Generally, all things that have a similar life, are acquired together, and are used together should be a single base unit. However, the ability to control the asset should be reviewed. As establishment of the base unit will affect future depreciation and capitalization versus expense decisions, the important thing is a consistent management policy. These elements must be considered in establishing the policy:
- The estimated life of the unit will be a composite of its parts.
- Items of substantially dissimilar lives should not be included in the same base unit.
- The minimum value should be $1,000 or higher.
- Include items used together, such as two interconnected machines, as one base unit.
- Stand-alone or equipment of substantial value should not be grouped.
In a theoretical assembly line we can address each of these items and explore the impacts of the policy determined. The assembly line could consist of a roller or conveyor line bringing raw materials to a computer-guided milling machine and associated manual finishing trimming equipment. The questions that must be asked include: Is the computer useful for any other purpose or is it dedicated to this one? In Criteria for establishing the base unit, common lives must be looked at first. The computer portion is likely to have a shorter life either due to obsolescence or increased maintenance costs. The milling machine may be single purpose or more likely suitable for multiple purposes. Are the dies in the machine a substantial investment relative to the remainder of the equipment? Sometimes dies require considerable engineering costs. If so, the total percentage of costs may indicate it is appropriate for the dies to be separate items.
If it is established that the milling machine and conveyors attached to it are one base unit, the finishing machine a separate base unit, and the computer a third, then it is helpful to explore the accounting for maintenance to these machines over a theoretical ten-year life. Routine maintenance, oiling, adjustment, and repair of broken parts will be accomplished either on a routine schedule, after a fixed number of hours of use, or as malfunctions occur. Components of the computer, especially in a dirty environment, may require replacement more often than other items, especially keyboards and other input–output devices, which are mechanical in nature and subject to wear and deterioration from dirt. If the assembly line runs two shifts a day, six days a week, with maintenance scheduled during one of those midweek shifts and on the seventh day, several components within each of these base units will have been replaced over the ten year life. All of the removable, replaceable parts on the equipment might even have been replaced, with only the frames and major components still the original parts. If over the ten-year life, one tenth of this maintenance and replacement has occurred each year (assuming equal usage each year) we will have properly matched this cost with its periods of benefit. That is the intent we should have as we establish a base unit. Creating base units of a large enough size is necessary for this to happen. Small base units increase the cost of the accounting process with little benefit. The base unit should be as follows:
Smallest asset unit
Property record unit
Made up of components with equal lives
Similar tax rules
Subject to periodic verification
The following is a list of asset categories and base unit classifications that might be included in an asset manual:
Asset Category Base Unit
Computers – Entire computer or central processing unit, disk drive, printer, monitor, backup tape drive, CD-ROM
Software – Operating system compiler, telecommunications software, word processor, database manager
Aircraft – Airframe, engines, radio set, navigation computer, emergency oxygen, megaphone, first aid equipment, life raft, emergency slide, cargo tie downs
Light trucks – Refrigeration units, utility beds, trailer, air compressor, electric generator, hydraulic lift, hydraulic crane
Land – Landscaping, underground utilities
Building – Building shell, roof, air conditioning unit, heating unit, parking lot, elevators, escalators, plumbing, electrical wiring
Furniture – Sound system, television, monitor, video camera, conference table
Manufacturing Equipment – Milling machine, conveyor, computer operating system
Normally, spare parts are expensed when purchased or, if significant, are kept in a supplies account and expensed as used. When expensive parts such as circuit boards for electronics equipment must be maintained, it may be appropriate to capitalize them as part of the unit in service. An example would be a local area network containing a number of personal computers. If ten computers are in service, an additional maintenance space may be maintained. The space is capitalized on the property record. Location code can indicate availability.
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