Office of Origin: Finance
Responsibility: Chief Financial Officer
Original Date Adopted: 05-19-20
Dates Reviewed: 05-19-20
Last Date Approved: 05-19-20

Capital Asset Threshold

A Capital Asset is an expenditure of $5,000 or more and an estimated useful life greater than 1 year, with the following exceptions:

• All library materials (e.g., books, journals, bound periodicals, microfilm, electronic media) are capitalized.
• All purchases of land are capitalized.

Capitalized Cost of Capital Assets

Purchased Assets

The “capitalized cost” (i.e., amount recorded as cost basis for asset) includes purchase price, transportation and installation costs, value received from trade-in, and other direct costs incurred in obtaining the asset and making it usable.

Construction and Renovation Projects

The capitalized cost for construction and renovation projects includes costs for constructing and/or improving an asset (labor, materials, architectural / design fees, permits, inspections, filing costs, agent fees, etc.) plus utilities during the construction period, certain landscaping, etc. These costs collectively are a “capital project.”

If a vendor or contractor is working on more than 1 capital project at a time, they are required to provide a breakout of costs by project. Alternatively, if separate bid documents are available, those documents can be used to allocate a consolidated invoice to the separate projects.

Capitalization of landscaping is determined by Generally Accepted Accounting Principles (GAAP), which vary based on landscaping type. Please seek guidance from the Finance Department.

Assets Purchased with Grant Funds

See Grant Supplies & Equipment procedure.

Leased Assets

The capitalized cost is determined by GAAP, which vary based on lease type. Please seek guidance from the Finance Department.

Donated Asset

All assets donated to the College must be processed through the Lake Michigan College Foundation (Foundation.) The capitalized cost is the asset fair market value on date of donation plus direct expenses of obtaining/installing the asset.

Repairs and Maintenance (R&M)

During the life of capital asset, it may be necessary to pay for R&M of the asset. Capitalization of these costs depends on the nature of the repair or maintenance.

R&M costs incurred to restore an asset to a previous operating condition or to keep an asset in its current operating condition are not capitalizable under GAAP. These costs refer to normal, regularly recurring expenditures required to keep an asset in efficient operating condition, and neither adding to the value of the asset nor appreciably prolonging its life. This type of expenditure, regardless of cost, is expensed and not capitalized.

R&M that cost over $5,000 and which also increase the asset estimated useful life can be capitalized.

Depreciation of Capital Assets

The straight-line method of depreciation is used for all depreciable capital assets. Depreciation is charged beginning with the month the asset is placed in service. Estimated useful lives are as follows by capital asset category:

• Art: not depreciable
• Buildings and improvements: 45 years
• Computer hardware: 5 years
• Computer software: 3 years
• Equipment: 7-15 years
• Furniture and fixtures: 5-7 years
• Land: not depreciable
• Land improvements & infrastructure: 15-20 years
• Library materials: 5 years

Capital Asset Categories

The College has 3 capital asset categories: Minor Capital, Routine Capital, and Major
Capital.

1. Minor Capital

   Minor Capital are assets that have an estimated useful life of more than 1 year but which cost less than $5,000. Minor Capital is not capitalized but instead expensed when purchased.
    

   Budget & Approvals

   Approval for purchase of Minor Capital comes through the annual operating budget process.
    

2. Routine Capital (RC)

   RC expenditures are generally intended for maintaining, renewing, improving, and replacing existing assets. These assets are generally non-emergency and planned in advance, and their maintenance/improvement/replacement considered to be part of an ordinary course of business.

   Examples of RC includes instructional equipment and library books; classroom/office equipment and furniture; replacement of vehicles, signage, doors; asphalt/pavement repairs; elevator upgrades; re-carpeting and room remodeling; occasional (or regular but less than College-wide) acquisition or replacement of digital signage, computers and peripherals, security cameras, servicers and network switches.

   Capitalizable repairs to existing assets will be designated as RC or MC depending on the investment required and the scope of the project.
    

   Budget & Approvals

   The RC budget is calculated annually using a standard methodology and is allocated between Academics, Facilities, Information Technologies (IT), President, other locations (Niles, South Haven), and auxiliaries.

   The RC budget is approved in total by the Board of Trustees (the Board) each year for the following fiscal year, and is funded by each fiscal year’s operating cash flow. Should no cash flow be generated from operations, RC could be funded by reserves, postponed, or funded by debt, as determined by the Board.

   All RC projects must be approved by the President.

   Although a list of planned RC projects is presented to the Board annually, Board approval of projects is not required unless the cost exceeds the President’s authority per the Authority to Bind College to External Agreements policy.

   For those RC projects that require Board approval, the information provided will include, as applicable, estimated annual incremental costs for a) asset operation, b) long-term maintenance, and c) depreciation, as well as d) proposed uses for unspent budget (such as bid alternates.)

   Any contract or obligation that is a component of a RC project that exceeds the President’s authority in the Authority to Bind College to External Agreements policy requires Board approval, even if the project as a whole has already been approved by the Board.

   Carryover of unspent RC budget from one fiscal year to the next requires approval of the Chief Financial Officer. Carried-over funding may only be used for the project originally intended and may only be carried over for 1 additional year after initially budgeted unless the project is in process and completion crosses fiscal years.

   RC budget overruns in total by area of 1% or less will be forgiven. Overruns in total of more than 1% by area will result in a reduction in the following year's RC budget for that area by the amount of the overrun.

   Savings (i.e., actual RC costs less than budgeted) may be reallocated to another RC project. In addition, RC budget may only be transferred to supplement a MC project with prior approval from the president.
    

3. Major Capital (MC)

   MC projects are generally intended for projects that are funded on a non-recurring or multi-year basis and which focus on acquiring, building, or significantly renovating, improving, or maintaining land, facilities, infrastructure, technology infrastructure and major systems, as well as for machinery and equipment that are part of a College-wide lifecycle replacement program.

   A MC project is generally a project with a budget greater than $50,000.

   In addition to the description of MC projects above, MC includes those projects funded by sources other than the College general fund, such as those funded by capital millage proceeds, debt proceeds, the Foundation, grants, or Student Senate Campus Funds.

   The determination of what is a MC project versus a RC project may be made on a project-by-project basis.

   Capitalizable repairs to existing assets will be designated as RC or MC depending on the investment required and the scope of the project.

   Budget & Approvals
   All MC projects require the President’s approval. MC projects exceeding the President’s authority per the Authority to Bind College to External Agreements policy require Board approval.

   If it is anticipated that a MC project will require Board approval, a summary of the project will be presented to the Board for review prior to incurring significant design or other costs and prior to seeking construction bids.

   For those MC projects that require Board approval, the information provided to the Board will include, as applicable, estimated annual incremental costs for a) asset operation, b) long-term maintenance, and c) depreciation, as well as d) proposed uses for unspent budget (such as bid alternates.)

   A 6% contingency will be included in all new construction MC budgets and an 8% contingency will be included in all renovation MC budgets. MC projects requiring equipment or systems testing will include commissioning costs in the budget.

   Any contract or obligation that is a component of a MC project that exceeds the President’s authority in the Authority to Bind College to External Agreements policy requires Board approval.

   Changes in project scope, such as change orders, that increase the cost of a MC project beyond the amount previously approved by the Board require additional Board approval if proposed changes exceed the President’s authority in the Authority to Bind College to External Agreements policy.

   Savings (i.e., actual project expenditures less than budgeted project expenditures) may not be reallocated to another capital project unless the approved budget included alternates to be included as funding permitted.

   Regular reporting of the status of MC projects will be provided to the Board.

References:
Authority to Bind College to External Agreements policy
Capital Assets procedure
Grant Supplies & Equipment procedure