(Last Modified on May 1, 2017)

Capital Assets are required to be accounted for and reported in accordance with generally accepted accounting principles (GAAP).

This section provides guidance on accounting and reporting of Capital Assets in the institution’s general ledger and the Annual Financial Report (AFR), as well as providing information on standards used in the initial implementation of GASB Statements Nos. 34 and 35 along with ongoing compliance with new reporting requirements. Included are asset category definitions, capitalization thresholds, depreciation methodologies, and examples of expenditures for each class of assets. Additionally, guidelines for leasehold improvements, impaired assets, intangible assets and construction in progress are included.

(Last Modified on May 1, 2017)

A Capital Asset is a tangible or intangible item with the following characteristics:

• Expected useful life of more than one year
• Acquisition cost(s) equals or exceeds capitalization limit/threshold
• Not expected to be sold as part of normal business operation, i.e. Inventory.

Capital Assets may be acquired via purchase, donation, construction or transfer.

The University System of Georgia (USG) has invested in a broad range of capital assets that are used in system operations, which include:

1. Land and land improvements
2. Building and building improvements
3. Facilities and other improvements
4. Equipment ( machinery, furniture, vehicles)
5. Infrastructure
6. Construction in progress
7. Capitalized Collections (works of art and historical treasures)
8. Library Collections
9. Intangible Assets

• Software
• Other Intangible Assets

7.1.1 Capital Asset Classification

(Last Modified on May 1, 2017)

Assets purchased, constructed or donated that meet or exceed the University System’s established capitalization thresholds or minimum reporting requirements must be uniformly classified. *

Institutions will follow USG accounting standards for establishing the historical acquisition cost for each asset. Institutions will be allowed to substitute information for residual value and/or estimated life based on individual experience. Any substitutions must be substantiated and auditable. Residual values for equipment will be zero. Equipment is normally disposed of through the state where the value to the system and state is nominal.

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7.1.2 Capitalization Thresholds

(Last Modified on June 21, 2019)

Standard capitalization thresholds for capitalizing assets have been established for each asset category. All University System of Georgia entities are required to use these thresholds.

Class of Asset	Threshold
Land/land improvements	Capitalize All
Buildings/building improvements (including leased buildings)	$100,000
Facilities & other improvements (including leasehold improvements)	$100,000
Infrastructure (Major Systems, including leased infrastructure, if any) Infrastructure (Additions, including leases if any)	$1,000,000 $100,000
Equipment / Leased Equipment	$5,000
Library books/materials (collections)	Capitalize All
Works of art/historical treasures	Capitalize All
Intangible Assets   Software developed (or obtained for internal use)   Other Intangible Assets     Water Rights     Timber Rights     Easements     Patents     Trademarks         Copyrights	$1,000,000 $100,000

Note: Capital assets purchased with federal funds may be subject to different capitalization thresholds. Please refer to the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards to determine if different capital thresholds should be applied to assets in question.

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7.1.3 Capital Asset Acquisition Cost

(Last Modified on May 1, 2017)

Capital assets must be recorded and reported at their historical costs, which include the vendor’s invoice (plus the value of any trade-in), plus sales tax, initial installation cost (excluding in-house labor), modifications, attachments, accessories or apparatus necessary to make the asset usable and render it into service. Historical costs also include ancillary charges such as freight and transportation charges, site preparation costs and professional fees.

Capitalized interest, which is interest accrued during the construction period of a capital asset that has been financed, must be added to the cost value of the asset. This is most prominent with our Public Private Venture (PPV) program assets. Assets acquired with gifts and grants that are restricted by the donor or grantor for acquisition of those assets do not qualify for capitalization of interest.

Estimating historical cost– In some instances, the acquisition cost of property may not be available and some alternative basis must be used to record the capital asset. For instance, documentation may not have been available to determine the original cost of acquired or constructed property; also, it may be impossible or very time-consuming to reconstruct the actual cost of the property. In situations such as this, the original cost of the property may be estimated and used as the basis for capitalization. When estimates are used, documentation must be maintained to describe and support the estimation methods employed and the extent to which estimates were used. Insured values and current value estimates cannot be used for capital asset reporting purposes. Allowable estimation methods include using historical sources to determine the cost of similar assets at the time of acquisition and indexing where the historical cost of an asset is estimated by taking the current cost of a similar asset and dividing it by an index figure which adjusts for inflation.

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7.1.4 Capital Asset Donations

(Last Modified on May 1, 2017)

GASB Statement No. 33, Accounting and Financial Reporting for Non-Exchange Transactions, defines a donation as a voluntary non-exchange transaction entered into willingly by two or more parties. Both parties may be governments or one party may be a non-governmental entity, including an individual. Assets donated by parties outside the financial reporting institution should be reported at their fair market value plus ancillary charges, if any, as of the date of the donation.

See Section 7.1.9 for assets transferred from component units/cooperative organizations.

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7.1.5 Depreciating Capital Assets

(Last Modified on May 1, 2017)

Capital assets should be depreciated over their estimated useful lives unless they are inexhaustible. Please refer to Section 7.9, Works of Art and Historical Treasures for a definition of an inexhaustible asset.

All University System of Georgia institutions will use the straight-line depreciation method (historical cost less residual value, divided by useful life). Institutions will use the following-month convention for depreciation for indicating when the asset is placed into service.

Depreciation data should be calculated and recorded in the entity’s Capital ledger for each eligible asset. Depreciation expense and accumulated depreciation is calculated monthly through the Asset Management module and posted to the Capital ledger.

Depreciation for auxiliary services, including athletics, must be funded by a Renewals and Replacements (R&R) Reserve. The amount of R&R reserve recognized each year should be recorded in each auxiliary unit in an amount equal to depreciation expense charged on the auxiliary unit’s capital assets that are owned by the institution. For PPV leased assets, an R&R reserve will be maintained by a third party trustee.

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7.1.6 Residual Value

(Last Modified on May 1, 2017)

In order to calculate depreciation for an asset, the estimated residual value must be declared and deducted before depreciation can be calculated. The use of historical sales information becomes invaluable for determining the estimated residual value. Since the residual value of machinery and equipment is normally nominal for USG institutions, there will be no residual value considerations.

Residual value will be considered in depreciation for buildings, building improvements, facilities and other structures, and infrastructure. Residual value for buildings, building improvements, facilities and other structures, and infrastructure will be 10% of historical cost, unless the institution can justify another value. For leased assets, generally no residual value will be applied if a ground lease is in effect. See Section 7.11.2 (example 2).

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7.1.7 Sale of Capital Assets

(Last Modified on May 1, 2017)

A sale of a capital asset is a type of disposition whereby cash is involved. When as asset is sold to an entity outside of the State of Georgia reporting entity, a gain or loss must be recognized in the accounting records for the difference between the proceeds received from the sale of the capital asset and its net book value. If the asset that is sold has been fully depreciated, the net book value equals the salvage value, if any. No gain or loss would be recognized if cash exchanged equals the net book value of asset.

Example

An asset, which had a net book value of $ 3,000 (historical cost of $ 10,000 less $ 7,000 accumulated depreciation), was sold for $ 2,000, resulting in a loss on sale of asset of $ 1,000 ($ 2,000 minus $ 3,000).

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7.1.8 Disposal Other Disposition of Capital Assets

(Last Modified on May 1, 2017)

Disposals/other dispositions related to theft, loss or destruction of capital assets normally would not involve cash, but would result in recognition of a gain or loss. When the capital asset is removed from the accounting records for disposal or other disposition, a loss would be recognized equal to the net book value of the asset to removed. No loss is recognized if the asset is fully depreciated or has no residual value. If the asset in question has a residual value, the residual value is recognized as the loss if the asset is fully depreciated.

Refer to the Department of Administrative Services Georgia Surplus Property Manual for tracking and disposal instructions for State owned assets.

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7.1.9 Exchange of Capital Assets

(Last Modified on May 1, 2017)

An exchange is a reciprocal transfer between a government and another organization that results in the government acquiring capital assets by surrendering other capital assets. The transaction usually involves little or no monetary consideration as opposed to a trade-in.

Exchanges between organizations included in the State reporting entity should be recorded at the book value of the assets received whether the assets are similar or not.

Note: Both State organizations participating in the transfer must report the same book value and these amounts should be reported as Special Item Transfers on the Statement of Revenues, Expenses and Changes in Net Position. Therefore, when institutions participate in capital asset exchanges, they should contact USO-Fiscal Affairs to ensure symmetry in reporting between units within the USG and other State organizations.

Assets acquired by the exchange of assets between the USG system office/USG institution and an organization outside of the State reporting entity should be recorded based on the value of the asset surrendered, if available. Whether the assets are similar or dissimilar will determine if the book value or the fair value of the assets surrendered will be used to record the asset acquired.

Similar assets are assets that are of the same general type, that perform the same function, or that are employed in the same line of operation.

When recording an exchange of similar assets with an entity not included in the State reporting entity, State organizations must use a book value basis for the assets surrendered.

• When assets are exchanged and no monetary consideration is paid or received, the asset acquired is recorded at the book value of the asset surrendered.
• When monetary consideration is given as part of the exchange, the asset acquired is recorded at the sum of the cash paid plus the book value of the asset surrendered.

Dissimilar assets – When recording an exchange of dissimilar assets with an entity not included in the State’s reporting entity, State organizations must use a fair value basis for the assets surrendered.

• When assets are exchanged and no monetary consideration is paid or received, the asset acquired is recorded at the fair value of the asset surrendered.
• When monetary consideration is given as part of the exchange, the asset acquired is recorded at the sum of the cash paid plus the fair value of the asset surrendered.

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7.1.10 Capital Asset Impairments

(Last Modified on May 2, 2017)

GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries addresses capital asset impairments. An asset impairment is a significant, unexpected decline in the service utility of a capital asset. The provisions of GASB Statement No. 42 should also be applied when determining impairments of intangible assets. Institutions must evaluate Capital Assets annually for impairment.

Impairments are indicated when events or changes in circumstances suggest that the service utility of a capital asset may have significantly or unexpectedly declined. The determination of an impairment is a two-step process. First potential impairments must be identified and then testing for the impairment must be conducted.

1) Indicators of impairment include:

• Evidence of physical damage
• Enactment or approval of laws or regulations or other changes in environmental factors
• Technological changes or evidence of obsolescence
• Changes in the manner or duration of use of a Capital Asset
• Construction stoppage

When one or more of the above circumstances exist, the institution must test for impairment. Testing for the impairment must be conducted to determine if both of the following factors exist.

• The decline in service utility of the capital asset is so significant that the cost of restoring or maintaining the asset outweighs the benefits provided; and,
• The decline of service utility is unexpected and not part of the normal life cycle for the asset.

Note: A common indicator of impairment for internally generated intangible assets is development stoppage, such as stoppage of development of computer software due to a change in the priorities of management. Internally generated intangible assets impaired from development stoppage should be reported at the lower of carrying value or fair value. GASB Statement No. 51 adds “development stoppage” to the impairment indicators of GASB Statement No. 42.

After testing, if it is determined that a capital asset has been permanently impaired, the carrying value of the asset (value prior to impairment restoration costs) must be written down by the amount of the asset impairment loss if the impairment loss or insurance proceeds (if any) exceed $ 100,000.

Example: A building had a net book value of $ 750,000 at date of impairment event. The impairment loss calculation yields a restoration cost ratio (actual restoration/rebuilding costs divided by estimated current replacement costs) of 12% which equates to an asset impairment loss of $ 90,000 ($ 750,000 X .12). Insurance proceeds of $ 400,000 were received on this property. Even with an impairment loss of less than $ 100,000, this property would still meet the threshold for reporting the impairment loss because the insurance recovery exceeded $ 100,000.

Note: When insurance recoveries are involved it is quite possible that a gain could be realized when calculating the impairment.

For impaired capital assets that will remain in service, the method used to calculate the impairment loss should be based on the indicator of impairment as follows:

Indicator of Impairment	Method Used to Calculate Impairment Loss (*)
Physical Damage	Restoration Cost Approach
Change in Legal or Environmental Factors	Service Units Approach
Technological Changes or Obsolescence	Service Units Approach
Change in Manner or Duration of Use	Service Units Approach or Depreciated Replacement Cost Approach

(*) The methods used to calculate impairment losses are discussed in more detail in SAO’s Statewide Accounting Policy and Procedure Manual’s Section: Capital Assets, Subsection Impairments.

SAO requires each agency to report impairments; therefore, institutions must report any potential impairments to the system office within 20 days of discovery of impairment. Institution must also report results of impairment testing and inform as to any impairment loss/gain.

If capital assets are affected by one or more of the impairment indicators but do not meet both of the impairment tests, the capital asset’s useful life, salvage value and depreciation should be re-evaluated to determine if any changes should be made. Any changes made in these circumstances should be made prospectively.
An Impairment loss/gain must be reported as follows in the institution’s Annual Financial Report:

1. If the impairment event was unusual and infrequent, report the loss/gain as an Extraordinary Item, which is separately reported at the bottom of the Statement of Revenues, Expenses and Changes in Net Position (SRECNP).
2. If the impairment event was unusual or infrequent and within Management’s control, report the loss/gain as a Special Item, which is separately reported at the bottom of the SRECNP.
3. If the impairment event was neither unusual nor infrequent, report the loss/gain as an Operating Expense on the SRECNP.

As evidence that a Capital Asset impairment has been evaluated, institutions should complete the Capital Asset Impairment Questionnaire annually.

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7.1.11 Assets Held in Trust

(Last Modified on May 1, 2017)

Capital assets held by an institution on behalf of a non-state entity (such as art collections owned by families, estates and others) and that are under the temporary control of the agency should be accounted for in the institution’s accounting records. This includes assets owned by the federal government that have been loaned to an institution. Assets held in trust must be recorded using the appropriate acquisition and disposal methodology for such assets. Since the institution does not own these assets, the assets should be recorded at $ 0.00 cost.

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7.1.12 Controlled Assets

(Last Modified on May 1, 2017)

Controlled assets are assets of the university system that must be secured and tracked as inventory. Moveable personal property with an acquisition cost of $3,000 or more must be inventoried and tracked by units of the university system. All weapons (including firearms), regardless of value, must be maintained and tracked in the asset management system. In addition to controlled assets, an institution may inventory other assets it considers high risk or for management purposes. Controlled assets with an acquisition cost of less than $5,000 will not be capitalized or depreciated for general-purpose or external financial reporting purposes.

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7.1.13 Jointly Funded Capital Assets

(Last Modified on May 1, 2017)

Capital Assets paid for jointly by the state and other governmental entities should be capitalized by the entity responsible for future maintenance.

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(Last Modified on May 4, 2017)

Capital asset transactions, which are housed in the Asset Management module, effect two accounting ledgers: the Capital Ledger and the Actuals Ledger. When capital assets are acquired, they are added to the Asset Management module and accounting entries are created which update the respective accounting/ reporting ledgers. The discussion in this section will center on how capital asset transactions affect the Capital Ledger and the Actuals Ledger.

When a capital asset is acquired/purchased, a debit is made in the Capitals Ledger to an account ranging from 161XXX to 1682XX. The credit offset is normally to an expense offset account, liability account or gift of asset account depending on how the asset was obtained. If a current flow of operating resources were associated with the acquisition, the Actuals ledger would also be affected by the asset transaction.

Example: A building, with a 15-year asset life, was purchased with cash for $ 150,000. For example purposes only, there will be no residual value assigned to this asset. After 14 years, the building is sold for $ 15,000.

Journal Entries for these transactions would be as follows:

Actuals Ledger (Purchase of Building from current operating funds)
860100 Building and Building Improvements-Expense	150,000
Cash		150,000

Capital Ledger (Recording Capital Asset and Depreciation Expense)
162000 Building and Building Improvements-Asset	150,000
860100 Building and Building Improvements-Expense		150,000
890100 Depreciation Expense (Yearly amount)	10,000
162900 Accumulated Depreciation-Buildings		10,000

Actuals Ledger (Sale of Building)
Cash	15,000
493310 Salvage Sales Capital Assets		15,000

 

Capital Ledger (Retirement of Asset)
162900 Accumulated Depreciation-Buildings (10,000 X 14)	140,000
493300 Realized Gain/Loss-Retirement of Capital Asset (non-cash)	10,000
162000 Building and Building Improvements-Asset		150,000

Notes related to asset transactions of this nature:

For specific examples of capital lease transaction accounting, see section 7.11.2.

7.3.1 Land Definition

(Last Modified on May 1, 2017)

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).

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7.3.2 Land Improvement Definition

(Last Modified on May 1, 2017)

Land improvements consist of betterments, site preparation and site improvements (other than buildings) that ready land for its intended use. The costs associated with improvements to land are added to the cost of the land.

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7.3.3 Depreciation Methodology

(Last Modified on May 1, 2017)

Land and land improvements are inexhaustible assets and do not depreciate over time.

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7.3.4 Capitalization Threshold

(Last Modified on May 2, 2017)

All acquisitions of land and land improvements will be capitalized. Expenditures to be capitalized as land and land improvements should include:

• Original purchase price or fair market value at time of gift
• Commissions, such as brokers’ commissions
• Professional fees, such as title searches, architectural, legal engineering, appraisal, surveying, environmental assessments, etc.
• Land excavation, filling, grading, drainage, etc.
• Demolition of existing buildings and improvements, less salvage
• Removal, relocation, or reconstruction of property of others, such as railroad tracks, telephone lines, power lines, etc.
• Interest on mortgages accrued at date of purchase
• Accrued and unpaid taxes at date of purchase
• Other costs incurred in acquiring the land
• Water wells, including the initial cost for drilling, the pump and its casing, etc.
• Rights-of-way

Note: Land and Land Improvements held as investments should not be recorded as capital assets. They should be recorded as investments at fair value, with any changes to fair value being reported as investment income.

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7.4.1 Building Definition

(Last Modified on May 1, 2017)

A building is a structure that is permanently attached to the land, has a roof, is partially or completely enclosed by walls, and is not intended to be transportable or moveable.

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7.4.2 Building Improvement Definition

(Last Modified on May 1, 2017)

Building improvements are capital events that materially extend the useful life of a building or increase the value of a building, or both. A building improvement should be capitalized as a betterment and recorded as an addition of value to the existing building if the expenditure for the improvement meets or exceeds the capitalization threshold, or increases the life or value of the building by 25 percent of the original life or cost.

Building improvements meeting the capitalization threshold or increasing the building value by at least 25 percent of the original cost should be recorded as an addition of value to the existing asset using a parent/child asset management relationship. The useful life of the improvement (the “child”) should generally not exceed that of the original asset (the “parent”). However, if the improvement is not an integral part of the original asset, it may possess a different useful life than the parent asset.

For example, the useful life of a floor renovation project should not exceed the useful life of the building asset to which it relates because it is an integral part of the building that cannot exist on its own. Alternately, a wing addition to a building could have a useful life that exceeds the life of the building to which it is attached because it did not exist as part of the original asset.

Building improvements increasing the building’s useful life by at least 25 percent of the original life period should be capitalized in one of two ways:

1. Capitalize as a betterment and record as an addition of value to the existing building using a parent/child asset management relationship. The parent’s useful life should be modified for the increase in useful life.
2. If fully depreciated, recapitalize the eligible improvements as a new building asset and retire the original building asset. This procedure would be used in cases where major renovations are completed.

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7.4.3 Depreciation Methodology

(Last Modified on May 1, 2017)

The straight-line depreciation method (historical cost less residual value, divided by useful life) will be used for buildings, building improvements, and their components. For useful lives of buildings, see Sections 7.15.1 and 7.15.2. Subsequent improvements that change the use or function of the building shall be depreciated.

Buildings designated as “historical” by the Georgia Department of Natural Resources will not be depreciated unless used in the operations of the University System of Georgia. However, any improvements or betterments not deemed “historical” by the Georgia Department of Natural Resources will be depreciated the same as any other improvements or betterments made to a building.

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7.4.4 Capitalization Threshold

(Last Modified on May 1, 2017)

The capitalization threshold for buildings and building improvements is $100,000. Examples of expenditures to be capitalized as buildings include:

Purchased Buildings

• Original purchase price
• Expenses for remodeling, reconditioning, or altering a purchased building to make it ready to use for the purpose for which is was acquired (this would include payroll and related costs for employees directly involved in the modifications)
• Environmental compliance, such as asbestos abatement, etc.
• Professional fees, such as legal, architectural, inspections, title searches, etc.
• Payment of unpaid or accrued taxes on the building to date of purchase
• Cancellation or buyout of existing leases
• Other costs required to place or render the asset into operation

Constructed Buildings

• Completed project costs
• Interest accrued during construction
• Cost of excavating, grading, or filling of land for a specific building
• Expenses incurred for the preparation of plans, specifications, blueprints, etc.
• Cost of building permits
• Costs of temporary buildings used during construction
• Unanticipated costs such as rock blasting, piling, relocation of the channel of an underground stream, etc.
• Permanently attached fixtures or machinery that cannot be removed without impairing the use of the building
• Additions to buildings, such as expansions, extensions, enlargements, etc.

Building Improvements/Replacements

The following are examples that should be capitalized as improvements to buildings if (1) the addition of value to the existing building meets or exceeds the capitalization threshold, or (2) the addition increases the life or value of the building by 25 percent of the original life or cost.

• Conversion of attics, basements, etc., to usable office clinic, research, or classroom space.
• Structures attached to the building, such as covered patios, sunrooms, garages, carports, enclosed stairwells, etc.
• Installation or upgrade of heating and cooling systems, including ceiling fans and attic vents
• Original installation or upgrade of wall or ceiling covering, such as carpeting, tile, paneling, parquet, etc.
• Structural changes, such as reinforcement of floors or walls, installation or replacement of beams, rafters, joists, steel grids, or other interior framing
• Installation or upgrade of window or doorframes, upgrading of windows or doors, built-in closets and cabinets, etc.
• Interior renovation associated with casings, baseboards, light fixtures, ceiling trim, etc.
• Exterior renovation, such as installation or replacement of siding, roofing, masonry, etc.
• Installation or upgrade of plumbing and electrical wiring
• Installation or upgrade of phone or closed circuit television systems, networks, fiber optic cable, wiring required in the installation of equipment that will remain in the building, etc.
• Other costs associated with the above improvements

Examples of building improvements that should be capitalized (even when the improvements do not meet the $100,000 threshold):

• Institution has a storage/maintenance building that originally cost $ 200,000 with a useful life of 15 years. After 10 years the building was structurally reinforced with steel beams at a cost of $ 50,000, which extended the useful life to 20 years. Even though the $ 50,000 did not meet the capitalization threshold, this improvement would be capitalized because it extended the useful life by 5 years (33%).
• Institution has a greenhouse that originally cost $ 300,000 with a 25-year useful life. In year 10, the original wooden floor was replaced with a concrete reinforced floor. The cost of the improvement was $ 80,000 and the useful life remained the same. The $ 80,000 should be capitalized because it improved the value of the overall asset value by 27%, which is more than 25% of the original cost.

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7.4.5 Building Maintenance Expense

(Last Modified on May 1, 2017)

The following are examples of expenditures, which should be recorded as maintenance expenses because they do not qualify as capital improvements.

• 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, wallpaper, etc.
• 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, etc.
• Replacement of a part or component of a building with a new part of the same type and performance capabilities, such as replacement of an old boiler or roof with a new one of the same type and performance capabilities or replacing a shingle roof with another shingle roof.
• Any other maintenance-related expenditure that does not increase the value or useful life of the building

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7.5.1 Facilities and Other Improvements Definition

(Last Modified on May 1, 2017)

Facilities (other than general use buildings) and Other Improvements are depreciable assets that are built, installed or established to enhance the quality or facilitate the use of land for a particular purpose.

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Facilities should be capitalized if the new asset is at the capitalization threshold of $ 100,000. Other improvements should be capitalized if the improvement is at the capitalization threshold, or the expenditure increases the life or value of the original asset by 25 percent of the original life period or cost.

Other Improvements should be recorded as an addition of value to the existing asset using a parent/child asset management relationship. The useful life of the addition (the “child”) should generally not exceed that of the original asset (the “parent”). However, if the Other Improvement is not an integral part of the original asset, it may possess a different useful life than the parent asset. The useful life of the parent may be modified to reflect an increase in useful life.

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7.5.2 Depreciation Methodology

(Last Modified on May 1, 2017)

The straight-line depreciation method (historical cost less residual value, divided by useful life) will be used for facilities and other improvements.

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7.5.3 Capitalization Threshold

(Last Modified on May 1, 2017)

The capitalization threshold for Facilities and Other Improvements is $100,000. Examples of expenditures to be capitalized as Facilities and Other Improvements include:

• Fencing and gates
• Signs at institution entrances
• Landscaping
• Parking lots, driveways, parking barriers, etc.
• Lighting systems, such as for the campus, parking areas, streets, etc.
• Outside sprinkler systems
• Recreation areas and athletic fields, including bleachers
• Golf courses
• Paths and trails
• Septic systems
• Swimming pools, tennis courts, basketball courts, etc.
• Fountains
• Plazas and pavilions
• Retaining walls

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7.6.1 Infrastructure Definition

(Last Modified on May 1, 2017)

Infrastructure assets are long-lived capital assets that normally are stationary in nature and can be preserved for a significantly greater number of years than most capital assets. Infrastructure assets are often linear and continuous in nature. The capitalization threshold for new infrastructure is $ 1,000,000.

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7.6.2 Infrastructure Improvements

(Last Modified on May 1, 2017)

Infrastructure improvements are capital events that materially extend the useful life or increase the value/capacity of the infrastructure, or both. For example, additional lanes may added to a highway or the weight capacity of a bridge could be increased, which increases overall capacity, thus increasing the service level of the infrastructure. Another example would be re-engineering of a heating and cooling plant which produces the same temperature changes at a reduced cost.

Infrastructure improvements should be capitalized and recorded as additions to the value of the infrastructure if the improvement or addition to value is $100,000 or more. The improvement should be depreciated over the remaining life of the asset using the parent/child relationship in PeopleSoft. If the improvement increases the life of the asset, the asset takes on a new useful life.

If the $100,000 was expended intermittently during the year and if the intent of the expenditures are to allow the infrastructure to continue to be used as intended for the originally established useful life, those costs should be considered expenses rather than capital improvements

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7.6.3 Maintenance Costs of Infrastructure

(Last Modified on May 1, 2017)

Maintenance costs allow infrastructure to continue to be used during its originally established useful life. Maintenance costs are expensed in the period incurred.

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7.6.4 Preservation Costs

(Last Modified on May 1, 2017)

Preservation costs are generally considered to be those outlays that extend the useful life of an asset beyond its original estimated useful life, but do not increase the capacity or efficiency of the asset. Preservation costs should be capitalized if $100,000 or more. Since the useful life of the asset has been extended, the useful life of the asset should be changed.

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7.6.5 Depreciation Methodology

(Last Modified on May 1, 2017)

The straight-line depreciation method (historical cost less residual value, divided by useful life) will be used for infrastructure assets.

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7.6.6 Capitalization Threshold

(Last Modified on May 1, 2017)

The capitalization threshold for infrastructure is $1,000,000 for major systems ($100,000 for improvements to existing systems). Examples of major systems to be capitalized as infrastructure include:

Road Systems

Examples of costs to be capitalized would include payments, bridges, lighting systems (including traffic control devices) signage, curbs, and sidewalks.

Water Systems

Examples of costs to be capitalized would include distribution lines, fire hydrants, water meters, valves, joints and bends.

Drainage Systems

Examples of costs to be capitalized would include catch basins, storm drains, inlets, pipes, detention/retention facilities (ponds), and junction boxes.

Sewer Systems

Examples of costs to be capitalized would include piping, manholes, laterals, and lift stations

Fiber Optic and Telephone Distribution Systems Between Buildings

Examples of costs to be capitalized would include fiber optic cable and telephone distribution lines.

Waterway Systems

Examples of costs to be capitalized would include canals, wharves, docks, bulkheads, boardwalks and sea walls.

Note: The six major infrastructure systems identified above are not all inclusive. Some institutions may have other infrastructure assets that do not fit into these six categories. Examples could be major electrical lines or hubs, radio and television towers, etc. If management believes that their institution has infrastructure assets that have not been captured in the categories listed above, please contact the system office to discuss capitalization.

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7.7.1 Equipment Definition

(Last Modified on May 1, 2017)

Equipment includes machinery, furniture, vehicles and other personal property that is either a fixed or a movable tangible asset to be used for operations, the benefits of which extend beyond one year from date of acquisition and rendered into service. Improvements or additions to existing equipment that meet the capitalization threshold and increase the value or life of the asset by 25 percent of the original cost or life should be capitalized and recorded as an addition to the value of the existing asset using a parent/child asset management relationship. The useful life of the parent may be modified to reflect an increase in useful life.

Generally, the useful life of the addition or improvement (the “child”) should not exceed that of the original asset (the “parent”). However, if the improvement is not an integral part of the original asset, it may possess a different useful life than the parent asset. For example, new memory in an existing file server could possess a different useful life than its parent because if necessary, this memory could be moved to another file server. See Section 7.1.15 for discussion on component depreciation.

For schedule of useful lives of capitalized assets, see Appendix, Section 7.15.3.

Note: Costs of extended warranties and/or maintenance agreements that can be separately identified from the cost of the equipment should not be capitalized.

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7.8.1 Library Books and Reference Materials Definition

(Last Modified on August 7, 2023)

A library book is generally a literary composition bound into a separate volume and identifiable as a separate copyrighted unit. Library reference materials are information sources other than books which include journals, periodicals, microforms, audio/visual media, computer-based information, manuscripts, maps, documents, and similar items that provide information essential to the learning process or which enhance the quality of academic, professional or research libraries. Changes in value for professional, academic or research libraries may be reported on an aggregated net basis. 

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7.8.2 Library Characteristics

(Last Modified on August 7, 2023)

A professional, academic or research library normally has one or more of the following characteristics:

1. Internal controls are in place in lieu of central property management.
2. Information is housed in a separate centralized location.
3. Physical security measures are in place to protect the assets.
4. Checkout procedures and policies exist and are used.
5. Individual item costs and supplemental information is generally contained in a supplemental database.
6. Volumes assigned to libraries are typically available to employees, students, and other individuals for checkout or use.
7. Existence of the library helps the institution fulfill its mission.
8. The value is material to the organization.
9. Equipment assigned to libraries typically remains under central security for on-premises use.

USG system libraries will be reported on a composite basis by making net adjustments to total value to reflect increase or decrease in total value. Net adjustments must be made at least once annually by the close of the fiscal year.

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7.8.3 Depreciation Methodology

(Last Modified on August 7, 2023)

The straight-line depreciation method will be used. The useful life of library assets is 10 years. For depreciation methodology, please see worksheet associated with Year- end Journal Entry # 17.

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7.9.1 Works of Art and Historical Treasures Definition

(Last Modified on May 1, 2017)

Works of art and historical treasures are collections or individual items of significance that are owned by an institution, which meet the following criteria:

• Assets are held for public exhibition, education or research in furtherance of public service rather than for financial gain,
• Assets are protected, cared for and preserved, and
• Assets are subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.

Exhaustible collections or items are assets whose useful lives are diminished by display or educational or research applications. Inexhaustible collections or items are assets for which the economic benefit or service potential is consumed so slowly that the estimated useful lives are extraordinarily long. Because of their cultural, aesthetic, or historical value, the holder of the asset applies efforts to protect and preserve the asset in a manner greater than that for similar assets without such cultural, aesthetic, or historical value.

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7.8.4 Capitalization Threshold

(Last Modified on August 7, 2023)

State Accounting Office (SAO) policy requires that all library collections that exceed $ 100,000 in value must be capitalized. Since all institutions have total library collections, which exceed this threshold, all purchases of books and materials for a professional, academic or research library must be capitalized. Library acquisitions are valued at cost or other reasonable basis, while deletions are valued at annually adjusted average cost. The library should maintain records of all books and other library items, which should suffice as detailed inventory records.

Books periodicals and other materials purchased, but not used in a library, should be expensed unless they constitute a capital event. Examples of expenditures to be capitalized as library books and reference materials include:

• Invoice price
• Freight charges
• Handling
• In-transit insurance charges
• Binding
• Reproduction and like costs required to place assets in service, with the exception of library salaries

Fees paid for E-books, software licenses and access rights to other electronic reference materials whereby access to databases is obtained through a one-time cost that makes the data permanently accessible/perpetual should be capitalized as library collections. 

Generally, fees paid for E-Books, software licenses and access rights to other electronic reference materials that is not permanently accessible/perpetual would be expensed. Typically, the fees paid for fees paid for E-Books, software licenses and access rights to other electronic reference materials is to only access the e-book/e-material and the vendor is not conveying control of the underlying asset.

However, if the fees paid for E-Books, software licenses and access rights to other electronic reference materials is not permanently accessible/perpetual whereby the institution has determined that the institution does have control of the underlying asset the fees should follow the Subscription-Based Information Technology Arrangements (SBITAs) capitalization policy, see section 7.10.4 for further information. 

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7.9.2 Depreciation Methodology

(Last Modified on May 1, 2017)

The straight-line depreciation method (historical cost less residual value, divided by useful life) will be used for exhaustible collections.

Note: Inexhaustible items should not be depreciated.

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7.9.3 Capitalization Threshold

(Last Modified on May 1, 2017)

All works of art and historical treasures acquired or donated will be capitalized, unless held for financial gain. Works of Art and historical treasures should be capitalized at historic cost or fair value at date of donation.

If a collection is held for financial gain and not capitalized, disclosures must be made in the notes of the financial statements to provide a description of the collection and the reasons these assets are not capitalized. When donated collection items are added to non-capitalized collections, program expense(s) equal to the amount of revenue(s) should be recognized.

Examples of expenditures to be capitalized as works of art and historical treasures include:

• Collection of rare books and manuscripts
• Maps, documents, and recordings
• Works of art such as paintings, sculptures, and designs
• Artifacts, memorabilia, and exhibits
• Unique or significant structures

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7.7.2 Depreciation Methodology

(Last Modified on May 1, 2017)

The straight-line depreciation method (historical cost, divided by useful life) will be used for equipment.

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7.7.3 Capitalization Threshold

(Last Modified on May 1, 2017)

The capitalization threshold for equipment is $5,000.

Examples of expenditures to be capitalized as equipment include:

• Original contract or invoice price
• Freight charges
• Import duties
• Handling and storage charges
• In-transit insurance charges
• Applicable sales, use, and other taxes imposed on the acquisition
• Installation charges
• Charges for testing and preparation for use
• Costs of reconditioning used items when purchased
• Parts and labor associated with the construction of equipment

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(Last Modified on August 7, 2023)

GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets establishes standards for accounting and reporting of intangible assets. GASB Statement No. 51, as amended, does not address accounting for Subscription-Based Technology Arrangements (SBITAs). SBITAs are explained and further discussed in section 7.10.4.  

An intangible asset is property, which possesses the following characteristics:

* Lacks physical substance, such as computer software
* Nonfinancial in nature which has no monetary form
* Initial useful life extends beyond one reporting period.  

Examples of intangible assets include easements, water rights, timber rights patents, trademarks and computer software.  Intangible assets may be purchased, licensed or internally generated.

Intangible assets should be measured/valued in the same manner as other capital assets: historical cost, or if donated, estimated fair value at date of donation.  

7.11.1 Leased Land, Buildings, Equipment and Other Assets

(Last Modified on November 2, 2022)

GASB Statement No. 87, Leases, is effective for fiscal years beginning after July 1, 2021.   A lease is defined as a contract that conveys the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction. 

There are four main criteria that a contract must have in order to meet the definition of a lease:

 

1.  Control of the Right to Use

In order to determine the control of the right to use, an institution will need to assess whether it has both of the following:

• The right to obtain the present service capacity of the underlying asset
• The right to determine the nature and manner of use of the underlying asset

Please keep in mind that most contracts contain a termination for defaulting or misusing leased assets.  This is more of an exception to allow the lessor a protection and should not preclude the determination of the right to use from existing.

 

2.  Nonfinancial Asset

When analyzing the contracts, it is important to remember the purpose of the GASB Statement 87 is to record a liability for the intangible right to use an asset.  Examples of nonfinancial assets may include land, buildings, vehicles, and equipment.

 

3. Period of Time

A lease should be established as the right to use an asset for a period of time.  In understanding this concept, if a contract transfers ownership at the end of a lease without an option to terminate this is not a lease because it doesn’t include the right to use the asset for a period of time.  In this case, the transfer of ownership would result in a sale of an asset or a financed purchase.  Similarly, leases such as permanent land easements, that last indefinitely would not meet the criterion of period of time and therefore, would not be deemed a lease according to GASB Statement 87.

 

4. Exchange or Exchange-Like

The foundational principle of this standard is that leases are financings.  In a lease transaction, a lessee receives the right to use an asset in exchange for the promise to make payments over time.  If the transaction is a nonexchange transaction, it would therefore not be deemed a lease.  An example of a transaction that may not be deemed a lease as a result of not meeting the exchange or exchange-like criterion would be a land easement that where the payment may be for a nominal charge that is deemed a nonexchange transaction. 
 

Lease Exclusions

Not all leases are subject to GASB Statement 87.  The following are excluded from GASB 87 leases: 

• Leases of intangible assets
• Leases of biological assets, including timber, living plants, living animals
• Leases of inventory
• Contracts that meet the definition of service concession arrangement
• Leases in which the underlying asset is financed with outstanding conduit debt, unless both the underlying asset and the conduit debt are reported by the lessor.
• Supply contracts

Transfer of Ownership

As discussed earlier, contracts that transfer ownership without a termination option would also be excluded from GASB Statement 87 reporting as a result of not meeting the period of time criterion.  These contracts are commonly referred to as financed purchases or finance lease arrangements.  For reporting purposes, the liability associated with these agreements are reported as notes and loans payable. 

Short-Term Contracts

Short-term leases may be excluded from consideration. These transactions will meet all four criterion of the lease definition, however GASB Statement 87 establishes a provisional exception for leases with a maximum possible term of 12 months (or less), including any options to extend, regardless of their probability of being exercised should be excluded from reporting as a lease.  For these situations, a lessee would recognize an expense when incurred. 

Lease Term

The lease term starts with the noncancelable period plus the periods covered by options to extend the lease, if reasonably certain of being exercised by either the lessee or lessor and the periods covered by options to terminate, if reasonably certain of not be exercised by either the lessee or lessor. The lease term should exclude any cancelable period (such as a rolling month-to month-lease). Fiscal funding clauses and cancellation clauses are generally ignored in determining the lease term unless there is reasonable certainty of those clauses being exercised.

Reasonably Certain

When determining if an option to extend or termination is reasonably certain the following factors that need to be considered:

• Significant economic incentives that are favorable compared with current market rates
• Significant market disincentive, such as cost to terminate and sign a new lease
• History of exercising options to extend or terminate
• The extent to which the asset is essential to the provision of governmental services

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7.11.2 Measuring the Lease

(Last Modified on January 9, 2023)

Future Lease Payments

The lease liability should be measured at the present value of payments expected to be made during the lease term.  Future lease payment should include the following: fixed payments (less incentives), variable payments based on index rate, variable payments that are in substance fixed, residual value guarantees, purchase options, termination penalties, and any other payments reasonably certain of being exercised.

If a lease is structured to include variable payments based on future performance of the underlying asset, this variable payment should NOT be included in the lease liability calculation. 

For example, if a bus lease is structured for payment of $5 per mile with no minimum payment this is deemed a variable payment based on future performance and would be expensed in the period in which the obligation was incurred. 

In contrast, if the lease payments were structured at $5 per mile with a minimum payment of $500 per month this would be a variable payment that is in-substance fixed and the $500 per month would be used in determining the liability. 

Some lease obligations have executory costs built into the total lease payment. This additional rental payment may include costs such as insurance, maintenance, and taxes but generally are used for repairs and replacements. If the additional rent is for a non-lease component, these payments would not be included in the calculation of the lease obligation/notes loans payable nor the intangible right-to-use asset/capital asset.  This payment would be expensed when paid since this is a period cost.  If the additional rent is a component of the lease, these payments should be included in the calculation of the liability. 

Discount Rate

After determining the future lease payments, the institution will need to discount these payments using the interest rate the lessor charges the lessee, which may be the interest rate implicit in the lease.  If the interest rate cannot be easily determined, the lessee should use the incremental borrowing rate.  Since USG intuitions fall under the state reporting entity, the State of Georgia’s incremental borrowing rate will be used when that rate is necessary.  The State of Georgia’s incremental borrowing rate will be provided to the Chief Accounting Officer’s annually, when available. 

Measuring Lease Asset

Generally, the lease liability will equal the leased asset.  Some exceptions to this may include lease payments made prior to commencement (less incentives received) or when it is necessary to expend funds prior to placing the asset into service (an example may include installing shelving into a building prior to use). 

Beginning Balance: Present Value of Future Expected Lease Payments

Plus: Lease payments made prior to commencement

(Less: Lease incentives received)

Plus: Initial direct cost necessary to place asset into service

Leased Asset Balance

Amortization of Leased Asset

A leased asset should be amortized as the shorter of the lease term or useful life of the underlying asset.  If the lease contains a purchase option that the lessee has determined is reasonably certain of being exercised, the lease asset should be amortized over the useful life of the underlying asset.  Under this circumstance, if the underlying asset is a non-depreciable asset, such as land, the lease asset should not be amortized. 

Modifications and Terminations

Amendments to the contract currently in effect may require a re-measurement of the lease liability or leased asset if the modification is deemed significant. An amendment is considered to be a modification of the lease unless the lessee’s right to use the asset decreases. If the right to use the asset decreases, this would be deemed a termination of the lease (may be full or partial) since this would no longer meet the definition of a lease (control of the right to use criterion). 

If significant, a change in the following will trigger a re-measurement:

• Lease term
• Likelihood of purchase option
• Likelihood of residual value guarantee being paid
• Estimated amounts for payments already included in the measurement of lease liability – excludes variable rates
• Interest rate the lessor charges the lessee, if used as the initial discount rate
• Contingency upon which variable lease payments are based

 

Contracts with Multiple Components

A lease may contain multiple components.  In such cases, the non-lease part of the contract should be separated from the leased asset in order to accurately reflect the liability and asset that is being used.  If there are no stated prices for individual components or the prices stated appear unreasonable it is permissible to account for the component as a single lease. 

Possible contracts with multiple components: 

• Copiers and toner and paper
• Building lease and utilities and janitorial costs

Lessor

A lessor will recognize a lease receivable and deferred inflow of resources at the commencement of the lease term using the same measurement of the lease described previously.  A lessor should recognize interest revenue on the receivable from the deferred inflows of resources in a systematic and rational manner over the term of the lease. 

The lessor should not derecognize the asset underlying the lease.  In instances where the lease contract requires the lessee to return the asset to its original condition, the lessor should not depreciate the asset during the lease term. 

 

Initial Reporting

	Assets	Liability	Deferred Inflow
Lessee	Intangible right to use lease asset -  value of lease liability plus prepayments and initial direct costs that are ancillary to place asset in use, less incentives	Present value of future lease payments (include fixed payments, variable payments based on index or rate, reasonably certain residual guarantees, etc.)	N/A
Lessor	Lease receivable (generally includes same items as lessee’s liability) Continue to report the leased asset	N/A	Equal to lease receivable plus any cash received up front that relates to future period

 

Lessee

At the start of the lease term, a lessee would recognize a lease liability and an intangible right-to-use lease asset.

• (DR) Lease Asset
  • (CR) Lease Liability
  • (CR) Cash (possible entry) – for any indirect costs and lease payments made prior to the start of the lease

Lessor

At the start of the lease term, a lessor would recognize a lease receivable and a deferred inflow of resources. 

• (DR) Lease Receivable
• (DR) Cash (possible entry) – for any lease payments received prior to the start of the lease.
  • (CR) Deferred Inflow of Resources

Subsequent Reporting

	Assets	Liability	Deferred Inflow
Lessee	Amortize the intangible lease asset over shorter of useful life or lease term	Reduce by lease payments (less amount for interest expense)	N/A
Lessor	Depreciate leased asset (unless indefinite life or required to be returned in its original or enhanced condition) Reduce receivable by lease payments (less amount needed to cover accrued interest)	N/A	Recognize revenue over the lease term in a systematic and rational manner

 

Lessee

Lease payments made to the lessor:

• (DR) Lease Liability
• (DR) Interest Expense
  • (CR) Cash

Amortize the leased asset over the shorter of the lease term or useful life of the underlying asset:

• (DR) Depreciation Expense
  • (CR) Accumulated Depreciation –Leased Asset

Lessor

Lease payments received from the lessee:

• (DR) Cash
  • (CR) Lease Receivable
  • (CR) Interest Income
• (DR) Deferred Inflow of Resources – systematic and rational manner
  • (CR) – Lease Revenue

Lessor continues to report and, if applicable, depreciate the leased capital asset.

 

Matching of Payments from Foundation to Institution 

Due to the differences in the lease standards for FASB and GASB, matching of lease liability/notes and loans payable amounts reported by the lessee to the lease receivable amounts reported by lessors will likely not agree between institution and foundation and should be reviewed by the institution annually for significant variances as part of the Annual Financial Reporting process.   

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7.12.1 Construction in Progress Definition

(Last Modified on May 1, 2017)

Construction in progress reflects the economic construction activity status of buildings and other structures, infrastructure (roadways, energy distribution systems, pipelines, etc.), additions, alterations, reconstruction, installation, and maintenance and repairs that are substantially incomplete.

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7.12.2 Depreciation Amortization Methodology

(Last Modified on May 1, 2017)

Depreciation is not applicable while assets are accounted for as construction in progress. Refer to the appropriate capital asset category when the asset is capitalized.

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(Last Modified on May 1, 2017)

The auxiliary enterprises renewals and replacement (R&R) reserve was established to be used for capital improvements to institutionally owned auxiliary capital assets. Major repairs, such as roof replacements, which do not meet applicable capitalization thresholds, may also be funded from these reserves. However, general repairs and maintenance should be funded from operating funds.

The R&R reserve should not be used to make any improvements to Public Private Venture (PPV) projects. PPV project lease payments include a maintenance component that is held by a third party trustee for use in making repairs and renovations to existing PPV projects.

Please refer to Section 3.4.2.6 of this Manual for instructions on capital improvements and reserve requirements related to dining and catering contracts.

7.12.3 Capitalization Threshold

(Last Modified on May 1, 2017)

Construction in progress assets should be capitalized to their appropriate capital asset categories upon the earlier occurrence of execution of substantial completion contract documents, occupancy, or when the asset is placed into service.

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7.15.1 Building Classes of Construction

(Last Modified on May 1, 2017)

Class	Frame	Floor	Roof	Walls
A	Structural steel columns and beams, fireproofed with masonry, concrete, plaster, or other incombustible material	Concrete or concrete on steel deck, fireproofed	Formed concrete, precast slabs, concrete or gypsum on steel deck, fireproofed	Nonbearing curtain walls, masonry, concrete, metal and glass panels, stone
B	Reinforced concrete columns and beams; fire-resistant construction	Concrete or concrete on steel deck, fireproofed	Formed concrete, precast slabs, concrete or gypsum on steel deck, fireproofed	Nonbearing curtain walls, masonry, concrete, metal and glass panels, stone
C	Masonry or concrete load-bearing walls with or without pilasters; masonry or concrete walls with steel, wood or concrete frame	Wood or concrete plank on steel floor joists, or concrete slab on grade	Wood or steel joists with wood or steel deck; concrete plank	Brick, concrete block, or tile masonry tilt-up, formed concrete, curtain walls
D	Wood or steel studs in bearing wall, wood frame, primarily combustible construction	Wood or steel floor joists or concrete slab on grade	Wood or steel joists with wood or steel deck	Almost any material except masonry or concrete; generally combustible construction
S	Metal bents, columns, girders, purlins, and girts without fireproofing, incombustible construction	Wood or steel deck on steel floor joists, or concrete slab on grade	Steel or wood deck on steel joists	Metal skin or sandwich panels; generally incombustible

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7.15.2 Building Useful Life by Type and Class of Construction

(Last Modified on May 1, 2017)

Public Buildings	A	B	C	D	S
Good and Excellent libraries	60	60	55	50	50
Average libraries	55	55	50	45	45
Low-cost libraries	50	50	45	40	40
Good and excellent medical offices	50	50	45	40	40
Average and low-cost medical offices	45	45	40	35	35
Good and excellent governmental buildings	60	60	55	50	…
Average and low-cost governmental buildings	55	55	50	40	40
Good and excellent general hospitals	50	50	45	40	…
Average and low-cost general hospitals	45	45	40	35	35
Good and excellent convalescent hospitals	50	50	45	40	…
Average and low-cost convalescent hospitals	45	45	40	35	35
Average and good dispensaries	…	…	35	30	30
Average and good veterinary hospitals	45	45	40	35	35
Low-cost veterinary hospitals	…	…	35	30	30

Colleges and Universities	A	B	C	D	S
Good and excellent buildings	60	60	50	45	45
Average buildings	50	50	45	40	40
Low cost buildings	…	…	40	35	35

Theaters, and Auditoriums	A	B	C	D	S
Excellent auditorium	55	55	50	45	…
Good and average auditorium	50	50	45	40	40
Low-cost auditorium	…	…	40	35	35
Good and excellent theater	50	50	45	40	…
Average and fair theater	45	45	40	35	35
Low-cost and cheap theater	…	…	35	30	30
Good bowling alleys	…	…	40	35	35
Low-cost average bowling alleys	…	…	35	30	30
Good skating rink and tennis clubs	…	…	45	40	40
Average skating rink and tennis clubs	…	…	40	35	35
Low-cost skating rink and tennis clubs	…	…	35	30	30
Good handball racquetball clubs	…	…	45	40	40
Average handball racquetball clubs	…	…	40	35	35

Sheds and Farm Buildings	A	B	C	D	S
Good creameries	…	…	45	…	45
Average creameries	45	45	35	…	30
Low-cost creameries	…	…	25	…	20
Grain elevator facilities	…	60	…	55	…
Grain storage buildings	…	…	…	30	30
Good and excellent dairies	…	… 35	30	30
Average dairies and fruit packing buildings	…	…	30	25	25
Low-cost dairies	…	…	20	20	15
Bulk fertilizer storage	…	…	…	30	30
Excellent barns and stables	…	…	40	…	35
Good barns and stables	…	…	35	30	30
Average barns, hog barns, stables and silos	…	…	30	25	25
Low-cost barns and stables	…	…	20	15	15
Excellent poultry houses	…	…	30	25	25
Good poultry houses, equipment, and utility sheds	…	…	25	20	20
Average poultry, equipment, and utility buildings	…	…	20	15	15
Low-cost poultry houses	…	…	15	15	15
Tobacco barns	…	…	20	20	15
Portable outbuildings	…	…	…	15	15
Sheds	…	…	…	10	10
Good greenhouses	…	…	…	30	40
Average lath and greenhouses	…	…	…	20	25

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7.15.3 Useful Lives of Capitalized Assets

(Last Modified on May 1, 2017)

Useful Lives of Capitalized Assets

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7.1.14 Fully Depreciated Capital Assets

(Last Modified on May 1, 2017)

Fully depreciated capital assets that are still in service should remain on the capital asset records until the asset is retired in accordance with guidance provided by GASB Comprehensive Implementation Guide question 7.13.5. The original cost of a capital asset cannot change; therefore, the only way to extend the service life is to change the depreciation period.

Institutions should review capital assets periodically and extend useful lives where appropriate. It is recommended that this be done when capital assets reach the 50% depreciation threshold. It is required for capital assets that have been depreciated 75% or more of their useful lives.

Salvage values, like depreciable periods, are accounting estimates and as such, they may change later in an assets life, therefore, any change to salvage value is a change that would be accounted for prospectively affecting only current and future periods.

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7.1.15 Component Depreciation for Certain Capital Assets

(Last Modified on May 1, 2017)

Generally it is preferable to depreciate capital assets, such as buildings, as one unit, however, it is sometimes more appropriate to capitalize assets on a component basis. This is often true for research building and equipment that are included in organized research and affect indirect cost rate calculations.

When depreciating capital assets using a component basis approach, the depreciation is based on the useful life of each component. This will generally provide a more accurately measure of annual depreciation for multi-functional buildings with fixed equipment.

For Buildings that have multiple components, institutions that wish to use component depreciation approach should group the building components into (4) general categories.

• Building Shell – basic building structure that includes site preparation, foundation, frame, construction exterior, floor structure, exterior walls, and roof structure.
• Building Finishes – not part of basic building structure, but includes components such as roof covering, construction interior, and floor covering which enhance service and aesthetic quality.
• Building Services System – includes components which enhance buildings functionality, such as electrical service and distribution lines, HVAC systems, plumbing, fire protection systems, and elevators
• Fixed Equipment – generally includes built in components, such as built in lab equipment, cabinetry, fixtures, etc.

Useful lives should be applied separately by category as follows:

• Building Shell – Since this is the basic structure, depreciation would be based on building useful lives found in the Appendix, Section 7.15.2.
• Building Finishes – Useful lives of 20 years are recommended for this category.
• Building Services System – Useful lives of 10 to 20 years are recommended based on type of component. Since many of these components are viewed as equipment type items when not capitalized as part of an overall building projects, Appendix, Section 7.15.3 will provide guidance to help determine their useful lives.
• Fixed Equipment – Useful lives of 10 to 15 years are recommended depending on type of component. Appendix, Section 7.15.3 should also be referenced when determining the useful lives of these components.

While most component depreciation is related to a building and its components, there may be instances where it is appropriate to apply component depreciation methodology to assets other than buildings, such as complex machinery and IT network infrastructure.

Individual components may not have a longer asset life that the primary capital asset. For example, components of a building may not have asset lives longer than that of the primary structure (Building Shell).

Capital Assets to be componentized should be recorded at actual component cost if possible; however, if not practical, total costs may be allocated to individual components. If allocation methodology is used, the institution must maintain documentation of such methodology and apply consistently to all capital assets affected.

Any additions or future improvements to these assets that meet capitalization thresholds must also be componentized. If an existing capital asset is moved to component depreciation status, componentized depreciation should be applied prospectively on the undepreciated portion of the capital asset.

Note: If any institutions were using an internally developed component depreciation approach for certain capital assets prior to July 1, 2016, they may continue to use that approach on those particular assets until they are fully depreciated. Going forward, those institutions should adopt the requirements of this section for all new capital assets where the component approach is to be applied.

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7.10.1 Depreciation Amortization Methodology

(Last Modified on August 7, 2023)

Amortization is the accounting process of allocating the intangible asset’s capitalized costs to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Amortization is not a matter of valuation, but a means of cost allocation. Intangible assets are not amortized based on a decline in their fair market value but based on systematic charges to expense.

An intangible asset that has an indefinite useful life is **not** amortized if there are no legal, contractual, regulatory, technological, or other factors that limit its useful life. A permanent right of way easement would be an example of an intangible asset that is considered to have an indefinite useful life.  

Intangible assets with discernable useful lives should be amortized over the estimated useful life using the straight-line method (historical cost less residual value, divided by the useful life.)

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7.10.2 Capitalization Threshold

(Last Modified on August 7, 2023)

Intangible assets should be capitalized on the accrual basis of accounting in the institution’s accounting records if the asset meets all of the following conditions:

1. Is owned by the institution and held for operations, not for resale,
2. Has a useful life that exceeds one (1) year,
3. Meets the appropriate capitalization threshold(s), as shown below:

Intangible Asset Description and Capitalization Thresholds

Asset Description	Cost Threshold	Useful Lives
Software (purchased or internally generated)	$1 Million	10 years
Water Rights	$100,000	20 years
Timber Rights	$100,000	20 years
Mineral Rights	$100,000	20 years
Easements	$100,000	20 years

Asset Description	Cost Threshold	Useful Lives
Patents	$100,000	20 years
Trademarks	$100,000	20 years
Copyrights	$100,000	20 years

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7.10.3 Internally Generated Intangible Assets

(Last Modified on May 1, 2017)

Common types of internally generated intangible assets include computer software, patents, trademarks and copyrights.

Generally, intangible assets are considered internally generated if they are:

1. Created or produced by the institution or a third party entity contracted by the institution, or

2. Acquired/purchased from a third party, but require more than a minimal incremental effort on the part of the institution to achieve their expected level of service capacity.

Costs incurred in creating an internally generated intangible asset should either be expensed or capitalized depending on the asset’s stage of development. In initial development, outlays incurred related to the development of an internally generated intangible asset, should be capitalized only when all three of the following have occurred:

1. Determination of the specific objective of the project and the nature of the service capacity that is expected to be provided by the intangible asset upon the completion of the project.

2. Demonstration of the technical or technological feasibility for completing the project so that the intangible asset will provide its expected service capacity.

3. Demonstration of the current intention, ability, and presence of effort to complete or, in the case of a multiyear project, continue development of the intangible asset.

Only outlays incurred subsequent to meeting the above criteria should be capitalized. Outlays incurred prior to meeting those criteria should be expensed.

Internally Generated Computer Software

Internally Generated Computer Software (IGCS) is the most common type of intangible asset that is generated internally.

In addition to the capitalization criteria discussed above, which is applicable for all internally generated intangible assets, IGCS will only meet those capitalization criteria if/when both of the following occur:

1. Activities in the preliminary project stage are completed; and,

2. Management implicitly or explicitly authorizes and commits to funding the software project, at least currently in the case of a multiyear project.

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As with other internally generated intangible assets, IGCS is considered internally generated when it is either:

1. Developed in-house by institution personnel or contractors on behalf of the institution, or

2. Commercially available software that is purchased or licensed by the institution and modified using more than minimal effort before placing in in operation. An example would be purchased software that has been specially modified to add special reporting capabilities.

Capitalization of IGCS Based on Stages of Software Development

Costs incurred in developing and installing IGCS are either expensed or capitalized depending on the stage of the asset’s development.

Software development generally involves three stages based on the nature of the activities, not timing of occurrence.

1. Preliminary Project Stage: Activities in this stage include the conceptual formulation and evaluation of alternatives, the determination of existence of needed technologies, and final selection of alternatives for development of the software. Activities in this stage should be expensed as incurred.

2. Application Development Stage: Activities include the design of the chosen path, including software configuration and software interfaces, coding, installation of computer hardware, and testing, including parallel processing phase. Activities in this stage should be capitalized to the point at which the computer software is substantially complete and operational.

3. Post-Implementation/Operation Stage: Training and application maintenance activities. Activities in this stage should be expensed as incurred.

Data conversion costs, costs that allow for access or conversion of old data by new information systems should be capitalized only to the extent necessary to make the computer software operational. Otherwise, those costs should be expensed as part of Stage 3-Post Implementation.

When dealing with IGCS costs, it is particularly important to capture them into the appropriate project stage to ensure there is an accurate proration of costs between expenses and capitalized activity. Costs incurred during the Application Development State are subject to capitalization.

Examples of capital costs incurred during the Application Development State would include:

• External direct costs of materials and services, such as third party fees for services
• Costs to obtain software from third parties
• Travel costs incurred by employees in their duties directly associated with development
• Payroll and payroll-related costs of employees directly associated with or devoting time in coding, installing, or testing
• Interest costs incurred during the application development

Modifications of internally generated software that is already in operation should only be capitalized if the modifications result in any of the following:

• An increase in the functionality of the software; or,
• An increase in the efficiency of the software; or,
• An extension of the estimated useful life of the software.

Note: If an institution determines that a shorter useful life is appropriate for software, then the method for estimating the useful life must be formally documented.

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7.14 Pollution Remediation

(Last Modified on September 29, 2022)

Normally pollution remediation costs will be expensed when the liability is recognized; however, paragraph 22 of GASB 49 provides specific instances where pollution remediation expenditures should be capitalized when goods and services are required for any of the following circumstances:

1. To prepare the property in anticipation of sale. Institutions should only capitalize amounts necessary to place asset into its intended use and condition. Capitalized amounts should not exceed estimated fair value.

2. To prepare the property (with known or suspected pollution that would require remediation) for use when the property was acquired. Capitalization should be limited to outlays expected to be necessary to place the asset into its intended location and condition for use.

3. To perform pollution remediation that restore a pollution caused decline in service utility for an impaired asset.

4. To acquire property, plant and equipment that have a future alternative use.

For items (1) and (2) above, capitalization is only appropriate if the outlays take place within a reasonable period prior to the expected sale for item (1) or prior to use for item (2). Capitalization is also appropriate if outlays are delayed and the delay is beyond the institutions control.

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7.11.3 Lease Resources

(Last Modified on January 9, 2023)

• GASB Statement 87
• GASB Implementation Guide No. 2019-3
• State Accounting Office Lessee/Lease Accounting Policy 
• USG Leases Journal Entry Guide
• GeorgiaFIRST Guidance for Leases (see Asset Management job aids)
• Present Value of Lease Payments Calculation Tool
• GASB 87 – Lease Survey
 

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7.11.4 Glossary

(Last Modified on January 9, 2023)

Cancelable period – Periods for which a lessee and lessor both have an option to extend or terminate.

Commencement Date – The date a lessor makes the underlying asset available for use which may be the same date as the lease execution date. 

Contract – An agreement (written or verbal) between two or more parties that creates an enforceable right and obligation.

Contracts that transfer ownership – A contract that transfers ownership of the underlying asset to the lessee by the end of the contract and does not contain termination options should be reported as a financed purchase by the lessee or a sale by the lessor. 

Discount Rate – For the lessee, the discount rate for the lease is the rate implicit in the lease unless that rate cannot be readily determined.  In that case, the lessee is required to use its incremental borrowing rate. 

Exchange or Exchange –Like – A transaction in which each party receives and sacrifices something of approximately equal value.

Fiscal Funding Clause – A provision by which the lease is cancelable if the legislature or other funding authority does not appropriate the funds necessary for the government unit to fulfill its obligations under the lease agreement. 

Implicit Rate – The rate of interest that at a given date, causes the aggregate present value of (a) the lease payments and (b) the amount that a lessor expects to derive from the underlying asset following the end of the lease term to equal the sum of (1) the fair value of the underlying asset and (2) any deferred initial indirect cost of the lessor.  However, if the rate determined is less than zero, an implicit rate of zero should be used.

Incentive – This may be a discount or an offer to pay moving costs or make a cash payment to the lessee as a means to induce a lessee to sign a lease.

Incremental Borrowing Rate – The rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. For entities within the state reporting entity (including USG institutions), this is the State’s incremental borrowing rate, provided by the State Accounting Office.

Lease – A contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.

Lease Term – The period in which a lessee has a non-cancelable right to use the underlying asset, plush periods covered by lessee or lessor’s option to extend the lease (if reasonably certain of being exercised) and periods covered by the lessee or lessor’s option to terminate lease (if reasonably certain of being exercised).  Note that periods for which both the lessee and the lessor have an option to extend or terminate the lease without permission from the other party are excluded from the lease term.  

Lessee – An entity that enters into a contract to obtain the right to use an underlying asset for a period of time in an exchange for consideration.

Lessor – An entity that enters into a contract to provide the right to use an underlying asset for a period of time in an exchange consideration.

Noncancelable Period – The period for which a lease contract is enforceable and the lease is cancellable only upon the occurrence of some remote contingency.

Nonfinancial Asset – An underlying asset that is not a financial asset as defined in GASB 72.  Examples include: land, buildings, vehicles, and equipment.

Period of Time – The total period of time that an asset is used to fulfill a contract.

Regulated Lease – A lease in which there is another party that executes legal restrictions establishing the price that may be recovered through lease payments that significantly limits the lessors ability to set rates in excess of those limitations.  Potential regulated leases may include airwaves, airports, technology, etc. 

Reasonably certain – Implies a higher level of certainty. It is much greater to occur than likely to occur.

Residual Value Guarantee – A guarantee made to the lessor that the value of an underlying asset will be at least a specified amount at the end of the lease.

Right to Use – the right to obtain the present service capacity from use of the underlying asset and the right to determine the nature and manner of its use.

Short-term leases – Leases that, at the commencement of the lease, have a maximum possible term of 12 months or less, including any options to extend. 

Sublease – A transaction in which the underlying asset is re-leased by the lessee (or immediate lessor) to a third party (the sub-lessee) and the original lease between the lessor and the lessee remains in effect. 

Underlying Asset – An asset that is the subject for the lease for which a right to use the asset has been conveyed.

Variable Payments Based on Index – Payments that are linked to a benchmark and may fluctuate to reflect changes in market rental rates.

Variable Payments, In-Substance Fixed – Payments that are structured as variable lease payments but are in-substance fixed. This is when there are multiple sets of payments that a lessee could make, but it has to make at least one of these.  An example of this the lessee has to pay $1 per mile for the vehicle lease or a minimum of $500. 

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7.10.4 Subscription-Based Information Technology Arrangements (SBITAs)

(Last Modified on September 18, 2023)

GASB Statement No. 96, Subscription-Based Information Technology Arrangements (SBITAs), is effective for fiscal years beginning after July 01, 2022. GASB Statement No. 96 establishes standards for accounting and reporting of a right-to-use subscription asset. 

A SBITA is defined as a contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction.

There are three main criteria that a contract must have to meet the definition of a SBITA:

1. Control of the Right to Use
             In order to determine whether the contract conveys the control of the right to use the underlying information technology asset, an institution will need to assess whether it has both of the following:
   
   • The right to obtain the present service capacity of the underlying information technology assets as specified in the contract
   • The right to determine the nature and manner of use of the underlying information technology assets as specified in the contract
     Most contracts contain a termination for defaulting or misuse of the underlying IT asset, this is more of an exception to allow the lessor a protection and should not preclude the determination of the right to use from existing.
2. Period of Time
             A SBITA should be established as the right to use an underlying IT asset for a period of time. 
3. Exchange or Exchange-Like
             The foundational principle of this standard is that SBITAs are similar to leases.  In a SBITA transaction, an institution receives the right to use software in exchange for the promise to make payments over time.  If the transaction is a nonexchange transaction, it would not be deemed a SBITA.  An example of a transaction that may not be deemed a SBITA as a result of not meeting the exchange or exchange-like criterion would be a software license where the payment may be for a nominal charge that is deemed a nonexchange transaction.

SBITA Capitalization Threshold

SBITA items that are greater than $100,000 over the subscription term and the initial term exceeds 12 months are capitalized.

SBITA Exclusions

Not all SBITAs are subject to GASB Statement 96. The following are excluded from GASB 96 SBITAs:

• Contracts that convey control of the right to use another party’s combination of IT software and tangible capital assets that meets the definition of a lease in GASB Statement No. 87, Leases, in which the software component is insignificant when compared to the cost of the underlying tangible capital asset (for example, a computer with operating software or a smart copier that is connected to an IT system)
• Governments that provide the right to use their IT software and associated tangible capital assets to other entities through SBITAs
• Contracts that meet the definition of a public-private and public-public partnership in paragraph 5 of GASB Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements
• Licensing arrangements that provide a perpetual license to governments to use a vendor’s computer software, which are subject to GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets, as amended
• Contracts with a combination of a tangible capital asset and an insignificant software component.

Short-Term Contracts

GASB Statement 96 establishes a provisional exception for SBITAs with a maximum possible term of 12 months (or less), including any options to extend, regardless of their probability of being exercised.  For these situations, an expense should be recognized when incurred.

Subscription Term

The SBITA term starts with the noncancelable period plus the periods covered by options to extend the SBITA (if reasonably certain of being exercised by either the institution or the vendor) and the periods covered by options to terminate (if reasonably certain of not being exercised by either the institution or vendor). The SBITA term should exclude any cancelable period (such as a rolling month-to month-SBITA). Fiscal funding clauses and cancelation clauses that allow a government to cancel a SBITA, typically on an annual basis, if the government does not appropriate funds for the subscription payments, should affect the subscription term only if it is reasonably certain that the clause will be exercised.

Reasonably Certain

When determining whether an option to extend or terminate is reasonably certain the following factors need to be considered:

• Significant economic incentives that are favorable compared with current market rates
• A potential change in technological development that significantly affects the technology used by the underlying IT assets
• A potential significant change in the institution’s demand for the SBITA vendor’s IT assets
• Significant economic disincentive, such as cost to terminate and sign a new SBITA
• History of exercising options to extend or terminate
• The extent to which the underlying IT asset(s) is essential to the provision of institution services
  
   

7.10.4.1 Measuring the SBITA

Future SBITA Payments

The SBITA liability should be measured at the present value of payments expected to be made during the subscription term. Future subscription payments should include the following: fixed payments (less incentives), variable payments based on index rate, variable payments that are in substance fixed, termination penalties (if the subscription term reflects the government exercising (1) an option to terminate the SBITA or (2) a fiscal funding or cancellation clause, and any other payments reasonably certain of being exercised.

Variable payments other than those that depend on an index or a rate, such as variable payments based on future performance of a government, usage of the underlying IT assets, or number of user seats, should not be included in the measurement of the subscription liability. Rather, those variable payments should be recognized as an expense in the period in which the obligation for those payments is incurred

Fixed in substance SBITA example: The institution has a SBITA that includes paying the vendor for the total number of users. There is a minimum charge for $3,000 per month for the first 300 users. The $3,000 per month would be a variable payment that is in-substance fixed and the $3,000 per month would be used in determining the liability.

Beginning Balance: Fixed payments (less incentives)

Plus: Variable payments based on index rate

Plus: Variable payments that are in substance fixed 

Plus: Termination penalties/other payments reasonably certain of being exercised

Total Subscription Payments 

Measure the total subscription payments at present value to determine the subscription liability. 

Discount Rate

After determining the future SBITA payments, the institution should discount these payments using the interest rate the vendor charges the institution, which may be the interest rate implicit in the SBITA.  If the interest rate cannot be easily determined, the institution should use the incremental borrowing rate.  Since USG institutions fall under the state reporting entity, the State of Georgia’s incremental borrowing rate will be used when that rate is necessary.  The State of Georgia’s incremental borrowing rate will be provided to the Chief Accounting Officer’s annually.

Measuring SBITA Asset

Generally, the subscription liability will equal the subscription asset.  Some exceptions to this may include subscription payments made prior to commencement (less incentives received) or when it is necessary to expend funds prior to placing the IT asset into service (an example may include implementation costs). 

Beginning Balance: Subscription liability amount

Plus: SBITA payments made prior to commencement

Plus: Capitalizable initial implementation costs payments 

Plus: Costs related to increased functionality or efficiency after asset is placed into service.

(Less: SBITA incentives received)

Subscription Asset Balance

Amortization of SBITA Asset

A subscription asset should be amortized over the shorter of the subscription term or the useful life of the underlying IT asset. Generally, the subscription asset will be amortized over the subscription term since a subscription asset that has a useful life shorter than a subscription term would indicate that a contract was executed for payments past the useful life of the underlying IT asset.

Capitalization of a SBITA Based on the Stages of Implementation 

Costs incurred in developing and installing a SBITA are either expensed or capitalized depending on which stage the cost is categorized. 

A SBITA generally involves three stages based on the nature of the activities, not timing of occurrence. Training costs should be expensed as incurred, regardless of the stage in which they are incurred. Data conversion should be considered an activity of the initial implementation stage only to the extent that it is determined to be necessary to place the subscription asset into service—that is, in condition for use. Otherwise, data conversion should be considered an activity of the operation and additional implementation stage.

1. Preliminary Project Stage: Activities in this stage include the conceptual formulation and evaluation of alternatives, the determination of existence of needed technologies, and final selection of the SBITA vendor.  Activities in this stage should be expensed as incurred.
2. Initial Implementation Stage:  Activities in this stage include ancillary charges related to designing the chosen path, such as configuration, coding, testing, and installation associated with the government’s access to the underlying IT assets. Other ancillary charges necessary to place the subscription asset into service also should be included in this stage. The initial implementation stage for the SBITA is completed when the subscription asset is placed into service. Activities in this stage should be capitalized to the point at which the SBITA is placed into service (i.e. go live). Payments that are made in advance of the SBITA commencement term should be recorded as Intangible Right-To-Use in Progress.
3. Post-Implementation/Operation Stage: Activities in this stage include maintenance, troubleshooting, and other activities associated with the government’s ongoing access to the underlying IT assets. Activities in this stage also may include additional implementation activities, such as those related to additional modules, that occur after the subscription asset is placed into service. Activities in this stage are generally expensed as incurred unless a modification results in either 1) increased functionality of the asset that provides the ability to perform additional tasks, or 2) increased efficiency of the asset or level of service of the asset. 

Multiple Modules

If a SBITA has more than one module and the modules are implemented at different times, the initial implementation stage for the SBITA is completed and the subscription asset is placed into service when initial implementation stage is completed for the first independently functional module or for the first set of interdependent modules, regardless of whether all remaining modules have been completely implemented. For the remaining modules of that SBITA, all additional implementation activities should be considered subsequent implementation outlays and should be accounted for in accordance.

SBITA Contracts with Multiple Components

If a SBITA contract contains multiple components, such as (a) a contract that contains both a subscription component and a non-subscription component or (b) a contract that contains multiple underlying IT asset components, each component should be accounted for as a separate SBITA or non-subscription component and allocate the contract price to the different components. Examples of non-subscription components include a separate perpetual licensing arrangement and maintenance services for the IT assets. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, all components should be accounted for as a single SBITA.

If a SBITA involves multiple underlying IT asset components and the IT asset components have different subscription terms, each underlying IT asset component should be accounted for as a separate subscription component.

To allocate the contract price to the different components:

1. First, as long as price allocations appear reasonable, prices for individual components included in the contract should be used. Discounts for bundling multiple subscription components or bundling subscription and non-subscription components together in one contract may be considered when determining whether individual component prices appear to be reasonable.
2. If a contract does not include prices for individual components, or if any of those prices appear to be unreasonable, professional judgment should be used to determine the best estimate for allocating the contract price to those components. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, a government should account for those components as a single SBITA.

If multiple components are accounted for as a single SBITA, the accounting for that SBITA should be based on the primary subscription component within that SBITA. For example, the primary subscription component’s term should be used for the SBITA if those components have different terms.

Contracts with a combination of a tangible capital asset and an insignificant software component are excluded under GASB 96 SBITAs.

Contract Combinations

Contracts that are entered into at or near the same time with the same SBITA vendor should be considered part of the same contract if either of the following criteria is met: 

1. The contracts are negotiated as a package with a single objective.
2. The amount of consideration to be paid in one contract depends on the price or performance of the other contract

If multiple contracts are determined to be part of the same contract, that contract should be evaluated in accordance with the guidance for SBITA Contracts with Multiple Components. 

Modifications and Terminations

Amendments to the contract currently in effect may require a re-measurement of the subscription liability or subscription asset if the modification is deemed significant. An amendment is considered to be a modification of the SBITA unless the institution’s right to use the asset decreases. If the right to use the asset decreases, this would be deemed a termination of the SBITA (may be full or partial) since this would no longer meet the definition of a SBITA (control of the right to use criterion). The institution should account for a partial or full SBITA termination by reducing the carrying values of the subscription asset and liability and recognizing a gain or loss for the difference. 

An institution should account for an amendment during the reporting period resulting in a modification to a SBITA contract as a separate SBITA (that is, separate from the most recent SBITA contract before the modification) if both of the following conditions are present:

1. The SBITA modification gives the government an additional subscription asset by adding access to more underlying IT assets that were not included in the original SBITA contract.
2. The increase in subscription payments for the additional subscription asset does not appear to be unreasonable based on (1) the terms of the amended SBITA contract and (2) professional judgment, maximizing the use of observable information (for example, using readily available observable standalone prices).

In contrast to amending the provisions of the SBITA contract, exercising an existing option, such as an option to extend or terminate the SBITA, is subject to the below guidance for remeasurement.

A government should reassess the subscription term only if one or more of the following occur:

1. The government or SBITA vendor elects to exercise an option even though it was previously determined that it was reasonably certain that the government or SBITA vendor would not exercise that option.
2. The government or SBITA vendor elects not to exercise an option even though it was previously determined that it was reasonably certain that the government or SBITA vendor would exercise that option.
3. An event specified in the SBITA contract that requires an extension or termination of the SBITA takes place.

 

Initial and Subsequent Reporting

 

	Liability	Asset
Commencement of Subscription Term*	Record subscription liability equal to present value of subscription payments (fixed payments, variable payments, that depend on rate, variable payments that are fixed in substance, payments for penalties, subscription incentives, and any other payments reasonably certain of being required)	Record subscription asset equal to subscription liability + capitalizable initial implementation costs payments made to SBITA at contract commencement + payments made to SBITA vendor at contract commencement
Subsequent Periods	Reduce subscription liability as payments are made for portion related to principal Record interest expense	Record amortization expense and allowance for amortization on subscripting asset over the subscription term using straight-line method

*The subscription term begins when the subscription asset is place into service. This occurs when (1) the initial implementation stage is complete and (2) the institution has obtained the control of the right to use the underlying IT assets. For FY 23 (implementation year), the total of the SBITA contract starts from July 1, 2022 (or the date the SBITA beings if after July 1, 2022) through the end of the subscription term. 
 

7.10.4.2 SBITA Resources

- GASB Statement 96

- State Accounting Office SBITA Accounting Policy

- USG SBITA Journal Entry Guide

- GeorgiaFirst Guidance for Leases (see Asset Management job aids)

- GASB 96 – SBITA Analysis Tool
 

7.10.4.3 Glossary

Cancelable period – Periods for which an institution and vendor both have an option to extend or terminate.

Commencement Date – The date the underlying asset is available for use which may be the same date as the contract execution date.

Contract – An agreement (written or verbal) between two or more parties that creates an enforceable right and obligation.

Discount Rate – For the institution, the discount rate for the SBITA is the rate implicit in the software contract unless that rate cannot be readily determined.  In that case, the institution is required to use its incremental borrowing rate. 

Exchange or Exchange –Like – A transaction in which each party receives and sacrifices something of approximately equal value.

Fiscal Funding Clause – A provision by which the SBITA is cancelable if the legislature or other funding authority does not appropriate the funds necessary for the government unit to fulfill its obligations under the software contract. 

Implicit Rate – The rate of interest that at a given date, causes the aggregate present value of (a) the SBITA payments and (b) the amount that an institution expects to derive from the underlying subscription based IT asset following the end of the SBITA term to equal the sum of (1) the fair value of the underlying IT asset.  However, if the rate determined is less than zero, an implicit rate of zero should be used. 

Incentive – This may be a rebate, discount or cash payment to the SBITA vendor to induce an institution to enter into a SBITA. Examples of an incentive also include an agreement to pay preexisting subscription obligations to a third party, other reimbursements of end user costs, free subscription periods, reductions of interest or principal charges by the SBITA vendor.

Incremental Borrowing Rate – The rate of interest that the institution would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the SBITA payments in a similar economic environment. For entities within the state reporting entity (including USG institutions), this is the State’s incremental borrowing rate, provided by the State Accounting Office.

SBITA – A contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction.

SBITA Term – The period during which a government has a noncancellable right to use the underlying IT assets. The subscription term also includes periods covered by an option to extend (if it is reasonably certain that the government or SBITA vendor will exercise that option) or to terminate (if it is reasonably certain that the government or SBITA vendor will not exercise that option).

Noncancelable Period – The period for which a SBITA contract is enforceable and the SBITA is cancelable only upon the occurrence of some remote contingency.

Period of Time – The total period of time that an asset is used to fulfill a contract.

Reasonably certain – Implies a higher level of certainty. It is much more likely to occur than unlikely to occur.

Right to Use – the right to obtain the present service capacity from use of the underlying IT asset and the right to determine the nature and manner of its use.

Short-term SBITAs – SBITAs that, at the commencement of the SBITA, have a maximum possible term of 12 months or less, including any options to extend. 

Underlying IT Asset – An IT asset that is the subject for the SBITA for which a right to use the IT asset has been conveyed.

Variable Payments Based on Index – Payments that are linked to a benchmark and may fluctuate to reflect changes in market rental rates.

Variable Payments, In-Substance Fixed – Payments that are structured as variable SBITA payments but are in-substance fixed. This is when there are multiple sets of payments that the institution could make, but it must make at least one of these.  An example of this is when an institution has a SBITA with payments that vary based on the total number of users with a minimum amount due regardless of the number of users.

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