VIII110 - USM

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   VIII-1.10 - POLICY FOR CAPITALIZATION AND INVENTORY CONTROL
(Issued by the Chancellor, June 19, 1989; Revised by the Board of
Regents, June 9, 1995; Revised by Board of Regents, July 7, 2000)

I.   General

     To ensure compliance with generally accepted accounting
     principles and prudent financial management, an asset
     valuation, property capitalization, and inventory control
     policy for the University System of Maryland has been
     developed.
     
     Investment in property, plant and equipment comprises a
     substantial portion of the total assets of the University
     System of Maryland.  It is essential for both financial
     statement and cost accounting purposes that all components
     of the System follow a uniform policy regarding
     capitalization, valuation, and control of plant, related
     assets, and inventory.
     
     Capitalization of plant and related assets is the decision
     to report assets acquired or used under capital lease
     agreements as a long-lived (an asset which benefits more
     than a single year) asset within the Plant Fund fund group
     on the University System of Maryland financial records.
     
     Valuation is the amount assigned in the financial records as
     the recorded value of a long-lived asset.
     
     Control of plant and related assets are the procedures and
     policies in place to reduce to a reasonable level, the risk
     of loss or misappropriation of resources or assets.
   
     This policy establishes asset valuation methods, and
     capitalization thresholds for property and related assets
     for financial reporting and cost accounting purposes.  In
     addition, this policy sets forth guidelines for the minimal
     level of control for equipment, and requires institutions to
     establish a set of formal, written policies governing the
     control of plant and related assets, both capitalized and
     non-capitalized.
     
     The System will value, capitalize and establish the
     necessary controls for the elements and values as described
     in Sections II and III.
     
II.  Real Property

     The elements of real property are land, building and
     building improvements, land improvements (other than
     buildings), infrastructure and construction in process.
     Valuation principles outlined for buildings and building
     improvements also apply to infrastructure, land improvements
     and construction in process.

     A.   Land

          All land acquired by purchase is recorded at cost to
          include the amount paid for the land itself and all
          related acquisition costs.
   
          Land acquired by gift or bequest is recorded at the
          fair market value at the date of acquisition.
       
          When land is acquired with buildings erected thereon,
          total cost is allocated between the two in reasonable
          proportion at the date of acquisition.  If the transfer
          document does not show the allocation, other sources of
          the information may be used such as an expert appraisal
          or the real estate tax assessment records.

     B.   Buildings and building improvements

          This includes all buildings and permanent structures
          and all fixtures, machinery, and other appurtenances
          that cannot be readily moved without disrupting the
          basic building structure or services to the building.
          
          When buildings are purchased or acquired by gift or
          bequest, the basis of valuation is similar to that used
          for land.  The cost or fair market value is allocated
          between the buildings and the related land.
          
          Significant additions, alterations, renovations or
          structural changes that extend the useful life or
          enhance the value of an existing building and which
          exceed $250,000 in cost, are added to the recorded
          valuation of the building at 100 percent of their
          identifiable cost.  An estimate of the original cost of
          that portion of the building which is removed as a
          result of an alteration or renovation, for which the
          cost exceeds the $250,000 threshold, is deducted from
          the recorded valuation of the building.

     C.   Land Improvements (Other than Buildings)

          These include fencing, athletic fields, landscaping,
          and other modifications to the land of a permanent
          nature requiring no or minimal upkeep.  Only those
          components which exceed $250,000 in cost should be
          capitalized.
          
     D.   Infrastructure

          These include roads, bridges, curbs, sidewalks, water,
          sewer and utility distribution systems.  Only those
          components which exceed $250,000 in cost should be
          capitalized.

     E.   Construction in Process

          This includes all costs associated with building,
          building improvement, or land improvement construction
          projects that are not complete at the end of the fiscal
          year.
          
          When buildings are constructed, all identifiable costs
          are included such as (but not limited to) contract
          costs, insurance and interest costs during the period
          of construction.  Only those projects which exceed
          $250,000 in cost should be capitalized.

     F.   Leased Real Property

          Leased property is capitalized if the total cost of the
          property exceeds $250,000 and it meets the criteria
          outlined in the FASB Standard No. 13, subject to the
          provisions of other authoritative accounting guidance,
          which essentially provides that:
    
         A lease is a capital lease if at inception it meets any
         one of the following criteria:

         a.   It transfers ownership of the property to the lessee by the
             end of the lease term;
            
         b.   It contains a bargain purchase option;
            
         c.   The lease term is 75 percent or more of the estimated
             economic life of the leased property; or
            
         d.   At the beginning of the lease term, the present value of the
             minimum lease payments (excluding executory costs), equals or
             exceeds 90 percent of the excess of the fair value of the leased
             property.

The leased property is recorded at the total cost net of interest
expense (the present value at inception of the lease).

III. Personal Property

     This includes those items identified below as moveable
     equipment, library books, book collections, museum and art
     collections, livestock and merchandise inventories.

     A.   Equipment (Unit Value of $5,000 or More - Capital Equipment)

          This includes all equipment that is not permanently
          affixed to buildings, has a useful life greater than
          one year, and has a unit cost of $5,000 or more except
          for items predominantly composed of glass, rubber,
          cloth and equipment held for resale.  Equipment held
          for resale should be valued and controlled in
          accordance with the guidelines for merchandise
          inventories.
          
          A unit of equipment is defined for purposes of this
          policy as an individual item, or group of items, which
          is usable for its intended function and which cannot be
          separated without a diminishment in the usability of
          the item for its intended purpose.

1)   For equipment purchased, the valuation is the net amount
     paid through accounts payable which is the invoice price less all
     discounts (except trade-in allowances).  Trade-in allowance is
     included in the asset value.  Freight and installation costs are
     also included if they are shown on the original invoice, or if
     they are readily available on related freight bills.
                    
2)   Equipment acquired by gift is recorded at fair market value
     at the date of acquisition.
              
3)   Leased equipment is capitalized if it meets the criteria
     outlined in the FASB Standard No. 13, which essentially provides
     that:

A lease is a capital lease if at inception it meets any one of
the following criteria:
               
               a.   It transfers ownership of the property to the lessee by the
                  end of the lease term;

               b.   It contains a bargain purchase option;

               c.   The lease term is 75 percent or more of the estimated
                 economic life of the leased property; or

               d.   At the beginning of the lease term, the
                 present value of the minimum lease payments
                 (excluding executory costs), equals or exceeds
                 90 percent of the excess of the fair value of
                 the leased property
      
      The leased equipment is recorded at the total cost net of
      interest expense (the present value at inception of the
      lease).

4)   The valuation of fabricated equipment includes all
     identifiable costs such as drawings, blueprints, component parts,
     materials, and supplies consumed in fabrication, labor, and
     installation.

          Each institution is responsible for maintaining
          inventory records for all capital equipment, performing
          or coordinating physical inventories, reconciling
          physical inventories to the related records at least
          once every two years, and reconciling equipment
          additions and deductions on the inventory system to the
          general accounting system.
       
          Equipment inventory records should also include items
          of equipment that meet the above specifications except
          that the University System of Maryland is the custodian
          rather than owner.  Items for which the University
          System of Maryland is the custodian rather than the
          owner, excluding items used under capital lease
          agreements, should not be reported in the financial
          statements.

     B.   Equipment (Unit Value of Less than $5,000 - Non-Capital)

          Equipment that does not meet capital equipment
          specifications because its unit cost is less than
          $5,000 or because it is predominantly glass, rubber, or
          cloth is not reported for financial reporting purposes.
          
          A higher level of control should be exercised over non-
          capital items that are easily converted to personal use
          or must be controlled to meet external reporting
          requirements.  Each institution must determine the
          scope and level of control procedures appropriate to
          its operating environment, subject to the minimum
          requirements identified below.
    
          Each institution must develop a formal, written,
          institutional policy with respect to non-capital
          equipment.  At a minimum, the institutional policy on
          non-capital equipment must set forth the following:

1)   A threshold above which non-capital equipment is to be
     subjected to the tenets of the institution's policy on non-
     capital equipment.  In no event, however, should computers or
     firearms be excluded from the definition of non-capital equipment
     subject to the institution's policy.

2)   That a listing of non-capital equipment be maintained by the
     custodial department (the department using the equipment) which
     includes a description of the asset, its cost, physical location,
     and the custodial employee.  The custodial department is the
     lowest level at which control and record-keeping over non-capital
     equipment may be exercised.  This function may, alternatively, be
     handled centrally.
                         
3)   That all non-capital equipment subject to the institution's
     policy on non-capital equipment be tagged or otherwise
     identified.
                         
4)   That a periodic inventory of non-capital equipment be
     conducted, at a frequency of at least once every three years.

     C.   Library Books
   
          Purchases of books, bound periodicals, microfilm, or
          other library items are capitalized if they are part of
          a formal University catalogued library.
          
          Library items acquired by gift are valued at fair
          market value.  Deletions are valued at annually
          adjusted average cost per volume.
          
          Each library should provide information to the
          institution comptroller/controller for annual entries
          to the records underlying the financial statements.

     D.   Museums and Art Collections

          Each institution with a collection of art or of
          scientific or historical objects is required to
          maintain a detailed perpetual inventory with items
          valued at cost or market value at date of acquisition.
          For donated collections of substantial value, the
          appraised value should be the basis for the value
          recorded in the financial records.  The institution
          must include this information in the financial
          statements.
          
     E.   Livestock

          Animals used for instruction in agriculture or held for
          herd or flock perpetuation / improvement are
          capitalized at acquisition cost or fair market value.
          
          The institutions are responsible for keeping records of
          livestock.  Responsible units at all institutions must
          prepare annual inventories of capital livestock and
          report it to the institution comptroller / controller
          for inclusion in the financial statements.
          
     F.   Merchandise Inventories
      
          Any functional unit involved in resale, either within
          the department or to other departments, institutions,
          or individuals, is required to maintain an inventory
          system appropriate to the value of items held for
          resale.  The units involved in resale and the
          appropriate inventory system are to be determined by
          the institution.  Additionally, the unit must take a
          physical inventory of these items at year-end and
          report it to the institution comptroller / controller.
      
     G.   Chemicals, Pharmaceuticals, and Radioactive Materials

          Chemicals, pharmaceuticals, and radioactive materials
          present additional risks and responsibilities to the
          institution which must be acknowledged and accommodated
          in the institutions' control procedures, depending upon
          the institutions' situation.  All state and federal
          regulatory requirements must be incorporated into
          institutional control procedures surrounding these
          items.


Replacement for:  BOR VIII-1.10
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