[CAFR-Contacts-News] Capitalization of indirect costs

[HAMILTON Robert W * DAS]

Good Afternoon CAFR Contacts,

We've had some questions and comments come to us recently regarding the whether certain types of costs are capitalizable under GAAP for state and local governments.  We've appreciated the dialogue on these topics, and we've even submitted technical inquiries to GASB on some of these subjects seeking clarification.  Once we're able to complete the FY 2017 CAFR, we'll look to update the OAM to clarify the guidance and reflect the interpretations we've received.


1.     Paragraph 117 of OAM 15.60.10, Capital Assets: Classification and Capitalization currently states that "ancillary charges include costs that directly relate to acquisition of an asset..."  GASB 34 paragraph 18 uses the term "attributable" rather than "relate." Although this is a nuance, we think it is an important one, and we think it's imperative to use the same terminology as GASB whenever possible.



2.     Indirect costs may be capitalized if the indirect costs are solely related to multiple capitalizable projects. However, indirect costs that do not solely relate to multiple capitalizable projects are not capitalizable and therefore should be expensed. For example, if an agency's accounting staff performs functions for the entire agency, and their salaries and benefits are allocated across the agency, including to a capitalizable project or projects, the salaries and benefits of the accounting staff allocated to the project(s) are not capitalizable. However, if the accounting staff only performs accounting functions related to multiple capitalizable projects, the salaries and benefits of the accounting staff are capitalizable costs of the projects.



Note: Regarding the example above, if accounting staff work solely on a single capitalizable project, their salaries and benefits would be considered direct costs, and therefore capitalizable, rather than indirect costs.



3.     When an agency incurs a cost that is the result of a capitalizable project, that cost is not automatically capitalizable.  In addition to applying the capitalization criteria found in the OAM and those noted above, the agency should assess whether the cost would have been incurred even if the capitalizable project were not occurring.  For example, if an agency rents a work space for staff while their primary workspace is being renovated, the rental cost of the workspace is not capitalizable, as cost of providing a workspace for staff would be necessary regardless of whether the capitalizable project was occurring.



Thanks to the DAS Capital Finance & Planning team for their insight to some of the practical issues faced by agencies regarding these topics.



Please let me know if you have any questions or concerns.



Thank you,



Rob


Robert W. Hamilton, CPA
Statewide Accounting and Reporting Services Manager
Chief Financial Office
Department of Administrative Services
Phone:  (503) 373-0299
http://www.oregon.gov/DAS/financial/acctng

Data Classification: Level 1 - Published

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