1. This version replaces that issued 1999-09-21.
2. Capital Assets are tangible assets that are purchased, constructed, developed or otherwise acquired and:
3. For the government, capital assets have the following characteristics:
4. For government accounting purposes, capital assets generally include any asset which has been acquired, constructed or developed with the intention of being used on a continuous basis and is not intended for sale in the ordinary course of business. Capital assets also include betterments. Betterments are expenditures relating to the alteration or modernization of an asset that appreciably prolong the item's period of usefulness or improve its functionality. Departments shall treat as a capital asset any asset that, in addition to meeting the above conditions, has a useful life in excess of one year and a per item cost of greater than $10,000. Departments may establish a lower threshold than $10,000.
5. Departments may establish a lower and/or varying lower threshold for different asset classes but these must be consistent from year to year. Lower thresholds may be necessary to ensure all material capital assets are included in a department's financial statements. The threshold limit and any changes in the limit must be reported as a note to the financial statements. Departments are encouraged to capitalize all land regardless of its cost.
6. For further clarification, capital assets:
7. Certain items such as tools, furniture and desktop computers might be below the capitalization threshold individually but are typically purchased or held in large quantities so as to represent significant expenditures overall. In such cases, departments may capitalize all items acquired in a given asset class or pool and amortize the pool over a pre-determined amortization period.
8. Goods and Services Tax (GST) and Harmonized Sales Tax (HST) shall be accounted for as described in the "Policy on the Application of the Goods and Services Tax and the Harmonized Sales Tax in the Departments and Agencies of the Government of Canada" and shall not be capitalized.
9. Interest expense related to financing costs incurred during the time an asset is under construction will not be capitalized.
10. Spare parts, acquired as part of the same procurement as the original capital asset, may be considered integral to the acquisition of the asset and form part of the total cost of the capital asset. However, departments may instead choose to account for these separately.
11. Refer to TBAS 1.2 Departmental and Agency Financial Statements for the required note disclosure for capital assets.
12. Departments must ensure that all capital assets held by the department at the date this policy becomes effective and any future acquisition of capital assets are properly valued and recorded.
13. The capitalization of assets requires that departments:
14. All capital assets held by a department at the date this policy becomes effective must be identified and valued using an appropriate cost base. Departments should consider reasonableness and materiality in their approach. Specifically, in this regard:
15. In certain cases, more than one department or agency has some involvement with the use of an asset. The concept of "control" should be used in determining which department records and amortizes the asset in their financial statements. "Control" in this context means the ability to obtain future economic benefits in fulfilment of aims and objectives of the entity and to restrict the access to others. TBS should be consulted where it is unclear as to which entity should record the asset.
16. Assets acquired as a result of Confederation or the subsequent joining of a province or territory are recorded at a nominal value (e.g. $1).
17. Donated assets should be valued at fair value at the date of contribution. If the fair value cannot be determined, the asset should be recorded at a nominal value.
18. For purposes of capitalization and amortization, the two methods of defining a capital asset are Whole Asset and Component.
19. the whole asset method and the component approach are equally acceptable under Generally Accepted Accounting Principles. A department can choose the method that best serves its needs. In certain circumstances, it is appropriate to allocate the total disbursement on an asset to its component parts and account for each component separately. This is the case when the component assets have different useful lives or provide economic benefits or service potential to the entity in a different pattern, thus necessitating use of different amortization rates and methods. For example, the pavements, formation, curbs, footpaths, bridges and lighting may need to be treated as separate items within a road system to the extent that they have different useful lives. Similarly, an aircraft body and its engines may need to be treated as separate depreciable assets if they have different useful lives. Additional factors influencing the choice of method include:
20. For information technology systems, generally the whole asset approach is used for purchased systems since departments contract the entire implementation of the system, software and hardware, to a third party. In addition to not having separate costs for the various components, these systems are usually larger, are for a specific purpose, have well-defined parameters and a definite start date.
21. The component approach is generally used for internally developed and internally implemented information technology assets. These systems are usually more general in use and purpose with different start dates for different areas of the department. The department also typically purchases the components of the system from different suppliers.
22. Future site restoration costs encompass costs for dismantling, abandoning, and cleaning up a property. These costs may be incurred as a result of a contract or because the government has established a policy to restore a site. When such costs can be reasonably estimated, they should be accrued (net of expected recoveries), as part of the capital asset and amortized over its useful life. The provision for future site restoration costs is to be recorded as a liability until the future site restoration takes place.
23. An example of the application of this policy would be when a department constructs an asset on leased land, with the condition that it restore the site to its original condition at the end of the lease term. In this case, an estimate of the cost of demolishing the asset and cleaning-up the site should be capitalized as part of the cost of the asset and amortized to expense at the same rate as the asset. The rationale behind this accounting treatment is that the site restoration costs are linked to the use of the asset and hence should be recognized over the years of use rather than at the time the restoration work is performed.
24. Where future site restoration costs are expected to be significant but cannot be reasonably estimated, a contingent liability should be reported. See TBAS 3.6 for more information on the treatment of contingencies.
25. Costs to be capitalized exclude costs related to environmental liabilities due to contaminated sites and solid waste landfills. Accounting and disclosure requirements for these costs will be communicated in the Policy on Accounting for Costs and Liabilities Related to Contaminated Sites.
26. A leasehold improvement is a betterment made to leased property. Betterments are expenditures relating to the alteration or modernization of an asset that appreciably prolong the item's period of usefulness or improve its functionality.
27. To be considered a leasehold improvement, the modification must have at least four characteristics:
28. Examples of leasehold improvements that should be capitalized include significant upgrades to the electrical system to meet the needs of computer systems and the installation of walls and doors to create permanent offices. Examples of modifications that would not be capitalized include remodelling costs such as painting and carpeting.
29. Betterments made to an asset subject to an operating lease or a capital lease where ownership does not transfer to the lessee (i.e. lease does not contain a bargain purchase option or provide for transfer of ownership of the asset) should be classified as a leasehold improvement. Betterments made to an asset subject to a capital lease where ownership is expected to transfer to the lessee, should be classified as betterments. The cost of betterments may be capitalized as part of the cost of the capital asset and amortized over the useful life of the asset. However, where the useful life of the betterment is significantly shorter than that of the asset, it should be capitalized and amortized separately.
30. Where a department builds a building and/or infrastructure on leased land, these costs would be capitalized as a leasehold improvement except where the land is leased from an other government department or the lease provides for transfer of ownership. In the latter cases, the building and/or infrastructure should be capitalized as an asset rather than a leasehold improvement.
31. Certain situations exist where a lease agreement does not exist but may be deemed to be lease-like for accounting purposes. An example includes assets that have been built years ago on unoccupied land without right or title or where a department occupies a building owned and managed by PWGSC free of charge. As long as the expectation is for continued occupancy, any betterment made to such property may be capitalized as a leasehold improvement.
32. The cost of property, equipment and other capital assets is essentially a long-term prepayment of an expense in advance of the use of the asset. As the economic service life of the asset expires, the cost of the asset is systematically allocated to operations as an expense called "amortization".
33. Periodic amortization expense should be an allocation of the historical cost of the asset less expected salvage value, if applicable, to operations in proportion to the economic benefits received each period from the use of the asset.
34. The service life of an asset should be determined on a basis that is linked with the expiration of the economic benefits. For example, service life may be measured in terms of years; total units of output; or total hours of operating time. Aircraft might use hours of operation as the appropriate measure of service life.
35. Where the appropriate measure of service life is "in years", it is recommended that the amortization of assets be on a straight-line basis for administrative simplicity.
36. Departments are in the best position to estimate the expected life of an asset. The maximum amortization period should be limited to 40 years unless the department can estimate and clearly demonstrate that the useful life of the asset is expected to exceed 40 years. As a guideline assets should be amortized over the following life spans:
37. Amortization shall be recorded monthly commencing on the first day of the month following the month that the asset was put into service. Note: for pooled assets, where purchases and disposals affect the pool balance throughout the year, the amortization calculation may be based on the estimated pool balance rather than actual. For example, where a type of asset has an average expected life of 3 years and the average balance of the pool throughout the year is $1 million, the monthly amortization would be calculated as 1/36 x $1 million. The amortization charges related to the pool should be reviewed for reasonableness at year-end.
37. The amortization method and estimate of the useful life of the remaining unamortized portion of a tangible capital asset should be reviewed on a regular basis and revised when the appropriateness of a change can be clearly demonstrated.
39. Transfers of capital assets between departments shall be at the net book value of the asset. The receiving department would record the asset at its original historical cost and accumulated amortization.
40. The transfer of land from an outside party to a department should only be capitalized as an asset when the agreement provides for a transfer of ownership. Where the agreement does not provide for a transfer of ownership, the land may not be capitalized. However, the costs of buildings and infrastructure built on the land may be capitalized if they meet the capitalization criteria. An example of this situation is when an agreement provides for unlimited use of the land by a department but the land reverts to the outside party once the department is no longer using it.
41. This policy is effective April 1, 2001 and should be applied retroactively. Note that the capitalization of software is to be performed prospectively (see TBAS 3.1.1). Additionally, the policy with respect to leasehold improvements is to be applied prospectively except for buildings and infrastructure constructed on leased land. These costs should be capitalized and included as part of the April 1, 2001 opening balances.