Marquette University –Changing the Capitalization Threshold for Furniture, Fixtures and
Equipment
Questions and Answers
Updated Draft 5/15/2006
1. What is the change?
The University currently defines furniture, fixtures and equipment as articles of
non-expendable tangible personal property having a life of more than one year,
and an acquisition cost of $1,000 or more per unit. Effective July 1, 2006, the
acquisition cost threshold will be increased to $5,000.
2. Are any other asset categories affected by this change?
Yes, any asset category with a current capitalization threshold of $1,000 will also
use the $5,000 threshold beginning July 1, 2006.
3. Why is the change needed?
There are two primary reasons for this change. One is to reduce administrative
costs of recording and tracking items of equipment. The second, and more
compelling reason, is that by eliminating the requirement to record and track
relatively low valued items, more attention and effort can be given to
safeguarding the remaining, higher valued items. This should enhance the
University’s overall control and stewardship of its assets and promote our
compliance with external regulations and University policy and procedures.
The University remains fully committed to the proper stewardship over all of its
assets, regardless of its capitalization threshold.
4. What are the key points in the implementation plan?
The basic elements of the implementation plan are summarized as follows. For
more detailed guidance or application to specific circumstances, see the
Comptroller’s Office Accounting Policy “Capitalization, Inventory, Depreciation
and Retirement of Property, Buildings and Equipment” and the rest of the
questions and answers in this document. If you still have questions, please
contact one of the following Comptroller staff:
Dennis Butler (dennis.butler@marquette.edu) 288-7933
Donna Braun (donna.braun@marquette.edu) 288-7487
Sa Yang – Sponsored Programs (sa.yang@marquette.edu) 288-5444
Transaction Processing:
Effective July 1, 2006, all furniture, fixture and equipment transactions received
on or after July 1, 2006 will be processed using the new threshold of $5,000.
Existing accounts have been modified to record expenditures for any items with a
useful life greater than one year with a unit cost less than $4,999. The accounts
will be used to gather data required by the Comptroller’s Office for financial
reporting. In addition, separate grant equipment accounts will be used to track
expenditures less than $999 and $1000 through $4,999 and to apply the grant
program indirect costs at the $1,000 threshold through the grandfathered period as
discussed below. Departments must take steps to ensure the proper use of these
accounts.
Computers and Computer Replacement Program
The new accounting policy allows for the purchase of like items (i.e., computers)
to be bundled into a single purchase and capitalized. Therefore, purchases of
computers that are coordinated through the Information Technology Services
(ITS) department Computer Replacement Program (CRP) will qualify to be
capitalized. Computers purchased on a stand alone basis by a department where
the cost does not equal or exceed $5,000 will not be capitalized. When a
department purchases computers on a stand alone basis, it should notify ITS of
their computer purchases to ensure that departmentally purchased equipment is
added to the Computer Replacement Program for inclusion in the four year
replacement cycle. If ITS does not receive departmental computer purchasing
information, stand alone computer purchases will not be considered part of the
CRP.
Contracts and Grants – Proposal Budgets and Indirect Cost Application:
Effective July 1, 2006, all new proposals for extramural funds will use the new
$5,000 threshold for any equipment items.
For awards based on proposals submitted to a sponsor before July 1, 2006, the
University will continue to apply indirect charges based on the $1,000 threshold
where the awarded budget already includes equipment or where new equipment
acquisition has been approved by the sponsor prior to July 1, 2006.
However, any and all rebudgeting involving equipment on or after July 1, 2006,
must use the new $5,000 threshold. This includes any rebudgeting done during
“no-cost” extensions. For example: A five-year award based on a five-year
budget submitted to a sponsor on June 30, 2006 includes equipment acquisition at
the $1,000 threshold in project year 5 (2010). In this case, the University will
apply indirect costs based on the $1,000 threshold through the end of the sponsorapproved award period, as proposed and as awarded. However, if the submitted
and approved budget did not include equipment acquisition in year 5 and the PI
wishes to rebudget in order to acquire equipment in year 5, the University will use
the $5,000 threshold to calculate indirect costs on that budget year.
In rare cases, a sponsor may require the University to budget capital equipment at
a rate lower than the $5,000 threshold or to waive indirect costs on equipment at a
threshold lower than $5,000. In such cases, the University will either comply
with a sponsor’s written guidance or negotiate a waiver of the sponsor’s
requirement.
Inventory of Furniture, Fixture and Equipment:
Effective July 1, 2006, newly received items with unit value of less than $5,000
shall not be tagged, tracked, or physically inventoried or otherwise required to be
physically inventoried.
Effective July 1, 2006, previously received items of equipment with unit
acquisition value below $5,000 will be exempt from physical inventory unless
otherwise required.
Financial Accounting
Effective July 1, 2006, only items with acquisition values of $5,000 or more per
unit or lot will be capitalized. Items capitalized in previous years, with unit
acquisition value below $5,000 shall remain capitalized until they are fully
depreciated or disposed.
5. Why can’t we implement all aspects of the change on July 1, 2006? Why
must we delay implementation for grants and contracts?
Immediate implementation will reduce the administrative burden of tracking lowvalue items as soon as possible. However, a reasonable phase-in period is
required for sponsored projects so that project budgets can be prepared to reflect
the new threshold and to be consistent with the timing of the negotiated indirect
cost rate.
6. What determines the treatment of an equipment item during the transition in
FY 2007: the date of the purchase order, the date of receipt or the date of
payment?
The date the equipment item is received determines how it will be treated. Items
costing less than $5,000 that are received on or after July 1, 2006 must be coded
as supplies and materials using one of the accounts described below in question
12.
7. Don’t federal regulations and University policy require that all items on the
inventory be physically verified periodically?
Yes. As always, the University must ensure and exercise proper control and
stewardship over its assets. Items on the equipment inventory must be physically
verified periodically, at least once every two years, according to University policy
and federal regulation.
The federal government sets the threshold for grant funded equipment at the lesser
of $5,000 or institutional policy. By setting its threshold at $5,000, the University
will be consistent with the federal threshold. The items with unit value of less
than $5,000 remaining on the inventory during the transition process should not
affect the University’s compliance with inventory verification requirements.
Normally, the inventory will consist only of items valued at or above the
established capitalization threshold. However, during the next several years,
items with unit acquisition value below $5,000 will remain on the inventory due
to the prospective nature of this change. The physical verification requirement for
these items is being waived to reduce the administrative burden associated with
these relatively low value items.
The waiver is also consistent with the change in the threshold, where new items
below $5,000 acquired after June 30, 2006 will not be capitalized or inventoried.
This waiver is applicable only during the transition period. Over the next several
years, all items with unit values below $5,000 will be permanently removed from
the inventory when the items have been fully depreciated or disposed.
8. Will this change affect the surplus equipment process?
No. Furniture, fixtures and equipment valued below $5,000 that are no longer
needed in your department, may still utilize the Purchasing Department’s surplus
equipment process.
9. How should extramural funding proposal budgets be prepared?
Effective July 1, 2006, all new proposals for extramural funds will use the new
$5,000 threshold for any equipment items.
For awards based on proposals submitted to a sponsor before July 1, 2006, the
University will continue to apply indirect charges based on the $1,000 threshold
where the awarded budget already includes equipment or where new equipment
acquisition has been approved by the sponsor prior to July 1, 2006.
However, any and all rebudgeting involving equipment on or after July 1, 2006,
must use the new $5,000 threshold. This includes any rebudgeting done during
“no-cost” extensions. For example: A five-year award based on a five-year
budget submitted to a sponsor on June 30, 2006 includes equipment acquisition at
the $1,000 threshold in project year 5 (2010). In this case, the University will
apply indirect costs based on the $1,000 threshold through the end of the sponsor-
approved award period, as proposed and as awarded. However, if the submitted
and approved budget did not include equipment acquisition in year 5 and the PI
wishes to rebudget in order to acquire equipment in year 5, the University will use
the $5,000 threshold to calculate indirect costs on that budget year.
10. If the sponsor defines equipment using a lower threshold than the University,
and takes title to the equipment so defined, at what level will indirect costs be
applied in the project budget? In the billings to the sponsor? And how
should these items be treated for inventory purposes?
In rare cases, a sponsor may require the University to budget capital equipment at
a rate lower than the $5,000 threshold or to waive indirect costs on equipment at a
threshold lower than $5,000. In such cases, the University will either comply
with a sponsor’s written guidance or negotiate a waiver of the sponsor’s
requirement.
11. Can general office equipment now be purchased with federal funds,
assuming that the item costs less than $5,000?
No (under ordinary circumstances). OMB Circular A-21 places restrictions on
purchases of both general office equipment and general office supplies as direct
charges.
Under unusual circumstances, items that would normally be considered general
office supplies or general office equipment are necessary for the operation of a
sponsored project. In such circumstances, it is recommended that these items be
specifically identified in the proposal budget, that the rationale for such items be
provided, and that the documentation be retained so that it is clear to auditors that
both the sponsor and the University were aware of the planned expenditure.
12. What financial accounting changes will occur beginning in FY 2007?
Financial accounting changes will occur beginning in FY 2007 as a result of the
new definition of capital.
The following naturals will be required for use:
Capital Items > $5,000
1934 Equipment over $5,000
Non-capital items
6244 Equipment (under $5,000) / Internal
6245 Equipment (under $5,000)
6246 Grant Equipment ($1,000 - $4,999.99)
6247 Grant Equipment ($5,000 and over)
6255 Furnishings (under$5,000)
6256 Furnishings (under$5,000) / Internal
6260 Computer Hardware (under $5,000)
6261 Computer Hardware (under $5,000) / Internal
6265 Computer Software (under $5,000)
6266 Computer Software (under $5,000) / Internal