Accounting Standard 3.1 - Treasury Board - Capital Assets
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1. This version replaces that issued 1999-09-21.
2. Capital Assets are tangible assets that are purchased, constructed, developed or otherwise acquired and:
- Are held for use in the production or supply of goods, the delivery of services or to produce program outputs;
- Have a useful life extending beyond one fiscal year and are intended to be used on a continuing basis; and
- Are not intended for resale in the ordinary course of operations.
3. For the government, capital assets have the following characteristics:
- Beneficial ownership and control clearly rest with the government; and
- The asset is used to achieve government objectives.
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:
- Include land, buildings, military assets, infrastructure assets, purchased computer software, in-house developed software (refer to TBAS 3.1.1 for further guidance on software), computer hardware, equipment, leasehold improvements, and assets acquired by capital leases or by donations;
- Do not include intangible assets such as copyrights, trademarks, patents, easements and rights of way;
- Do not include immovable assets located on Indian reserves or obsolete and surplus items;
- Include operational heritage assets. Heritage assets are those assets, usually irreplaceable, that are intended
to be preserved in trust for future generations. Operational heritage assets are those assets used for purposes in addition
to the maintenance of national heritage (e.g. heritage building with office space, parkland). Non-operational heritage
assets will not be capitalized. Non-operational heritage assets include:
- Museum and gallery collections, other works of art, national archives; and
- Archeological sites, ruins, burial sites, monuments and statues.
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.
Capitalization of 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:
- Establish procedures to ensure all costs required to make a capital asset operational have been recorded. Costs to capitalize include purchase price and other acquisition costs such as installation costs, design and engineering fees, legal fees, survey costs, site preparation costs, freight charges, transportation insurance costs and duties. The cost of a constructed asset would normally include direct construction or development costs (such as materials and labour), and overhead costs directly attributable to the construction or development activity (such as the costs of leased space used solely for the construction or development activities);
- Ensure that procedures are in place to differentiate between "betterments" which are capitalized, and "repairs and maintenance" which are expensed. Betterments improve the functionality or increase the useful life of an asset while repairs and maintenance primarily maintain the functionality of the asset. Where a cost can not easily be differentiated between a repair and a betterment, the cost should be expensed in respecting the accounting principle of conservatism;
- Establish procedures to ensure that when capital assets are sold or traded-in, the historical cost and accumulated amortization amounts relating to the particular capital asset are removed from the appropriate general ledger accounts and a gain or loss on disposal is recognized to the extent that the asset's net book value differs from the sale proceeds or from the trade-in value;
- Establish procedures to distinguish between a capital lease and an operating lease;
- Establish procedures to ensure that when capital assets become obsolete, impaired and/or are removed from service, and the long-term expectation is that the assets no longer have value or use to the government, the department will write down the net carrying amount of the asset to its net realizable value. If the capital asset is subsequently returned to service, departments must not "write up" its book value. Only betterments that have been made to bring the asset back into service should be added to the book value;
- Estimate the useful life of capital assets on a consistent basis; and
- Apply an appropriate amortization methodology in a rational and systematic manner, appropriate to the nature of the capital asset and its use by the department. This methodology should be developed by asset type and in consultation with responsible asset managers.
Valuation of capital assets on hand
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:
- Where practical and cost-effective, existing capital assets will be valued using historical costs, adjusted for the proportion of the useful life of the asset that has already been consumed through the establishment of a provision for accumulated amortization;
- Where it is not practical and cost-effective to establish a reasonable estimate of an asset's historical cost, departments may use appraised or some appropriate measure of current value and extrapolate back to estimated historical cost using the consumer price index (CPI) or some other relevant price/cost index. Replacement cost should not be used unless it is the lower of cost alternatives;
- Buildings and other assets acquired more than 40 years ago where no betterments have been undertaken should be carried at zero cost. If the historic cost of betterments made within the last 40 years can be established for buildings in excess of 40 years of age, this cost, can be used as the cost base of the building, once adjusted for the proportion of the increased service life that has been consumed through the establishment of a provision for accumulated amortization; and
- All lease agreements must be reviewed to determine if they should be accounted for as capital leases. Guidance on evaluating leases and the accounting for these can be found in the CICA Handbook Section 3065 and the Accounting Manual. Departments should also refer to the Public Sector Guideline 2, when assessing whether a lease should be classified as a capital lease. This guideline lists conditions, additional to those listed in Section 3065 of the CICA Handbook, that should be considered in identifying when substantially all the benefits and risks of ownership have been transferred (PSG-2, para. 4-10). The interest rate for incremental borrowing to be used in calculating the asset value should be the CRF term lending rates (if it is lower than the interest rate implicit in the lease).
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.
Bundling of assets (whole asset vs. component approach)
18. For purposes of capitalization and amortization, the two methods of defining a capital asset are Whole Asset and Component.
- The Whole Asset approach considers an asset to be an assembly of connected parts. Costs of all parts would be capitalized and amortized as one asset. For example, a computer network would be considered as one asset.
- Under the Component approach, different components are individually capitalized and amortized. Under this approach, the servers, routers, lines, software, etc. used in a network would all be individual assets.
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:
- Significance of amounts;
- Quantity of individual asset components (volume);
- Availability of information with respect to specific components of the capital expenditures; and
- Specific information needs of management for decision making and asset control purposes.
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.
Future site restoration costs
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:
- The modifications must be made to assets that have been leased;
- The lessee department/agency must pay for the improvements. If the expenses are the responsibility of the lessor (e.g. PWGSC) then it will account for the expenses in its own records;
- The leasehold improvements should be durable, they should bring benefits to the department/agency for more than one year; and
- The betterment reverts to the lessor at the end of the lease (i.e. cannot be detached from the leased property).
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.
Amortization of capital assets
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:
- The original cost of land is not amortized;
- Buildings: 20 to 30 years;
- Machinery and equipment: 5 to 15 years;
- Works and infrastructure: 20 to 40 years;
- Informatics hardware: 3 to 5 years;
- Informatics software: 1 to 10 years;
- Arms and weapons for defence: 5 to 10 years;
- Motor vehicles: 3 to 10 years;
- Military vehicles: 3 to 20 years;
- Ships and boats: 10 to 25 years;
- Aircraft: 10 to 20 years;
- Leasehold improvements: over the useful life of the improvement or the lease term, whichever is shorter. The lease term would include any renewal option periods where extension of the lease is expected; and
- Betterments: over the useful life of the asset to which the improvement was made or the useful life of the betterment if significantly shorter.
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.
Transfers of capital assets
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.