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Renovation/Improvements Policy

Effective Date:
7/1/95
6/29/98, Revised
1/22/07, Revised
6/15/07, Revised
7/01/09, Revised

Policy:
Renovation and improvement costs are incurred to restore or improve buildings or other capitalized assets. These costs involve the substitution of old parts for new ones and increase the economic benefits to be derived from the asset.

In order to capitalize a renovation or improvement cost, certain criteria must be met. First, the cost must equal or exceed the $5,000 capitalization threshold established for all capital assets (see Capitalization). Second, the renovation or improvement must either: a) significantly extend the useful life of the original asset, or b) increase the future service potential of the asset. If both of these criteria are met, the expenditure must be capitalized and recorded separately at total purchase or construction cost. Expenditures not meeting both of these criteria should be classified as a maintenance expense (see Maintenance). Care must be taken when distinguishing between maintenance costs and renovation and improvement costs. For example, energy conservation projects that guarantee energy savings to exceed costs should generally be capitalized since these projects increase the efficiency and future service potential of the asset and are not routine maintenance.

If parts of an asset are removed during a renovation/improvement project, the original cost (less depreciation if applicable) of the part of the asset being removed should be retired. Because of the difficulty of measurement or of immateriality, this may not be possible. The removal costs associated with the renovation should be expensed. The remaining cost of adding the renovation would be the cost of the new asset.

A modification/upgrade to existing internally generated computer software should be capitalized if the following criteria are met: First, the outlays associated with the modification must equal or exceed the $1,000,000 capitalization threshold for internally generated computer software (see Intangible Assets Policy). Second, the modification must result in at least one of the following: a) an increase in the software’s functionality, b) an increase the software’s efficiency, or 3) an extension of the software’s estimated useful life. All other modifications are considered maintenance. A modification/upgrade may have activities that can be grouped into the following three stages: preliminary planning stage, application development stage, and post-implementation/operation stage (see Intangible Assets Policy). Only outlays related to activities in the application development stage should be capitalized.