Chapter 3

POLICIES

Capitalization Policy
The Office of the State Comptroller has established a statewide policy for the capitalization of assets controlled by agencies. If the asset meets the following criteria it will be deemed an asset and will be disclosed on the Office of the State Comptroller's annual financial statements:

1.	Separate
	Capital assets are assets that:
	1. are used in operations and
	2. have an initial useful life that extends beyond a single reporting period.
	Capital assets includes both tangible assets (land, buildings, building improvements, vehicles, machinery, equipment, works of art, historical treasures, and infrastructure) and intangible assets (easements, software, water rights, etc). Real property (land, building and building improvements) is recorded as a capital asset regardless of cost.
2.	Valuation
	An asset must meet the capitalization threshold. Agencies desiring to capitalize assets with a value less than the capitalization threshold due to programmatic requirements or other justifiable reasons, should write to the Office of the State Comptroller for an exception to the capitalization threshold limit, stating the reason and justification for the exception. If an item is in a storage area or warehouse and meets the capital threshold, it is to be treated as an asset.

Controllable Property Policy
Controllable property is property with a unit value less than the capitalization threshold, an expected useful life beyond a single reporting period and/or, at the discretion of the agency head requires identity and control. It is mandatory that each agency maintains a written listing of controllable property that has been approved by the agency head or designee. Such assets must be identified and controlled because of their sensitive, portable, and theft-prone nature. The item must be tagged and maintained on the agency's perpetual inventory. Different color or style tags can be used to separate controllable items from capitalized items. Controllable items are to be coded as minor equipment.

Similar to capitalized property, controllable property is subject to the requirements of this manual regarding security, maintenance and utilization. These assets will be flagged with a control indicator in order to distinguish them from capitalized assets. Controllable assets must be inventoried on a regular basis, possibly more frequently than capitalized assets due to the nature of the items listed. Examples of sensitive, portable and theft-prone items are listed below; however this list is only a suggestion. Individual agencies may add or delete items in this list based on the nature of their business.

Tangible Assets
Tangible assets have physical substance and include buildings (real property) and their contents, inventories, personal property, and vehicles.

Intangible Assets
Intangible assets that meet the capitalization threshold must be capitalized. These costs are incurred in the same manner as the tangible assets and should be depreciated over their useful life. Intangible Assets are recorded in the same manner as capitalized tangible assets and require a property record.

Appraisals: Art
Appraisals for works of art and historical treasures are no longer a mandatory requirement, but highly recommended when resources are available. It is recommended that appraisals for all permanent collection pieces exceeding $10,000 should be conducted every five (5) years by an expert in the field.

Collections of art capitalized as of June 30, 1999 will continue to be capitalized. To be a collection according to GASB 34 the following conditions are to be met:

1. Held for public exhibition, education, or research in furtherance of public service, rather than financial gain.
2. Protected, kept unencumbered, cared for, and preserved subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.

Capital Asset Expenditure EPM Report (Core-CT Agencies)
This report may be used as a tool to assist state agencies in compiling the Annual Physical Inventory of all Real and Personal Property, CO-59. This report lists all capital purchases for each agency charged to account codes 55610 through 55890, Capital Outlays-Land; Capital Outlays-Equipment; Capital Outlays-Buildings and Improvements.

Capital Equipment Purchase Fund
The Capital Equipment Purchase Fund (CEPF) is authorized pursuant to Section 4a-9 of the Connecticut General Statutes. The Secretary of the Office of Policy and Management administers the fund. "The fund shall be used for the purpose of acquiring, by purchase or the exercise of prepayment or purchase options in existing capital leases entered into by the state, capital equipment with an anticipated remaining useful life of not less than five years from the date of purchase and (1) to the extent of not more than two million nine hundred thousand dollars, payment for projects under subsection (a) of section 4-67f, and (2) to the extent of not more than one hundred thousand dollars, payment for awards under subsection (b) of said section."

Subsection (a) of Section 4-67f provides that OPM shall increase efficiencies through capital investment and energy efficiency measures. State agencies can request funding for capital purchases from the Office of Policy and Management.

A state agency may purchase necessary data processing equipment that has a unit price of less than the capital threshold from the Capital Equipment Purchase Fund, provided such equipment has a useful life of not less than five years. See Office of the State Comptroller Memorandum No. 2015-05 http://www.osc.ct.gov/2015memos/numbered/201505.htm.

Depreciation
Defined as the systematic allocation of the cost of a fixed asset over its estimated service life to the periods that are benefited by the use of the asset. Depreciation is calculated over the realistic useful lives of the assets using the straight-line method on a yearly basis. The straight-line method is generally preferred for financial statements because it accumulates depreciation evenly over the asset's life. The Office of the State Comptroller requires depreciation to be calculated on a straight-line basis for Statewide reporting purposes. Also, refer to the section on GASB 34 in this chapter.

Equipment with Component Parts (This section is optional for agencies to use.)
Parent/child relationship in Core-CT. A component part is that part of a unit of equipment that cannot be used independently of the remaining piece of equipment or is physically connected to the major asset. This definition applies even though the component part may meet the capitalization criteria by itself.

For example: A CPU box is used for simplification purposes, this "box" actually contains boards for CPU and all ancillary equipment, speakers, etc. Various boards or cards can be purchased to increase the functions of the CPU such as a network interface card, fax modem card, external tape drive card, etc. This is considered to be one unit consisting of multiple parts - none of which can be used independently. Therefore, the total cost of the CPU should be capitalized and tagged. The asset description would show a CPU consisting of the box and multiple cards.

Under normal conditions, if one of the cards had to be replaced, it would either be covered under a maintenance contract and no cost would be incurred, but the property control record must be corrected or the replacement piece would be purchased and an appropriate change would be made to the original equipment description.

Enhancements to the CPU simply increase the cost of the CPU. Change the property control record to reflect the additional cost.

Certain equipment components may be used with a large number of different equipment items. For example, a telephoto camera lens may be used on any of a number of cameras separately inventoried and tagged by the agency. EDP equipment is another area in which there would be equipment components, such as a printer connected to a server. The key difference here is that these items can operate on many different pieces of equipment, and the equipment to which they are attached can operate independent of the component (e.g. the camera can operate without the telephoto lens and the server can operate without the printer). Therefore, in the truest sense, the item is not a constituent piece of equipment. In these instances, if the item meets the capitalization criteria as an individual item, it should be separately recorded and tagged as an asset.

Due care and diligence should be exercised in determining whether an item is truly a component. If deemed to be a component, it should be included as part of the cost and description of the overall asset. If it is not, it should be recorded as a separate piece of equipment with its own cost and description. The majority of the items will probably fall into the latter category.

Government Accounting Standards Board (GASB) Statement No. 34 Requires

• Infrastructure assets are reported on the government-wide statement of net assets. The State Department of Transportation will report their infrastructure on the Asset Management/Inventory Report/GAAP Reporting Form CO-59
• Depreciation on assets is required, which is handled centrally by the Office of the State Comptroller
• Depreciation is included in the Asset Management Module in Core-CT.

Group Control Items (This section is optional for agencies to use.)
Group control items are those assets that have multiple parts and must be accounted for as an asset. Assets may be controlled by group within location if the original unit cost meets the capitalization threshold. A group control number (one tag number) is assigned for the group but they should be tagged for identification as a State asset. Group items may be tracked by total number of units at a location, and not by individual units.

A detailed example would be modular furniture associated with providing an open office workstation. If fifteen (15) panels plus shelves, rolling files, lighting, etc. were required to create an office area, and the aggregate cost met the capitalization criteria, but the individual cost per item did not, the item(s) would be capitalized. One group control number would be assigned for the entire system (the workstation) with multiple parts.

Intangible Assets
The Governmental Accounting Standards Board's (GASB) Statement No. 51 Accounting and Financial Reporting for Intangible Assets defines intangible assets and how they are to be handled for reporting purposes. An intangible asset is an asset that possesses all of the following characteristics:

• Lack of physical substance
• Nonfinancial nature
• Initial useful life extending beyond a single reporting period
• Common types of intangible assets include but are not limited to:
  
  • Rights of Way and other easements
  • Patents, copyrights, trademarks
  • Land use rights
  • Licenses and permits
  • Computer software (internally generated, government websites, purchased or licensed)

All intangible assets that meet the definition in GASB 51 should be classified as capital assets. All guidance related to capital assets should be applied to intangible assets. Since intangible assets are considered capital assets, they are not reported as assets in governmental fund financial statements. Intangible assets are recorded in the same manner as capital assets, are subject to depreciation and if applicable, impairment.

Internally Generated Intangible Assets are created or produced by the State, or are acquired from a third party but require more than minimal incremental effort on the part of the State to begin to achieve their expected level of service capacity.

Costs of internally generated intangible assets must meet certain conditions before any costs are capitalized. These conditions include:

• Determination of a specific objective of the project and the nature of the service capacity that is expected to be provided by the intangible asset
• Demonstration of the technical or technological feasibility for completing the project so the intangible asset will provide its expected service capacity
• Demonstration of the current intention, ability and presence of effort to complete or, in the case of a multiple-year project, continue development of the intangible asset

Only costs that meet these criteria are capitalized. Costs incurred prior to meeting these criteria are expensed.

Easements
An easement is the right of one party to use the property of another party. An easement is an intangible asset that has an indefinite useful life or has a useful life of 25 years or more. Permanent easements are considered intangible assets. When land is the primary purchase and an easement is included, the easement should be included as part of the purchase price and reported as land owned by the State.

Each permanent land easement that is acquired should be identified as an asset. Executive branch agencies using the Core-CT Asset Management Module should record the easement with the correct asset profile. See http://www.core-ct.state.ct.us/financials/asset/xls/updtd_asst_prfls.xls

Software

Internally Generated Software
Internally generated software is an intangible asset. Software that is developed in-house by the agency or a third party contractor hired by the agency is considered internally generated software. When an agency purchases commercial software and then has it modified using more than minimal incremental effort before being put into operation, this software is also considered internally generated software. Software is considered internally generated if it is created or produced by the government, an entity contracted by the government, or if they are acquired from a third party but require more than minimal incremental effort on the part of the government to begin to achieve their expected level of service capacity. Government websites are considered Internally Generated Software if it meets the criteria of an intangible asset.

Since computer software is a common type of internally generated intangible asset, GASB 51 also provides specific guidance for applying the specified conditions approach to internally generated computer software. The activities of developing and installing internally generated computer software typically fall into the following stages:

1. Preliminary project stage
Activities in this stage include conceptual formulation and evaluation of alternatives, the determination of the existence of needed technology, and the final selection of alternatives for the development of the software. These costs are expensed.

2. Application development stage
Activities in this stage include the design of the chosen path, including software configuration and software interfaces, coding, installation to hardware, and testing, including the parallel processing phase. These costs are capitalized. Costs associated for training that occur in the application development stage are expensed as incurred.

3. Post-implementation/operation stage
Activities in this stage include application training and software maintenance. Any costs during the post-implementation/operation stage should be expensed as incurred.

Data Conversion is considered an activity of the application development stage only to the extent it is determined to be necessary to make the computer software operational. Otherwise data conversion is considered an activity of the post-implementation/operation stage.

All of the conditions in the specified condition's approach are considered to be met when activities in the preliminary project stage are completed and management implicitly or explicitly authorizes and commits to funding. Intangible assets are depreciated except those with an indefinite useful life. The software must meet the capitalization threshold to be capitalized.

Licensed Software
Licensed software that meets the capitalization threshold is considered an intangible asset and must be capitalized. The individual license must meet the capitalization threshold. The renewal of the licensed software should not be added to the original cost but should be expensed. Any maintenance costs or minor unspecified upgrades associated with the software are to be expensed. If the software license requires an annual renewal, the annual renewal is expensed. Any upgrades to existing software should be capitalized as additions and the old version costs should be retired as deletions.

Software Reporting
Agency internally generated software that meets the capital threshold and is owned by the state, is reported on the CO-59 as SOFTWARE OWNED BY THE STATE. Executive Branch agencies must record agency developed software in the Core-CT Asset Management Module.

Licensed software that meets the capital threshold must be capitalized and be reported on the CO-59 as LICENSED SOFTWARE.

Other Intangible Assets
Other intangible assets include trademarks, copyrights, rights of way, websites, patents, etc. All intangible assets are to be treated as capitalized if they meet the capitalization threshold.

Lease Policy

1. Capital Lease
Equipment being purchased under a capital lease should be recorded within the appropriate category at the beginning of the lease term (See http://www.core-ct.state.ct.us/financials/asset/xls/updtd_asst_prfls.xls). The initial recording value of a lease is the lesser of the fair market value of the leased property or the present value of the minimum lease payments (excluding interest payments). The State Accounting Manual, within the Encumbrance Section, subsection 5, entitled "Installment Purchases, Lease Purchase And Capital Leases", elaborates criteria for determining if a lease is capital. See http://www.osc.ct.gov/StateAcct/sam/encumbrance/encumbrance.htm#5.0

2. Operating Lease
An equipment item that is leased whereby ownership is not transferred to the lessees, in effect no purchase is made, is called an operating lease. Operating leases are not reportable as capital items. If, under the terms of the operating lease agreement, the state agency as lessee were responsible for insuring the property, then the agency should contact the Department of Administrative Services, State Insurance & Risk Management Board for the coverage. Maintain sufficient detail to identify property and location including value. However, enter only the total value for which the State is obligated for insurance purposes.

Maintenance of Property
In order to properly perform the property management function, the agency should oversee all costs incurred for the maintenance of its property. By reviewing and controlling maintenance costs, the agency can demonstrate stewardship over its available resources. Being able to capture maintenance costs associated with a particular asset is essential in providing management with the information necessary to make allocation of resource decisions such as:

1.	Consider replacing a particular asset that has maintenance costs higher than other similar assets.
2.	Determine if the agency would be able to reduce maintenance cost by entering into a service contract.
3.	Determine if the service contract costs more than a repair-as-needed program would cost for certain assets.

Also, the agency would have available detailed information about each asset regarding maintenance contract dates (e.g., inception, expiration, renewal, warranty), maintenance contract number, and maintenance cost. Controlling maintenance contracts and cost is essential in ensuring that the property management function is appropriately addressed.

Property of the US Government
Separate records should be maintained of all property of the United States Government for which the State is held accountable. The records should be segregated because of the various types of information required for insurance purposes and cost analysis. However, all items under this category will be retained at the agency.

1. On Loan from Federal Agencies
Agencies of the federal government may, as a result of an Act of Congress or by Executive Order, loan certain items to an agency of the State of Connecticut. The obligation of the State agency to the loaning agency of the federal government is spelled out in an agreement and varies with the nature of the materials on loan.

2. Insurance Purposes
In some cases the State must provide insurance in the name of the federal agency and against specified perils. The policy must be forwarded to the particular loaning agency of the federal government and the State must bear the cost. In other cases the State must insure the federal property against perils that are normally insured by the State within its own program. The federal agency will repay the State for this coverage when billed.

Other federal property requires no specific insurance and the obligation of the controlling State agency may not warrant the purchase of coverage thereon. If the agency of the State knows the details of the contractual obligation of the State to the agency of the federal government, then a notation should be made in the records as to the manner in which that obligation pertains to insurance.

Inventory Policy
Inventory is an asset on the balance sheet. The best way to view inventory is to think of it as cash, an asset of the State. Inventory must be accounted for because its value may change over time. Factors that influence inventory value include depreciation, deterioration, obsolescence, changes in customer preferences, demand, and supply. The Inventory System must assure that the State's resources are effectively utilized by not carrying excessive inventory levels.

All agencies that have inventory that meets the capitalization threshold will have an inventory system and must report the inventory on the CO-59. All inventory systems, including agencies wishing to use the Core-CT Inventory Module must have the system approved by the Office of the State Comptroller's Fiscal Policy Statewide Services Unit. Agencies may send all the requests and questions to the Asset Management Mailbox, osc.assets@ct.gov.

Agencies must do a cost evaluation to determine if it is beneficial to retain inventory. Is the benefit of storing the inventory worth the cost? The staff time involved, personnel costs, overhead costs of the storage area, are among the costs that should be considered before establishing an inventory. The items stored collectively must meet the capitalization threshold and the storage area must be secured.

Each inventory control system must:

• Have an established storage area, (i.e., stockroom or warehouse) that is properly secured and restricts unauthorized access. The inventory system must assure that items are secured from pilferage, obsolescence and loss due to deterioration.
• Have adequate means of determining the agency's needs so sufficient quantities of goods are on hand to meet agency needs and agency funds are not tied up in excessive inventory.

Agencies will:

• Issue stock under the First In First Out (FIFO) method.
• Count and inspect all supplies and materials received when on receipt and
• Immediately report any discrepancies.
• Maintain all inventory records.
• All issuances from inventory must be supported by signed requisitions.
• Annual periodic physical count must be taken of all items in inventory.

INTERNAL AGENCY PROCEDURES

General Information
All State agencies must have policies and procedures in place to ensure that all assets currently owned, purchased under a capital lease, or certain non-owned property in possession of the state where insurance is required be properly recorded and reported by each respective state agency. This manual establishes guidelines for providing adequate oversight.

Property on Loan Policy
Property owned by the State may be removed from its assigned location only with prior written permission from the appropriate agency head. State assets are not intended to be used for personal reasons. Loan permission is to be granted only in order to conduct State business. The asset may be loaned if the agency head is convinced that the removal of the asset will not:

1. interfere with the normal operation of the agency
2. cause unreasonable wear and tear on the asset
3. cause expense to be incurred by the agency
4. provide for profit-making activities

The "Record of Property On Loan Form" - CO-1079 must be completed. An individual who has been authorized to use a State asset on loan must sign the form. One copy is retained by the division or department loaning the asset, one copy is to be sent to the Property Control Unit and the final copy should be given to the individual authorized to use the asset. The individual will be responsible for theft or other cause and/or any damage to the asset. They will provide due care and security for the asset until it is returned to the agency. In the event of any loss or damage, the procedures as prescribed in Chapter 8 regarding "Report of Adjustment to Real and Personal Property" Form, CO-853 must be adhered to.

Assets should not leave State premises unless an inventory tag is on the asset. The division or department should maintain the forms. The forms should be numbered consecutively. It is the responsibility of the unit to follow up on an asset out on loan. If the asset has not been returned by the expected date indicated, procedures should include making direct contact by letter or phone on a weekly basis with the individual until the asset is returned. Assets should not be loaned for extended periods of time and all assets should be returned to the agency during a physical inventory.

Firearms Inventory Control Policy
Each agency must establish written internal procedures regarding firearms that include the agency's property control unit and cover the destruction of firearms. Firearms are to be reported on the agency's inventory regardless of the fair market value or cost; all firearms are considered controllable at a minimum or be reported as a capitalized item.

Each agency must ensure that all firearms are properly stored in a secure manner in accordance with Connecticut General Statutes, Section 29-37i - Responsibilities regarding the storage of loaded firearms with respect to minors. Firearms loaned to another State agency or a municipality must be documented. The Record of Equipment on Loan Form (CO-1079) or facsimile must be completed.

All seized or confiscated items held in storage by the agency pending disposition will be exempt from this inventory control. Seized or confiscated firearms that are subsequently issued (assigned) to agency personnel, or used by the agency, for training purposes, must be added to the agency inventory.

Safeguarding State Property
Safeguarding State property is important to prevent theft and loss of State property that must be replaced by expending additional State funds. Agencies must review the adequacy of existing physical safeguards designed to protect State property. This is the responsibility of the property person and the property custodian. Appropriate safeguards must be implemented to prevent potential losses.

All questions regarding assets and inventory are to be directed to the Office of the State Comptroller's Asset Mailbox at osc.assets@ct.gov.

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