ACCOUNTING FOR CAPITAL EXPENDITURE

What is classed as Capital Expenditure?

Expenditure on Assets that:

“…are intended for use on a continuing basis in the company’s activities” (Companies Act)

“…have physical substance and are held for use in the production or supply of goods and services, for rental to others, or for administrative purposes on a continuing basis…” (FRS 15)

Therefore expenditure incurred to acquire long-term assets such as property, plant or equipment should be capitalised. This can include the following:

  • Labour costs of the entity’s own employees arising in the construction or acquisition of the asset. The University utilises this definition to charge Project Managers’ salaries to Capital Projects
  • “Mini-projects” comprising invoices of less than £20k (theUniversity’s materiality threshold below which expenditure would not normally be capitalised) where the total expenditure is greater than this amount eg bulk PC purchases or where the acquisition of a large piece of equipment is comprised of several smaller purchases. Craig Sherrit should be advised of these to ensure that they are capitalised.

As a general rule, subsequent expenditure on fixed assets should be charged to a Revenue budget. Such expenditure is generally of a repairs and maintenance nature and does not improve the asset. However subsequent expenditure can be capitalised where it:

  • Provides an enhancement of the economic benefits of the asset or
  • relates to a major inspection or overhaul of the asset that restores the economic benefits of the asset

Expenditure that should not be capitalised

The above includes:

  • Administrative and other general overheads. Specificallyhospitality, travel, turfing and bushes are not capital and if charged to a Capital Project code should be recharged to a Revenue budget.
  • Labour costs not related to the specific asset

Coding Structure for Capital Expenditure

Buildings

Nominal –AA**

Budgetholder – 00UES

Activity – AZZ****

Equipment

Nominal – AB**

Budgetholder – 02U**

Activity – dependent on the funding source eg TZZ or RZZ for Core, RBZ for SFC, RGA for a Research Council etc

Authorisation levels

These will normally be consistent with levels for Revenue expenditure.However, in the case of Institutional Capital Projects higher authorisation levels have been set for Estates staff on the basis that budgets for these projects have previously been approved by the Operating Board (previously JPFEC).

Deferred Capital Grants

These are sources of external funding used towards themeeting the cost of a capital project. As well as SFC Capital grants these can include Fundraising (normally channelled via the Development Trust), and Grants from bodies such as the NHS and Research Councils.

The coding structure for DCGs is:

Nominal Budgetholder

HAAA – SFC Buildings 15UGA

HBAA – Non FC Buildings 15UGA

HAAB – SFC Equipment 15UGB

HBAB – Non FC Equipment 15UGB

The Activity code will normally be comparable to the expenditure code for a similar funding source eg RBZ for SFC, RGA for a Research Council, RGB for Development Trust etc

Contributions to Capital Expenditure from College Revenue budgets

When a College is funding a contribution to a Capital project the simplest method of actioning this from a Management Accounting point of view is to input a journal entry debiting a College code and crediting the Capital project code. The merits of this are that

  • the journal would provide an audit trail of the College contribution
  • the I&E bottom line budgeted surplus would not change

However, the above is not proper Financial Accounting practice terms because:

  • the University’s fixed assets will be understated
  • in the year that the journal is processed the University’s I&E surplus will also be understated

To satisfy both the Management and Financial Accounting requirements it is therefore proposed that when a College contribution is approved

  • the College’s revenue budget for that year will be decreased and the capital project budget increased by the amount of the contribution
  • a compensating budget will be set-up in Financial Adjustments in code 4300 MC000 UZZ0000. When preparing the out-turn forecast for Financial Adjustments it will be assumed that there will be nil expenditure against this budget. We will therefore satisfy the dual aim of not changing the I&E budgeted surplus while at the same time reflecting reduced revenue expenditure in the out-turn forecast

Capital Expenditure funded from Discretionary and Principal’s DowryReserves

  1. Funded fromreserve draw-downsadditional to thoseincludedinthat financial year’s revenue budgets:

a)the normal activity code will apply eg expenditure funded from Zoology Discretionary reserves should be charged toROQ0061.

b)balance sheet nominal and budgetholder codes should also be used. These will vary depending on whether the expenditure is Buildings (AA** 00UES) or Equipment (AB** 02U** eg 02UZY for Zoology).

  1. Funded from reserve draw-downs alreadyincludedinthat financial year’s revenue budgets:

As in (1) but with a compensating budget addition to 4300 MC000 UZZ0000

At the year-end the relevantreserve balance should be reduced to take reflect this expenditure.

Capital Expenditure funded from Core Revenue budget underspends rolled forward from a previous financial year

A capital project budget should be established and the Depreciation budget should be uplifted to include related Depreciation charges.