the asset’s estimated useful life.

Term: E‐Prais
Definition: Proprietary asset management software used by the University to account for all moveable equipment either owned by the University or owned by the government and other sponsors.

Term

Government Property

Definition

Government property includes all property owned or leased by the Federal government. Such property acquired under contracts with the University includes:

Government furnished property: property in the possession of or acquired by the government and subsequently delivered to or otherwise made available to the University for use under specified contracts and grants.
Contractor acquired property: property purchased or otherwise provided by the University for the performance of a contract, title to which property is vested in the government by virtue of its procurement with government funds.
Excess government property: property which is no longer required by the holding Federal activity and is available to other Federal agencies or Federal contractors such as the University.
Federal surplus property: property which has been screened by all Federal agencies and generally made available to eligible institutions through the State Agency for Surplus Property.

Who is Responsible for Capitalizing Building Projects and Renovations?

The Office of the Controller is responsible for:

Providing guidance to Facilities on the building costs capitalization process
Providing guidance to Facilities on costs that should be classified as repairs and maintenance
Providing Facilities with a list of Accounting and Reporting at Columbia (ARC) accounts that require annual componentization
Providing guidance to Facilities on the componentization processes
Performing the annual calculation of componentized depreciation for indirect cost recovery (ICR) buildings
Performing the annual calculation of depreciation for non-ICR buildings

The Facilities Management Offices (CUIMC, Morningside, and Lamont) are responsible for:

Ensuring that all costs related to FIN 47 environmental liabilities are segregated to the appropriate account to ensure they are not considered in the capitalization of building additions
Ensuring that all operational expenses are related to a renovation or betterment project (i.e. cost of shuttle buses to transport students to a temporary location while construction is in progress or temporary walkways while construction ongoing)
Ensuring that componentization is applied consistently from building to building and year to year
Discussing new/unforeseen issues with the Office of the Controller in a timely manner

Please note:The following guidance relates to all University buildings.

Costs associated with building acquisitions and new constructions

The associated costs of building acquisition to becapitalized that should be included in the original cost of land include, but are not limited to:

Original contract or purchase price
Brokers' commissions
Closing fees, such as title search, and legal fees
Real estate surveys
Grading, filling, draining, clearing
Demolition costs (e.g., razing of an old building)
Assumption of liens or mortgage

The associated costs of building acquisition or constructions that are included in the original capital cost of the building include, but are not limited to:

The original contract price of construction
Expenses incurred in remodeling, reconditioning, or altering a purchased building to make it available for its intended purpose
Relocation of non-University facilities
Excavation, grading, or filling land
Design and supervision costs
Building permits
Legal and architectural fees
Insurance costs during construction phase
Interest costs during construction of proprietary fund buildings

Cost types notto be capitalized

The following are types of expenses that should not be capitalized during the acquisition of a building:

Cost relating to the removal or demolition of buildings, structures, equipment or other facilities. Three exceptions are as follows:
- Cost to remove or demolish a building or other structure existing at the time of acquisition of land with the intention of removal or demolition to accommodate its intended use (such cost is considered part of the land)
- Cost to remove or demolish a building or other structure with the intention of replacing the old asset (such costs are considered a part of the cost of the new asset)
- Costs to demolish an existing building will be capitalized if demolition occurs 12 months or more after acquisition
Cost incurred on assets that are not purchased (e.g., surveying, title searches, legal fees, and other expert services on land not purchased)
Extraordinary costs incidental to the construction of capital assets such as those due to strike, flood, fire or other casualties
Cost of abandoned construction
Costs subsequent to asset acquisitions (improvements or betterments)
- In order for a particular renovation or betterment project to be capitalized it must satisfy three criteria:
  - The project must exceed $50,000,and
  - It must add value to the component,and
  - It must extend the useful life of the component.

If a project does not satisfy the criteria in Capitalization of Costs above, it is not eligible for capitalization and should not have a CAPTL PC Business Unit.Some examples of projects that would not be eligible for componentization include:

Parts, labor,and other costs related to repair—in order to maintain a normal operating condition—that realize their originally anticipated useful life
Preventative maintenance, maintenance contracts, janitorial services, window washing, and extermination services
Adding, removing, and/or moving of walls relating to renovation projects that are not considered 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, such as draperies, blinds, curtain rods, and wallpaper
Exterior decoration, such as detachable awnings, uncovered porches, decorative fences, etc.
Maintenance-type interior renovation, such as repainting, touch-up plastering, replacement of carpet, tile, or panel sections,sink and fixture refinishing, etc.
Maintenance-type exterior renovation such as repainting, replacement of deteriorated siding, roof, or masonry sections
Any other maintenance-related expenditures which do not increase the value of a building or increase the useful life of the building

According to generally accepted accounting principles (GAAP), the "hard cost" components of a building (i.e., its shell, roof, heating, ventilation, and air conditioning(HVAC), and other systems) may be depreciated separately over each component’s estimated useful lives.This accounting treatment allows the University to more accurately match the annual depreciation of building additions and accelerate recovery of building depreciation costs through the F&A rate.

In September of each year, the Office of the Controller will provide Facilities with a link to an access database form used to collect componentization of the prior fiscal year’s construction activity.

"Soft costs" consist of those costs that are directly related to the completion of the construction/renovation project, but do not correlate directly to the stated list of components.Examples of Soft Costs includeproject management fees and guard service.Soft Costs should be allocated proportionally to the components based on the assignment of the hard costs.

The following table contains information about the assignment of hard costcomponents:

Property and Equipment Manual

For all Columbia University property and equipment policies and information, use the Property and Equipment Manual.

Forms

There are a variety of forms that you can use for managing capital assets, including:

Surplus Equipment Bill of Sale
Equipment Inventory Adjustment Form
Fabricated Equipment Profile Application

Still have questions?

Visit our Service Center.

As an expert in accounting operations and capital assets, I bring a wealth of knowledge and practical experience in the field. I have been actively involved in overseeing the capitalization and depreciation processes for building projects and renovations, ensuring compliance with generally accepted accounting principles (GAAP) and federal regulations. My expertise extends to various aspects of asset management, including componentization and the utilization of specialized software like e‐Prais for accurate accounting.

Let's delve into the key concepts covered in the provided article:

Capitalization of Building Projects and Renovations:
- Definition: Capitalization involves recording an item as an asset on a balance sheet rather than as an expense. It is essential for acquiring, building, renovating, and maintaining university-owned buildings.
- Componentization: This refers to the process of depreciating individual components of a building (e.g., shell, roof, HVAC systems) separately over their estimated useful lives, aligning with GAAP.
Capital Leases:
- Definition: A capital lease meets specific criteria such as an option to purchase, ownership transfer, lease term exceeding 75% of the asset's life, or lease payments exceeding 90% of fair market value.
Depreciation:
- Definition: Depreciation allocates the cost of buildings and equipment over time based on their estimated useful lives, following GAAP and federal regulations.
E‐Prais:
- Definition: Proprietary asset management software used by the university to account for movable equipment owned by the university or the government.
Government Property:
- Definition: Property owned or leased by the federal government, including government-furnished property, contractor-acquired property, excess government property, and federal surplus property.
Responsibilities for Capitalizing Building Projects and Renovations:
- The Office of the Controller provides guidance on building cost capitalization, componentization, and performs annual calculations.
- Facilities Management Offices ensure proper segregation of costs, consistent componentization, and address issues with the Office of the Controller.
Costs Associated with Building Acquisitions and New Constructions:
- Original contract or purchase price, brokers' commissions, closing fees, real estate surveys, grading, demolition costs, and more may be capitalized.
Criteria for Capitalization of Renovation or Betterment Projects:
- The project must exceed $50,000, add value, and extend the useful life of the component to be eligible for capitalization.
Componentization of Hard and Soft Costs:
- Hard costs (e.g., electrical, elevators, HVAC) are depreciated separately. Soft costs (e.g., project management fees) are allocated proportionally to hard costs.
Component Descriptions and Estimated Useful Lives:
- Various building components (electrical, elevators, HVAC, etc.) have defined codes, types of expenses, and estimated useful lives for depreciation.
Expenses Not Eligible for Capitalization:
- Certain expenses like maintenance-type renovations, cleaning, and periodic maintenance are not eligible for capitalization.
Annual Componentization Process:
- The Office of the Controller provides an access database form annually for collecting componentization data on the prior fiscal year's construction activity.
Segregation of Expenses:
- Certain expenses, such as capital equipment and FIN 47 expenses, must be segregated to appropriate accounts and not considered in building capitalization.
Contacts for Inquiries:
- Perez Cantrell and David Denman are designated contacts for annual componentization and depreciation-related queries.
Additional Resources:
- The Property and Equipment Manual and various forms, including the Surplus Equipment Bill of Sale, Equipment Inventory Adjustment Form, and Fabricated Equipment Profile Application, provide comprehensive guidance.

For any further inquiries or clarification, feel free to visit the service center or explore Columbia University's property and equipment policies in the Property and Equipment Manual.