In establishing the list of base units for your organization, make decisions using specific criteria. The estimated life of a base unit and its components should be the same. All components of a base unit should have the same depreciation life. Tax and accounting depreciation will be different for the same base unit, but all components of a base unit should have the same tax life. It should also have only one accounting depreciation life, even though different from tax life. Abase unit must be readily identifiable. It must be distinguishable from other similar items and it must be readily apparent to the observer.
In the personal computer example, a processing unit, disk drive, and monitor all contained in the same computer box are not readily identifiable. They appear to be all one item to the casual observer, because disassembly would be necessary to make separate units. Even more difficult is the installed computer card to provide additional capability.
Examples are telephone modems, additional storage, or automatic processing functions. The base unit must be subject to verification of its existence without disassembly.
Aircraft, manufacturing production lines, and complex equipment may pose difficulty in meeting these criteria. In contrast to the personal computer is an aircraft with four or six engines. Engines are readily identifiable and can have separate serial numbers; individual radio equipment within an aircraft may be more difficult to establish. Telephone switching systems may all be located within a single cabinet much like a personal computer. Capabilities of handling ten, twenty, or one hundred telephones may be added to the cabinet without any external modification. If these items have material value and a need for control, they should be individually identified. Establishing separate base units may also require education of the people who are responsible for those assets in order that their existence can be verified periodically.
Minimum Capitalization Policy
The value of a base unit should generally be no less than the minimum capitalization policy established. Typically this minimum would be between $1,000 and $5,000. Any amount less than the minimum capitalization policy should be expensed. In establishing base units for your company, however, this minimum would not be rigidly adhered to. A $5,000 part of the airframe of a $5,000,000 aircraft is not material. If one part must be present for the aircraft to be operational and it is not subject to further need for control, there is no reason to consider less than the entire airframe one base unit. However, a $3,000 radio set, life raft, and other emergency equipment contained in the aircraft may be an appropriate separate base unit. Factors other than a reasonable minimum capitalization level are ability to control, the possibility of getting lost, and so forth. Similarly, maintenance requirements and the ability to check that necessary maintenance is accomplished must be taken into consideration.
Individual components of a manufacturing production line will have differing maintenance requirements. Personal computers, disk drives, molding, and welding or fabrication equipment may have little maintenance need. However, the components that do the fabrication may have close tolerances that should be ensured on a specific interval of calendar time, hours of use, or a combination thereof. Components that have different maintenance requirements should be established as distinct base units.
For some items, there are legally required maintenance intervals. In addition to aircraft, large trucks operating on the highway must have periodic maintenance as well as inspections to ensure they are within tolerance. These inspections may be performed by state inspection stations on a calendar basis; they may also be performed by employees certified as mechanics or inspectors. Records must be maintained and made available when requested. Individual components such as tractors, trailers, airframes, engines, and electronic equipment with legally required maintenance or inspections should be established as separate base units.
Industry practices must also be taken into consideration. In the cattle industry, different practices exist for the commercial breeder who produces meat to eat versus the registered breeder who produces genetic improvements in breeding cattle. The commercial breeder typically maintains records of a cow and calf unit until the calf is weaned and then will keep a record of the year’s production of steer calves. The registered breeder, however, will create a new asset record for each calf as it is born. The difference in the industry is the relative value of a new calf, which will vary from $200 or $300 for a commercial breeder to $15,000 or $100,000 for the registered breeder. Also, individual records of the lineage of the new registered calf are necessary. The recording of individual birth dates, weaning weight, and birth weights contributes to the value of the registered breeding animal.
Similarly, aircraft and trucks have periodic maintenance routines that may keep them in usefulness well beyond their depreciation life. Practice in the industry requiring legal inspections and continuous maintenance will keep these assets in use well beyond reasonable depreciation lives.
In some government units, it is necessary to maintain base units of small and inexpensive items. Examples are police and fire safety equipment. Pistols and revolvers, oxygen units, and other small items must be controlled for security reasons.
Nonprofit organizations may find it necessary to have base units that are much smaller than their capitalization minimum. For example, a nonprofit trade or marketing association that maintains assets necessary to put on periodic fairs or educational activities may have many items whose original cost is less than $100. The fact that these items are stored in member’s donated buildings requires greater control efforts. One nonprofit organization that conducts a fair annually to raise the funds for its promotion and advertising events has such a system. The assets consist of portable fencing and booths with walls, windows, and roofs to meet food handling requirements. They also have installed lighting and underground electrical wires in the local park where the fair is held. The portable lighting booths and fencing are stored in one or more members’ barns throughout the year. As the needs of the members change, these items may be moved. The institutional memory is dependent upon volunteer managers who change from year to year, or a detailed asset record. Most of these assets were expensed as they were created. Lumber and wire were purchased typically in less than $200 or $300 increments and the booths were then constructed. However, in order to know the location of the asset and its condition, the organization found it necessary to create an asset record. Many of these items have been carried at a historical cost of zero indicating their original expense.
There is also a requirement in this jurisdiction for businesses as well as nonprofit organizations to maintain records of personal property and pay a tax to the county. A property record substantiates the existence of the items, but a zero-value entry in the property record substantiates not paying personal property tax.
Each individual booth, however, is maintained as a property record item (base unit), and condition, estimated need for replacement, etc., is maintained in the property record for each item.
A prime consideration in documenting the rules for determining base units and the list of base units by property class is that they are understandable by the non-accountants in purchasing, management, and production.
The means of identification should also be useful to those who are using the assets. Examples are individual works of art, which are numbered and identified, versus a flock of breeding hens, which may have leg bands designating their particular hatch.
Each base unit must be identifiable by some means on invoices that document its purchase, move, and retirement. Some means of identification is necessary to distinguish each individual base unit from similar ones.
Controllability depends on the environment in which the asset is used. Fish in the ocean or birds loose in the wild are not controllable. It is no different from small tools used by construction crews that move from place to place and are used by many employees. In some cases, the environment can be established to improve the controllability and reduce the number of base units required. For example, in high school vocational classes, it has long been the practice to have tool cribs. One person passes out the tools at the beginning of each period and is responsible for ensuring that they are back in the crib hanging in a specific spot at the end of the period. Typically, these shops have a designated spot for each tool with its outline drawn, and if one is missing it is immediately obvious. A different approach is used by libraries, where an individual record of the book and its whereabouts is maintained. In the case of the tool crib, the review procedure eliminates the need for an individual record of the asset because it can be controlled by its environment. However, in the library situation, a record must be maintained in order to know whether the book is housed on the library shelf.
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