Capital Accounting

The following guidelines explain the accounting treatment for UBC capital expenses.

These guidelines help us to:

  • clarify the distinction between operating expenditures and capital expenditures
  • provide general guidance and resources to assist units and departments in accounting for capital expenditures
  • allow for a fair allocation of the cost of capital assets against revenues over the useful life of the asset
  • achieve consistency of capital accounting across all departments, units and UBC.

FMS does not provide a detailed fixed asset ledger, and detailed asset listings are not maintained in the accounting system. Where asset control is required for tracking, maintenance or costing purposes, the department should develop its own internal tracking system.

Capital Accounting Process
  • Units need to make an independent evaluation to determine if an expense is capital in nature based on the definition in PSAB.
  • If an expenditure is capital in nature, it should be recorded to an account within the 8XXXXX series (library books use the 637XXX series). 
  • These accounts are expense accounts that are available for units and faculties to record capital expenditures.
  • When recorded in these accounts, capital expenditures are treated in the same manner as other operating expenses, which enables units and faculties to manage your operations on a cash basis. Consequently the funding for a capital purchase is given as a current year budget item.
  • The capital expenses recorded in the accounts reflect the use of the budgeted funds.
  • A capitalization process is run each month to take the expenses recorded to the accounts series 8xxxxx (library books use 637XXX) and reallocate them to the asset accounts (18xxxx).
  • These entries are made in Finance Dept IDs, which are not seen by the departments and units.
  • Once the expenses are recognized as assets, they start to get depreciated over the useful lives for purposes of external financial reporting.
  • This capitalization process converts UBC’s records from the ‘cash’ basis of accounting to the ‘accrual’ basis, which is required for external financial statements presentation.
Criteria for Capitalization
  • Units need to make an independent evaluation to determine if an expense is capital in nature based on the definition in PSAB.
  • Specific dollar values have not been established as thresholds for capitalization other than as identified in the Major Asset Classes table, which summarizes the characteristics of major asset classes.
  • Rather, if an item is considered to be a capital expenditure, it is recorded to a capital expense account (8xxxxx) and capitalized using the process described above.
Capital Fund
  • Capital fund records all transactions applicable to donations and grants received for the specific purpose of funding capital projects and acquisitions.
  • The use of these monies is restricted by the donor or granting agency.
  • Project grants (PGs) are set up in the Capital Fund for major capital projects, which require periodic reporting to UBC’s Board of Governors) and for those projects which have committed external funding, as mentioned previously.
Depreciation
  • Financial Reporting depreciates assets on a monthly basis using the straight line method, which depreciates assets evenly based on their estimated useful lives.
  • Therefore it is crucial to charge capital expenditures to appropriate capital expense account codes in order to reflect accurate amounts of depreciation on UBC’s consolidated financial statements.
  • Depreciation will be applied against the same Capital Project/Grant (PG) and Dept ID to which the asset was capitalized, and departments and units normally do not have access to these PGs and Dept ID.
  • For non-building capital assets, or additions to the existing buildings, a half-year of depreciation will be applied in the year of acquisition, and in the year of retirement.
  • In the year when new buildings are placed in service, depreciation will begin in the month after the new building is placed in service.
  • Pro-rated depreciation for the first and final retirement year is calculated and recognized manually at year-end.
Asset Retirement
  • When a capital item is disposed of or no longer has a future value, units and departments may record the proceeds as revenues into their own record and Financial Reporting does not need to be notified if the proceeds are less than $100,000.
  • If the proceeds or consideration are greater than $100,000, the units or faculties should notify Financial Reporting so that the proper disposal entry can be recorded to remove all related balances from the general ledger.
  • Fully amortized assets must be written off in the year in which they become fully depreciated. This is necessary to ensure that depreciation is not applied in the subsequent year.
  • Finance will write-off fully depreciated assets each year.
Deferred Capital Contributions
  • Where capital assets have been financed from externally restricted donations, Finance will set up a Deferred Capital Contribution (DCC) equal to the amount of the donation when it is spent on the specified capital project.
  • Finance will amortize (credit) the DCC to income over the life of the building at the same rate as it is depreciated.
  • If the building was fully funded from donations, the credit to income will completely offset the depreciation charged for the year.
Capital Lease
  • There are two different ways for which leases can be accounted: capital lease or operating lease.
  • An operating lease is treated as an operating expense as the lessee is considered to be renting the equipment.
  • A capital lease is considered to be similar to a loan because the asset is treated as if it is owned by the lessee with a corresponding lease obligation to be paid down over the term of the lease arrangement.
  • In the case of a capital lease, because the asset is treated as if it is owned by the lessee, the asset needs to be capitalized.
  • The capitalization criteria used for leases are to capitalize those which meet one of the following conditions:
    • There is an option to purchase the asset at the end of the lease agreement at a bargain price.
    • There is a clause to transfer the ownership title to UBC at the end of the lease term.
    • The lease term allows UBC to receive substantially all of the economic benefits from use of the asset, which is generally defined as having a term that represents 75% or more of the item’s expected useful life.
    • The lessor is expected to recover their investment in the asset, which is generally the case when the present value of the lease payments is 90% or more of the fair value of the leased property at the time of inception.
  • When a lease meets any of the above capitalization criteria and the cost of the lease payments per year are greater than $100,000, faculties and units should consult with Financial Reporting to determine the proper accounting treatment.
Interest on Capital Projects
  • All major capital projects (over $2.5 million) are subject to carrying charges on bridge financing. Bridge financing occurs when construction has commenced on the capital project without the receipt of some or all of the cash flow from committed funding sources.
  • The interest rate is determined by Treasury monthly.
  • Interest charges are calculated based on the closing cash deficit balance at month-end.
  • These charges are recognized as Interest Expense and are not capitalized.
  • Capital projects with surplus funds will earn interest to the extent that it will offset interest charges already recognized or to be recognized.
Responsibility of Units
  • Faculties and units should identify capital expenditures and record them using the most appropriate account codes.
  • While account code name may be a good indicator when choosing a capital expenditure account code, it is highly recommended that useful life and description of account code to be also considered to minimize the risk of inaccurate coding.
  • For example, a unit may renovate 90% of an existing building and charge related expenses to the asset class called “Major Renovations” which depreciates the cost over 15 years. However such a renovation is likely to last more than 15 years, and therefore “Major Upgrades”, which depreciates assets over 25 years or “Building Renewals”, which depreciates assets over 40 years, may be more suitable choices in this case.
  • Visit Major Asset Classes and familiarize yourself with the categories, their life spans and descriptions. 
  • Ancillaries are responsible for reconciling their year- end Asset and Accumulated Depreciation balances.

Need assistance?

Contact Alexia Lee in Capital Accounting.