CAPITAL EXPENDITURE POLICY

PREPARED BY:

APPROVED BY:

REVISION DATE:

EFFECTIVE DATE:

PURPOSE

• To establish policies surrounding the company’s capital equipment in order to ensure that they are properly
accounted for, tracked and safeguarded.

• To clearly document the proper process and required documents to ensure that the company’s key capital
equipment transactions are performed timely, accurately and with all required information entered into the
accounting system.

• To ensure that vendors are paid timely and only after assets have been properly ordered, received and tagged
in the accounting system.

SCOPE

This policy covers all purchases of capital assets. Capital assets are defined as purchases made for items and/or
projects to be used in the normal course of Company XX’s business (not for resale) with an economic life greater
than one year and with costs as follows:
• Disclosure to or requests by a provider for treatment.
• Individually greater than or equal to $XX per unit.
• For a group of assets with unit costs greater than or equal to $XX per unit and total cost greater than $XX in
aggregate, assets must be individually identified and tracked.
• Purchases less than $XX that are used to construct another asset in which the aggregate exceeds $XX are
initially considered construction-in-process (CIP) until completed and properly capitalized as one asset.

The following items are not considered capital items:

• Application software such as Excel, with a cost less than $XX.
• Purchased maintenance service support over a pre-determined period although the cost may exceed $XX. The
support should be expensed over the service period and should not be included as a capital asset.

POLICY

CAPITALIZATION AND ECONOMIC LIFE OF ASSETS

• Initially, capital assets and leasehold improvements are capitalized at cost.

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• Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which generally
range from X to X years.

Category Description Life

COH Computer equipment (supported by IT) <Insert Months>

Implementations of sizable solutions that will be the

COS <Insert Months>
continuing solution for the foreseeable future

Enhancements and upgrades to existing software solutions

COS that add additional functionality and small-dollar-value <Insert Months>
software packages

LAB Laboratory equipment <Insert Months>

MHE Material handling equipment <Insert Months>

ME Manufacturing equipment <Insert Months>

TOOLS Tooling equipment <Insert Months>

FNF Furniture and fixtures (projectors, video units, etc.) <Insert Months>

Permanent additions or improvements made to a building

LSHLD <Insert Months>
leased or owned by Company XX

CONSTRUCTION-IN-PROCESS (CIP) PURCHASES

• CIP purchases include the following:
− Cost of materials and services purchased from vendors.
− Inventory removed from stock to build tooling or test assets.
− Costs to make the software application ready for its intended internal use.

• The costs of constructing CIP assets are charged to fixed-asset-in-process until the project is complete. Once
completed, the asset is placed into service and depreciated in accordance with the appropriate asset category
in the table above.

UPGRADES
• The cost of upgrading an existing asset is considered a capital asset if the cost of the upgrade is equal to or
greater than $XX and has an economic life greater than one year.

• The economic life of the upgrade is determined by the fixed asset accountant based upon a number of factors,
including the remaining life of the asset being upgraded and the nature of the upgrade.

• In no event would the life of the upgrade exceed the economic life of the asset category.

INACTIVE, DAMAGED AND IMPAIRED ASSETS

• For any assets identified as not in-use, department managers will work with finance to properly dispose of the
asset.

• Department managers must submit a completed and approved fixed asset retirement form to the fixed asset
accountant to retire the asset from the system.

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• Disposals of capital assets are recorded by removing the costs and accumulated depreciation from the
accounts. Gains or losses are included in the results of operations.

• Once each year, assets will be tested for impairment using methodology consistent with X standards. If
significant economic or business events occur, this schedule can be altered at the direction of the corporate
controller or CFO.

• Assets which have been impaired and will not be used over the original depreciable life will be identified and
the remaining book value will be depreciated over the remaining economic life, if any. If the asset is deemed to
be obsolete with no remaining life, the asset will be disposed of or sold and any resulting gain or loss will be
recorded.

INTERCOMPANY ACCOUNTING
• Transfers of assets to another department will be at the current net book value at the time of transfer.

• Asset transfer forms are used to authorize and record the re-deployment of assets to a different location or
department. Forms can be obtained from the fixed asset accountant.
− Asset transfer forms must be approved by the department managers of the original department and the
destination department.

CAPITAL BUDGETS
• The capital budget is developed in sufficient detail to enable tracking of actual budget spending levels by the
appropriate department.

• The approved capital budget may be revised and updated for subsequent approved revisions, such as
quarterly re-forecasts, and distributed as appropriate.

SALES/USE TAX GUIDELINES

• In order to ensure payment and proper recording of sales/use tax, the fixed asset accountant on a monthly
basis will deliver to the tax department the prior closing month’s fixed asset packages.

• The tax department will review each purchase to ensure the proper recording of sales/use tax.
− The tax department will accrue sales/use tax for any purchases in which sales/use tax was not properly
recorded.
− The accrued taxes will be coded to the appropriate capital account and will reference the associated fixed
asset ID numbers.

• As necessary, inventory removed from stock for use as a capital asset will have use tax accrued by cost
accounting.

• Capital expenditures purchased from outside vendors should include sales/use tax on the invoice for AP
processing. If the vendor did not charge sales tax, accounts payable will accrue the appropriate amount of use
tax for the purchased item.

APPROVAL AND PROCESSING OF CAPITAL ASSET PURCHASES

• Capital assets purchases must be approved in accordance with the commitment and expenditure policy.

• Depending on the process in each location, an online requisition, capital expenditure request form (CER),
purchase requisition (PR) or purchase order (PO) must be completed for each item to be purchased, including
items to construct CIP assets.
− Online requisitions, CERs, PRs and POs are routed for approval as outlined in the commitment and
expenditure policy.

• Forms can be obtained by contacting the fixed asset accountant or the purchasing department.

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• It is the requester’s responsibility to ensure that the amount being requested is budgeted and available.
− The appropriate finance representative who approves the online requisitions or CER will validate this as
part of the approval process in accordance with the commitment and expenditure policy.

• For online requisitions and capital request forms:

− The requestor will be responsible for driving the online requisitions or CER process.
− The CER must have the appropriate signatures as outlined in the commitment and expenditure policy.
− The online requisition or CER must:
ᵒ Include the expected physical location where the assets will be used.
ᵒ Be specific enough about items being purchased such that an accurate assessment of the sales/use tax
consequences can be made.
ᵒ Be specific enough about items being purchased such that it will aid in easily identifying the asset during
physical inventory. Where several items are being purchased to make one asset or grouped into one
asset, they will be clearly identified as such.
− The fixed asset accountant will return to the requester any online requisitions or CER form that is not
complete or properly approved.
− Purchasing is prevented from processing online requisitions for capital purchases without the release from
hold processing (approval) from the fixed asset accountant.

• For internal purchase orders:

− An internal purchase order form is required to request the purchase of Company XX equipment to be used
as a capital asset.
− A completed CER must accompany the internal purchase order form.
− The internal purchase order form and CER form must be sent to the appropriate level for approval.
ᵒ After obtaining the appropriate approvals, the requester will forward the approved documentation to the
fixed asset accountant.
ᵒ The CER and internal purchase order form will be returned to the requester after the CER number is
assigned to the approved CER documentation and the CER number is set up within (Insert ERP
System).
ᵒ It is the requester’s responsibility to forward the completed and approved documentation to order
management.
− Order management cannot process internal purchase orders for capital purchases without a CER number
first being set up in (Insert ERP System). The CER number serves as a control mechanism to link the CER
(approval) documentation to the fixed asset cover sheet and invoice during asset input, thus producing a
complete fixed asset package for each asset.

PHYSICAL ACCOUNTABILITY OF CAPITAL ASSETS

• Receiving:
− The tagging of capital assets is primarily a receiving-driven process. Company XX receiving departments
are responsible for the physical tagging of capital equipment they receive at the point of receiving capital
goods.
− System controls exist that require asset tagging and input of tagging information into the accounting system
prior to the vouchering of capital equipment invoices by accounts payable.
− Asset tag information in the receiving module is linked to voucher information in the accounts payable
module via the purchase order number.

• Physical Counts:
− Fixed asset accounting, finance and department managers will conduct a physical inventory of fixed assets
every year.

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 − These physical inventories will include all assets consisting of at least X% of the total net book value of
worldwide fixed assets.
− Disposals and transfers resulting from these inventories must be supported by the applicable forms and
contain required approvals.

ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR

INTERNAL USE
• Internal-use software is software having both of the following characteristics:
− The software is acquired, internally developed or modified solely to meet the entity’s internal needs.
− During the software’s development or modification, no substantive plan exists or is being developed to
market the software externally.

• Internal and external costs incurred during the preliminary project stage should be expensed as incurred.
− Application development stage activities should be capitalized (exception: certain data conversion costs,
which should be expensed).
− Capitalization should begin once the preliminary project stage is completed, management authorizes and
commits to funding the project, and it is probable that the project will be completed and the software will be
used for the intended function.
− When it is no longer probable that the project will be completed and placed in service, no further costs
should be capitalized and any prior amounts capitalized should be reviewed for impairment.
− Capitalization should cease when the software is substantially complete and ready for its intended use.
Generally, software is ready for its intended use after all substantial testing is completed.
− Post-implementation/operation stage activities should be expensed as incurred.

• Upgrades and enhancements:

− Upgrades and enhancements are defined as modifications to existing internal-use software that result in
additional functionality (i.e., modifications to enable the software to perform tasks that it was previously
incapable of performing).
− Costs incurred for minor upgrades and enhancements should be expensed as incurred.

• New software development activities should result in the evaluation of the remaining useful lives of software to
be replaced to determine if any unamortized costs should be expensed when the new software is ready for its
intended use.

External Costs
Description
Expense Capitalize

Scoping/Business Process Re-Engineering:

Preparation of request for proposal (RFP) X

Current state assessment X

Process re-engineering X

Preliminary Software Project Stage Activities:

Defining requirements X

Conceptual formulation of alternatives X

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 Evaluation of alternatives X

Determination of existence of needed technology X

Vendor demos and selection X

Application Development Stage Activities:

Design of chosen path, including software configuration and software interface X

Coding X

Installation to hardware X

Testing, including the parallel processing phase X

Data conversion costs: X

Costs to develop or obtain software that allows for access of old data by new
X
system

All other data conversion processes (purging or cleansing of existing data,

reconciliation of data, creation of new/additional data, and conversion of the old X
data to the new system)

Training X

Post-Implementation/Operation Stage Activities:

Training X

Application maintenance X

Ongoing support X

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