Machinery And Equipment Depreciation
Machine And Equipment Depreciation
Equipment (with the exception of those items that are pooled) should be capitalized on an individual item basis and recorded within the appropriate asset account. This account should be charged for the full acquisition cost as described in paragraph 30.01 and care should be taken to ensure asset and liability accounts are properly reflected at the time the asset is received.
Assets classified as Furniture/Furnishings/Fixtures must be capitalized and depreciated using the pooled asset method, as described in paragraph 30.55 below. In addition to purchased furniture, a Reserve Bank may, at its option, capitalize and depreciate salaries and the outside cost of materials that are consumed in the construction of furniture and equipment by Reserve Bank personnel. These costs are also capitalized and depreciated using the pooled asset method.
Depreciation will be calculated monthly on the gross amount of each pool account, using the “straight-line method.” Depreciation on each furniture pool account will begin in the first month following the end of the pool year (calendar year). Guidelines on useful lives of pooled assets are found in table 30.78. Depreciation will continue until the allowance for depreciation equals the amount of the pool account, at which time the pool account will be credited and the related allowance for depreciation will be debited for the amount of the pool account (effectively removing these accounts from the balance sheet).
Depreciation should continue until the asset is fully depreciated or disposed. At the end of an asset’s estimated useful life, the asset’s net book value should equal its salvage value and depreciation should be discontinued. Depreciation on impaired assets should continue until the Reserve Bank ceases the operations for which the asset is used. Assets that are held for sale are reclassified to other real estate and depreciation ceases. The asset and related allowance for depreciation should not be removed from the balance sheet until the asset is retired or disposed, even if the net book value of the asset is zero. (See paragraph 30.95.)
When To Replace Machinery
Full acquisition cost should also include trade-in allowances (i.e., the amount capitalized when an asset is traded-in for a new asset should equal the cash outlay for the new asset plus the lesser of (1) the net book value of the asset traded-in or (2) the allowance provided for the trade-in. Further information on trade-ins is found in paragraph 30.90.
This account is used to record costs of acquiring or constructing a building to be used by the Bank. The cost of a building should include all expenditures related directly to its acquisition or construction. Generally, all costs incurred beginning with excavation through completion of construction, are considered part of the building costs. The cost of the building should not include the cost of land, land improvements, or fixed machinery and equipment.
A replacement is a substitution of an existing asset by a new asset. Replacements should be capitalized if they meet one of the criteria discussed above. Replacements should be accounted for under the substitution approach which requires removing the cost of the existing asset and its accumulated depreciation from the books and charging current expense for the difference. The new asset should be depreciated over its own useful life.
Projects such as repairing, painting or refurbishing should be charged to expense unless they meet the capitalization tests for improvements as defined in section 30.70. The maximum useful life of a building is 50 years. Improvements should be assigned unique useful lives, not to exceed 50 years.
To justify the additional time and expense of capitalizing a lease, the materiality test to apply is that the leased asset value equals or exceeds $100,000 (see paragraph 30.01 for guidance in determining the asset unit for capitalization). If the lease has been determined to meet any one of the four criteria above and has passed the materiality test, the transaction should be treated as the acquisition of a capital asset. If the lease meets either criterion 1 or 2 listed above, the asset should be depreciated as any similar capital asset would be, otherwise, the asset should be depreciated over the lease term. The amount capitalized should be equal to the lesser of the current fair market value of the asset or the present value of the lease payments and the payment called for by the bargain purchase option (if any). The present value of the lease payments should be calculated using the current Treasury borrowing rate for a term comparable to the lease term unless the interest rate implicit in the lease, as computed by the lessor, is both readily determinable and less than the current Treasury borrowing rate. At the time of capitalization, a liability in the Sundry Items Payable account (see paragraph 11.70) should be recorded for the capitalized value of the lease. Additionally, a portion of each lease payment should be treated as interest expense at the time each payment is made such that a constant periodic rate of interest is in effect over the life of the lease. The interest rate used should be the same as that used in determining the present value of the lease payments.
In general, assets should be capitalized using the individual asset method, which is based on the individual asset unit. Asset units should be readily identifiable (subject to verification of existence without disassembly) and provide economic benefit through distinct, substantive functionality. Thus, in some instances, an asset may be an integrated unit made up of components that individually do not provide functionality without connection to the other components.
This account should be charged when a building is purchased for immediate Bank use or when the Construction account is closed upon completion of a project. Thereafter, only major alterations, renovations and improvements may be added to the capitalized cost of the building.3 Building improvements must be capitalized if the cost is $100,000 or more, and if the improvements meet the capitalization criteria defined in paragraph 30.70.
For an outlay to be capitalized, it should be material in value. For purposes of recognizing long-term physical assets, materiality is defined as equal to or greater than established capitalization thresholds.Table 30.72 provides the capitalization thresholds for the types of assets described in this chapter. The thresholds stated in the table represent the lower limit above which these transactions must be capitalized. A Reserve Bank has the option to implement more stringent (lower) thresholds if it deems such a policy preferable. If a more stringent threshold is used, the Reserve Bank must consistently apply the threshold throughout the District (i.e., the head office and Branches must all use the same capitalization thresholds for all asset classes.) Such policy must be documented and provided as information to the RBOPS Accounting Policy and Operations Section.
The following are examples of disbursements, which are to be capitalized as land, land improvements, building, and machinery and equipment. The list is intended to suggest the scope of the Bank Premises accounts and is not exhaustive.
The carrying amount of other real estate that is held for sale should not exceed its fair value. The carrying value of other real estate held for sale should be evaluated by the end of the calendar year, at a minimum, to determine if adjustments are necessary (see 30.95). This does not necessarily require an annual formal appraisal; however, valuation methodologies should be consistent.
Machinery And Truck Parts
If an asset will be sold to another Reserve Bank, the deprecation will cease when production ceases and the sale should be recorded at book-value (no gain or loss).15 The receiving Reserve Bank should record the asset at the transferring Reserve Bank’s book-value, capitalize the installation and transportation costs and begin depreciation when the equipment is placed into production and continue over the asset’s remaining useful life.
In agriculture, examples of assets that are depreciable include buildings, vehicles, machinery, equipment, fences, drainage tiles, other land improvements, and breeding livestock. Land is not depreciable; nor is market livestock, crop inventories, materials or supplies. The calculation of depreciation utilizes the asset’s original cost and requires the projection of useful life and estimation of salvage value. Salvage value equals the asset’s worth after it has been fully depreciated. For some assets, salvage value is zero.
The fair value of the asset (group) is the amount at which the asset could be bought or sold in a current arms-length transaction. The ideal method for determining fair value is to use the price for the asset if it is traded in an active market. The next best method is to base fair value on the prices for similar assets (appraisal). The remaining method is to use the discounted present value of the expected cash flows for the asset. In general, assumptions and techniques used to determine fair value should be the same that marketplace participants would use if the information is available without undue cost and effort. Otherwise, the Reserve Bank should use its own assumptions. In general, absent reasonable appraisals of market, the undiscounted amount calculated in step three will be used for those assets that will be disposed of within five years. If applied to an asset that will be held for longer than five years such as a building, use the applicable Treasury rate for a security of that duration as of the impairment date. The impairment loss should be recorded as an adjustment to the asset account (proportionately to assets in a group) and a charge to the same account that would have been charged if the asset was sold.