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Susan Combs•Texas Comptroller of Public Accounts

Texas Higher Education System Generic Building Componentization Guidelines

FPP G.001

Introduction

As of September 1, 2001, state agencies are required to implement accounting changes required by Governmental Accounting Standards Board (GASB) Statements 34 Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments and GASB 35, Basic Financial Statements and Management’s Discussion and Analysis for Public Colleges and Universities. Two key changes stemming from this implementation are the reporting of infrastructure assets as a separate class (NACUBO required reporting infrastructure with improvements other than buildings) and depreciation.

The passage of SB 482 by the 77th Session of Texas Legislature requires state agencies to componentize various elements of buildings in order to calculate and record depreciation of a building’s structural components, subsystems and equipment. This allows an acceleration of depreciation for those components whose useful life is expected to be less than the useful life of the building.

The purpose of these guidelines is to establish a uniform standard by which institutions of Texas Higher Education will report capital assets as buildings and building components or systems.

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Definitions

  1. Building: a structure that is permanently attached to the land, has a roof, is partially or completely enclosed by walls and is not intended to be transportable or movable.
  2. Componentization: separating a building into its major elements of construction. The components as defined in SB 482 are:
    1. Building shell: the exterior walls, excavation within the building footprint, foundation, floors, roof structural system and decking of a building. The walls consist of the wall layers starting with the exterior building skin and ending at the inner thermal layer. The suggested useful life of a building shell is 30 years.
    2. Elevator system: comprised of the elevator and escalator conveyance systems including controls. The recommended useful life of this system is 20 years.
    3. Fire protection system: comprised of the piping, sprinkler heads and controls (Circuitry for fire detection, alarms, and warning devices are included in ‘Electrical’.). The recommended useful life of this system is 20 years.
    4. Fixed equipment assets: is any equipment other than equipment comprised of the HVAC system, electrical system, fire protection system, plumbing system or elevator system that is installed and permanently attached to some part of the building’s structure. Examples include built-in lab equipment and fume hoods. Ducting for built-in lab equipment and fume hoods will normally be included in ‘HVAC’. The recommended useful life is 20 years.
    5. Plumbing system: all piping, drains, fixtures, and associated equipment within the perimeter of the building used for moving domestic water, other fluid gases, compressed air or sewage. The recommended useful life of this system is 20 years.
    6. Electrical and lighting system: all telecommunication and alarm wiring, lighting fixtures, electrical conduit, wire, cables, circuits, switches, and controls within the perimeter of the building that provide power for all electrical apparatuses and lighting instruments. The recommended useful life of this system is 20 years.
    7. Floor Coverings: includes carpet, ceramic tile, stone, terrazzo, vinyl tile, wood, laminate and linoleum floor coverings, and other types of floor coverings and all padding and barrier sheeting installed above the concrete slab or wooden deck. The recommended useful life of ceramic tile, stone and terrazzo is 30 years. All other floor types should have a useful life of 15 years.
    8. Heating, ventilation and cooling system (HVAC): includes the chillers, condensers, exhaust fans and coil units, heating strips, chilled/heating water supply and return piping, air ducts, registers, climate control panels and all circuitry connected to the power supply panel. The recommended useful life of this system is 15 years.
    9. Interior finish: all walls, partitions, ceilings and millwork that are inside the building shell walls. This will include, but not limited to, all framework, interior doors, interior windows, sheet rock, paneling, paint and any other wall and ceiling coverings. The recommended useful life is 15 years.
    10. Miscellaneous construction features: any building component that does not fit into one of the other ten categories. The recommended useful life is 15 years. The useful life of this feature may be modified based on the cost elements included. For example, indoor swimming pools, spas, wave pool/tank will be reported here. The example table for a Generic Building in the following “Guidelines” section uses a 20-year life cycle rather than the recommended useful life of 15 years.
    11. Roof Covering: include the covering material used to establish the water barrier on the building’s roof deck. The roof covering starts with the first membrane above the roof decking material including the urethane layer, coating, shingles, films, metal panels, clay tiles and all material installed above the roof deck. The recommended useful life of clay tile is 30 years. The recommended useful life of a metal panel roof is 20 years and a urethane roof or shingle roof is 15 years. The recommended useful life of all other roof types is 10 years.
  3. Depreciation: allocation of the cost of the asset over its estimated useful life.

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Guidelines

The recognition of components is required for the construction or renovation of facilities or improvements with a fair market value greater than or equal to $1 million that are rendered into service on or after September 1, 2001. For centrally managed projects, the Office of Facilities, Planning and Construction, or other similar office, will begin requiring general contractors of newly awarded contracts to provide the cost data related to each of the specified components of a building. Capitalized buildings that have a fair market value between $100,000 and $1 million are not required to be componentized. However, for consistent treatment it is recommended that those buildings be componentized when it is cost beneficial to do so. The goal is to standardize these processes across State Higher Education.

For renovations and repairs to existing structures the total project cost will need to be evaluated to determine if capitalization is appropriate. If the project total meets the threshold for capitalization, project expenditures must be componentized. A component of a building that is replaced will be depreciated separately based on its individual useful life if the project cost is greater than the capitalization threshold or the expenditure increases either the useful life or value of the building by 25% of the original life period or cost of the building. An example of this would be the replacement of a shingle roof system. The key questions to ask are [1] does the project cost satisfy the capitalization threshold? Or [2] does this replacement increase the quality, value and/or useful life of the building by 25% or more? If the answer is yes to either question, then the cost incurred should be added to the value of the building as a component and separately depreciated based on its individual useful life.

Example

Roof Replacement cost
$250,000
Building’s original book value
$9,000,000
Building’s original useful life
100 years

Is the cost greater than the capitalization threshold?

Yes. ($250,000>$100,000)

Does the roof replacement extend the useful life or value of the building by 25%?

Life? No. (100 yrs * 25% = 25 yrs; 25 yrs > 15 yrs)
Value? No. ($9m. * 25% = $2,250,000; $2,250,000 > $250,000)

 

In this example, the $250,000 spent on the replacement of a building’s roof will be added to the book value of the building because the cost was greater than the capitalization threshold of $100,000. This $250,000 will then be depreciated over the new roof’s useful life of 15 years.

If detailed project costs by building component are not available or unattainable, ’Column B’ of the following table provides an estimate of component costs by percentage of the total construction cost. This table of percentages may be used to estimate component costs for those projects. Soft project costs such as design and management fees may be included in ‘(j) Miscellaneous construction features’ or may be prorated to the building component categories using the table.

For buildings that were constructed prior to September 2001, depreciation of buildings by components is not required. However, a campus may use the Generic Building Table below in developing a building useful life for depreciation purposes. Column D (Weighted Life-Cycle Years) of the table is computed by multiplying Column B (% of Total Construction) times Column C (Life-Cycle Years). This example illustrates the rationale used in developing a 22-year useful life for building depreciation. The campus may modify this example of a 22-year depreciation schedule by adjusting the typical life cycle year of a building component or the % of total construction. The table example includes a modification of the recommended useful life for the component, ‘Miscellaneous Construction’ feature, from 15 years (paragraph (2)(j)) to 20 years due to the inclusion of site costs in this component category. (For example, if the life cycle of ‘Miscellaneous Construction’ of 15 years were used, the weighted life-cycle years for Miscellaneous Construction would be (6% x 15 life-cycle years) 0.9 weighted life-cycle years instead of the 1.2 in the table example. If the 15-year life cycle were used in this example, the useful life of the building would be 21.7 years.

Other examples of modifications that could be expected to the table below involve the components, roofs and floors. These building components life-cycle years vary considerably by type of material used. For example, a building with a metal roof would have a roof weighted useful life cycle years of (3% x 20 life-cycle years) 0.6 weighted life-cycle years. And if that same building had ceramic tile floors, the weighted life cycle years for floor coverings would be (2% x 30 life-cycle years) 0.6-weighted life-cycle years. Using the other values as listed in the table, the useful life of the building would then be 22.6 years.

Generic Building Table
A*
Building Component
B
% of Total Construction
C*
Life-Cycle Years
D
Weighted Life-Cycle Years
Building Envelope
38%
30
11.4
Electrical & Lighting
11%
20
2.2
Plumbing
6%
20
1.2
Fire Protection
2%
20
0.4
Elevator Systems
1%
20
0.2
Fixed Equipment
2%
20
0.4
HVAC
17%
15
2.6
Floor Coverings
2%
15
0.3
Interior Finish
12%
15
1.8
Misc. Construction
6%
20
1.2
Roofs
3%
10
0.3
Total
100%
22.0

* Columns A & C “Building Component” and “Life-Cycle Years” include elements used in SB 482 and the Definitions section of this guideline. Column B the “% Total Construction” uses empirical data for new construction. The life cycle years (Column C) for “Misc. Construction” above uses a modified value of 20 years due to the inclusion of site costs in this category. Column D “Weighted Life-Cycle Years” has been developed to illustrate how a campus may develop an estimated useful life of a building when no details are available on components. Column D is derived by multiplying Columns B & C to develop the 22-year useful life example above. This 22-year useful life would change should a campus modify any of the values in Columns B or C.

For projects managed at the System level, a Construction Project Completion Report, for all projects rendered into service after September 1, 2001 will be forwarded to the campus. This report will show the separation of costs associated with each component category and will also recommend a useful life for each category based on an engineering analysis. In addition, the report will itemize any personal property and institutionally managed costs budgeted in the total project cost. It will then be the responsibility of the institution to record each of the componentized categories into the System or institution accounting ledger and the State Comptroller’s Statewide Property Accounting (SPA) system.

For projects that are institutionally managed, contractors and physical plant staff will need to componentize qualified projects. This will require a similar process to that used by the System Facilities Planning & Construction office. SB 482 establishes the minimum listing of components as used in the example table above. If your campus finds that it would be more appropriate to define additional components that is an option you may elect. You may find that every structure does not have all the listed components so in some cases the value may be $0 for those components. Also, please note that the useful life is the recommended useful life found in the definitions section. If your institutional experience indicates another useful life is more appropriate, you may use that useful life. Since this may be subject to audit, it would be important to maintain supporting documentation/reasoning.

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Susan Combs
Texas Comptroller of Public Accounts
Questions? Contact statewide.accounting@cpa.state.tx.us
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