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When an Asset Has Been Sold, Demolished, Is No Longer in Service

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When an Asset Has Been Sold, Demolished, Is No Longer in Service Policy Title: Facilities and HARVARD UNIVERSITY FINANCIAL POLICY Equipment Responsible Office: University Accounting Services Effective Date: February 15, 2007 FACILITIES AND EQUIPMENT – Revision Date: DISPOSALS AND IMPAIRMENTS PROCEDURES Policy Number: FA4 PROCEDURES • Basic rules: When an asset has been sold, demolished, is no longer in service or its value has been permanently impaired, any remaining value of the asset, net of accumulated depreciation, less any salvage value, must be written off or written down to its net realizable value. This involves removing both the asset and the accumulated depreciation from the general ledger, and recognizing a gain or loss for the difference. Additionally, any remaining plant equity is transferred to operating net assets. Any outstanding loans on debt-financed assets that are being written off must be settled. • Types of disposals: Sales of assets External – Sales of assets to third parties will result in either a gain or loss on sale. Where proceeds are greater than the net book value of the asset (historical cost less accumulated depreciation), a gain is credited to object code 5772, “Gain on sale, capital asset^miscellaneous income, External.” Conversely, where proceeds are less than the net book value of the asset, a loss is debited to object code 8722, “Loss on sale of capital asset.” In either case, the asset is written off by debiting accumulated depreciation and crediting the asset, and recognizing a gain or loss for the difference. If the asset is not yet fully depreciated, any remaining plant equity is transferred to operating net assets. This transfer would be recorded using the 9300 range of object codes, as a below-the-line internal transfer (non- operating activity). The University’s Internal Transfer Policy should be referenced for further information: http://vpf-web.harvard.edu/documents/fa_intrans104.pdf. When selling assets, any outstanding loans relating to the assets require settlement. The Office of Treasury Management (OTM) must be consulted in these cases. Journal entries for sales of assets are prepared by the tubs and forwarded to OFAA for review and posting. For sales of equipment, an accumulated depreciation balance is not available in the Oracle General Ledger, since equipment assets are depreciated in the aggregate. To determine the accumulated depreciation balance to be removed from the General Ledger, the amount must therefore be recalculated by the tub at the time of disposal. Internal – When assets are sold or transferred between tubs, no gain or loss on the transaction may be recorded since the asset is still owned by the University, and gains or losses may not be internally generated. The asset is transferred at the net book value at the time of sale. Any amount exchanged in excess of the net book value would be recorded through the 9300 range of object codes as a below-the-line internal transfer (non-operating activity), and would not affect the net book value of the asset. The University’s Internal Transfer Policy should be referenced for further information: http://vpf-web.harvard.edu/documents/fa_intrans104.pdf. For buildings, the root number remains the same; OFAA updates the root’s attributes to reflect the building’s new owner and any change to the building’s primary use. Demolition Partial demolition – In cases where part of a structure is being demolished so that a new addition may be built, the costs related to the partial demolition are capitalized to the new capital project through the CIP object code 1254, “CIP, Demo+Site Prep.” The historical costs associated with the asset that is being partially demolished must be written off. Full demolition – When an entire building or piece of equipment is demolished, the asset and accumulated depreciation are written off, and a loss on demolition is recorded to object code 8722, “Loss on Sale/Disposal of Capital Asset” for the difference. The costs associated with the demolition are expensed as incurred. HARVARD UNIVERSITY FINANCIAL POLICY Page 1 of 10 Policy Title: Facilities and Equipment Responsible Office: University Accounting Services Effective Date: February 15, 2007 Revision Date: Policy Number: FA4 PROCEDURES, continued If the assets are not yet fully depreciated, any remaining plant equity is transferred to operating net assets. This transfer would be recorded using the 9300 range of object codes, as a below-the-line internal transfer (non-operating activity). The University’s Internal Transfer Policy should be referenced for further information: http://vpf- web.harvard.edu/documents/fa_intrans104.pdf. When disposing of assets, any outstanding loans relating to the assets require settlement. The Office of Treasury Management (OTM) must be consulted in these cases. Journal entries to dispose of assets are prepared by the tubs and forwarded to OFAA for review and posting. Writing off work in progress/construction in progress (WIP/CIP) Equipment work in progress and/or construction in progress costs that have been on the General Ledger for an extended period of time (i.e., more than one year), where the project has been either abandoned or significantly altered from its original plan, must be written off. A loss is recorded to object code 8722, “Loss on sale/disposal of capital asset.” Assets no longer in service If assets are no longer in service, they must be written down to their estimated remaining value or, in some cases, written off entirely. This write-down or write-off is accounted for in the same manner described in the “Sales of assets” and “Demolition” sections of this document. Impairment If assets have been permanently impaired, whether by damage, neglect, obsolescence or a change in the economic landscape, such that future expected cash flows from the assets are less than their net book value on the balance sheet, the assets must to be written down to their estimated remaining value or, in some cases, written off entirely. This write- down or write-off is accounted for in the same manner described in the “Sales of assets” and “Demolition” sections of this document. • Timing of recording: Disposals due to sale or demolition and transfers of assets should be accounted for in the month of the disposal or transfer, and must be accounted for no later than year end. The University employs a full-year convention for depreciation, where a full year of depreciation is taken in the year of acquisition and no depreciation is recorded in the year of disposal. Any amounts recorded year-to-date are reversed by OFAA. As such, all disposals and transfers are recorded at the net book value as of the previous year-end. All tub assets must be reviewed at least annually for a potential write-off or write-down of their net book values to the remaining realizable value. • Fund accounting for disposal and impairment transactions: The 33-digit coding for income, expense and capital equipment expenditures must include a fund number between 000001 and 726999; however, balance sheet items such as facilities should generally not be recorded in a specific fund. The 33-digit coding for the balance sheet side of an entry to record facilities transactions should contain 000000 as the fund number, unless a fund is being used for specific tracking and recording purposes (e.g., if funds are used for separate programs and the tub would like to track balance sheet amounts for each program). HARVARD UNIVERSITY FINANCIAL POLICY Page 2 of 10 Policy Title: Facilities and Equipment Responsible Office: University Accounting Services Effective Date: February 15, 2007 Revision Date: Policy Number: FA4 PROCEDURES, continued • Disposal and impairment transaction coding vis-à-vis budgets: The budget may serve as a guide for what object codes to use in order to record expenditures, but it is more important that accurate object codes be used. Having budgeted funds left in a specific object code is not a sufficient reason for charging expenditures to that object code. Additional restrictions may exist for sponsored budgets. The Office for Sponsored Programs may be contacted with any questions regarding expenditure coding for sponsored projects. • Restricted fund spending: The use of restricted gift or endowment funds must be in accordance with the restrictions stipulated by the donors of those funds. HARVARD UNIVERSITY FINANCIAL POLICY Page 3 of 10 Policy Title: Facilities and Equipment Responsible Office: University Accounting Services Effective Date: February 15, 2007 Revision Date: Policy Number: FA4 Accounting for Disposals and Impairments Examples of the Proper Coding of Certain Types of Transactions 1. On December 15, 2005, HRES (tub 580) sold a building for $710,000 to an external party. The building had an original cost of $400,000 and accumulated depreciation of $36,000 as of June 30, 2005. This building was not debt-financed and there were no outstanding loans at the time of disposal. The University employs a full-year convention, where a full year of depreciation is taken in the year of acquisition and no depreciation is recorded in the year of disposal. As such, the appropriate net book value to remove from the books is the amount as of June 30, 2005, the previous year-end. Any current-year depreciation is reversed by OFAA. As the building is not fully depreciated, the plant equity (object code 3800, “CO^Funds invested in Facilities (Plant Equity”) as of June 30, 2005, is $364,000 ($400,000 - $36,000). The journal entries HRES will record for this transaction are: Part 1: To record the sale and cash
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