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Title: Section 442.18 - Accounting for property, plant and equipment

442.18 Accounting for property, plant and equipment. (1380)

(a) Classification of fixed asset expenditures. (1381) Property, Plant and Equipment and related liabilities must be recorded in the Unrestricted Fund, since segregation in a separate fund would imply the existence of restrictions on the use of the asset. Cost of construction in progress and related liabilities must be recorded in the Unrestricted Fund as incurred except for assets and liabilities related to certain debt agreements.

(b) Basis of valuation. (1382) (1) Property, Plant and Equipment must be reported on the basis of cost. Cost shall be defined as historical cost or fair market value at the date of gift of donated property.

(2) Property, Plant and Equipment must be reported on the basis of the historical cost incurred by the present owner in acquiring the asset under a bona fide sale. The historical cost shall not exceed the lower of current reproduction cost adjusted for straight-line depreciation or fair market value at the time of purchase. See section 104.10 of HIM-15. Cost is defined as historical cost or fair market value of donated property on the date of acquisition.

(c) Accounting control. (1383) (1) To maintain accounting control over capital assets of the hospital, a plant asset ledger should be maintained as part of the general accounting records. Some items of equipment should be treated as individual units within the plant ledger when their individuality and unit cost justify such treatment. Other items of equipment, if they are similar and are used in a single cost center, may be grouped together and treated as a single unit within the ledger.

(2) All equipment purchased on or after the first day of a hospital's first accounting period beginning after the effective date of this manual, and all equipment purchased prior to such date where the necessary records have been maintained, must be segregated in the plant ledger record by cost center so that the cost of equipment and the related depreciation for each cost center is available.

(d) Capitalization policy. (1384) (1) If a depreciable asset has at the time of its acquisition an estimated useful life of three or more years and an historical cost of at least $300, its cost must be capitalized, and written off ratably over the estimated useful life of the asset.

(2) If a depreciable asset has an historical cost of less than $300, or if the asset has a useful life of less than three years, its costs are recorded in the year it is acquired, subject to the provisions of writing off the cost of minor movable equipment. The hospital may, if it desires, establish a capitalization policy with lower minimum criteria but under no circumstances may the above criteria be exceeded. Alterations and improvements in excess of $300 which extend the life a minimum of three years or increase the productivity or efficiency of an asset, as opposed to repairs and maintenance which either restore the asset to or maintain it at its normal or expected service life, must be capitalized and depreciated over their expected useful lives, not to exceed the lives of the asset to which they are fixed. Normal repair and maintenance costs are to be reported as expense in the current accounting period.

(3) For cost reporting periods beginning January 1, 1981 and thereafter, the historical cost limits will be adjusted to "an historical cost of at least $500 or, if it is acquired in quantity, the cost of the quantity is at least $1,000". The new $500 limit will also apply to alterations and improvements. All other principles cited above will continue in force.

(e) Minor equipment. (1385) (1) Minor equipment includes such items as wastebaskets, bedpans, silverware, mops, buckets, etc. The general characteristics of this equipment are:

(i) in general, no fixed location, and subject to use by various cost centers within a hospital;

(ii) comparatively small in size and unit cost;

(iii) subject to inventory control;

(iv) fairly large quantity in use; and

(v) generally, a useful life of less than three years.

(2) There are two ways in which the cost of minor equipment may be reported:

(i) The original cost of this equipment may be capitalized and not depreciated. Any replacements to this base stock would be reported as operating expenses. The amount of the base stock would be adjusted only if there were a significant change in the size of the base stock.

(ii) All purchases of minor equipment may be capitalized and depreciated over their estimated useful lives.

(3) Once a hospital has applied one of the methods, that method must be used consistently thereafter.

(f) Interest expense during period of construction. (1386) Frequently hospitals borrow funds to construct new facilities or modernize and expand existing facilities. Interest costs incurred during the period of construction must be capitalized as a part of the cost of the construction. The period of construction is considered to extend to the date the constructed asset is ready for use. When proceeds from a construction loan are invested and income is derived from such investments during the construction period, the amount of interest expense to be capitalized must be reduced by the amount of such income. (g) Depreciation policies. (1387) (1) Depreciation on plant assets used in the hospital's operations must be reported as an operating expense in the Unrestricted Fund. The straight line method of depreciation must be used for all assets acquired after July 1970. The estimated useful life of a depreciable asset is its normal operating or service life in terms of utility to the hospital. Some factors to be considered in determining useful life include normal wear and tear, obsolescence due to normal economic and technological advances, climatic or local conditions and the hospital's policy for repair and replacement.

(2) In selecting a proper useful life for computing depreciation, hospitals must utilize the most recent useful life guidelines published by the Secretary of the Department of Health and Human Services or, if none exist, the most recent guidelines published by the Internal Revenue Service or the 1973 guidelines published by the American Hospital Association. However, with the rapidly changing technology in hospitals, these recommendations may not be all-inclusive; in which case, the expertise of the manufacturer, or other reliable sources, may be considered. Any changes in estimated useful lives must be properly documented by the hospital and approved by the hospital's Medicare intermediary.

(3) For reporting purposes each hospital must establish, and follow consistently from year to year, a policy relative to the amount of depreciation to be taken in the year of acquisition and disposal of depreciable assets. Examples of acceptable policies are:

(i) Computing first year depreciation based upon the portion of time the asset was in use during the year. That is, if a depreciable asset was received and in use in the hospital for eight months in the year of acquisition, two thirds of a full year's depreciation expense would be recognized in that first year.

(ii) Recording one half of the yearly depreciation expense in the years of acquisition and disposal, regardless of the date of acquisition or disposal.

(4) Depreciation expense reported on buildings, purchased or constructed, in the year of acquisition or disposal must be based on the actual time during which the building was in use for hospital operations.


VOLUME C (Title 10)