Accounting Policies Land and Land Improvements Buildings and Building Service Equipment Leasehold Improvements

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1 Page 1 of 14 Accounting Policies Section 4.0 Capital Assets 4.01 Capital Assets Defined 4.02 Land and Land Improvements 4.03 Buildings and Building Service Equipment 4.04 Leasehold Improvements 4.05 Equipment 4.06 Software and Software License Fees 4.07 Assets Under Capital Lease Section 5.0 Specific Accounting Policies 5.03 Rates and Methods of Capital Amortization These policies contain excerpts from the Accounting Policy Manual issued by Fraser Health s. It has been prepared to ensure that accounting and financial reporting standards for the recognition of capital assets are consistently applied throughout Fraser Health. It must be noted, however, that it is difficult to phrase policy to conform to all circumstances that may arise and that judgment is required in the determination of appropriate accounting policies.

2 Page 2 of Capital Assets Defined 1.0 Accounting Policies 1.1 Capital assets are defined as those items that meet all of the following criteria: a) Have a useful life 1 expectancy continuing beyond one year b) Are held for the purpose of rendering a service rather than for sale or immediate consumption c) Have a cost of more than the threshold stated for the capital asset category as follows: Category Capitalization Threshold Facility Projects $ 50,000 Leasehold Improvements $ 50,000 Information Systems $ 50,000 Equipment $ 5,000 d) Fraser Health acquires ownership of a tangible asset 1.2 The cost for each capital asset will reflect the total expenditures incurred to acquire, install and prepare the particular capital asset unit(s) for service. For a detailed list of capitalized expenditures by asset category refer to Accounting Policies 4.02 to The cost of a capital asset is not an operating expense in the year of acquisition. Rather, the cost is recorded as an asset and is amortized (or depreciated) over the expected useful life of the asset. 1.4 On the financial statements, the original cost of the capital assets, accumulated amortization and the net book value remaining are shown separately. 1 Useful Life: Period over which the capital asset is expected to be used.

3 Page 3 of 14 POLICY TITLE 1.5 Capital assets may be purchased by or donated (contributed) to Fraser Health: a) Donated (contributed) capital assets are recorded at their fair value at the date of contribution. b) Significant donations (contributions) of capital assets in a given year are disclosed in the financial statements. 1.6 Certain capital assets are classified as Capital Assets in Progress because they are not in working condition. These assets will remain in progress until they are transferred into in service when the asset is substantially complete and capable of operation. 1.7 Capital Assets are classified under the following categories for financial statement presentation: a) Land b) Land Improvements c) Buildings d) Building Service Equipment e) Construction in Progress f) Leasehold Improvements g) Equipment h) Information Systems Equipment i) Equipment in Progress j) Software License Fees k) Assets Under Capital Lease 1.8 Capital Assets are amortized (depreciated) on an individual or pooled basis over the expected useful lives of the assets using the straight-line basis calculation. See Accounting Policy Rates and Methods of Capital Amortization. 1.9 A separate accounting ledger is maintained to track capital assets.

4 Page 4 of Land and Land Improvements 1.0 Accounting Policies 1.1 Land is always considered a capital asset. It differs from other capital assets in that it does not have a finite useful life. Therefore, the cost of land is not amortized and remains constant in the accounts. 1.2 The capitalized cost of land includes: a) The purchase price and net applicable taxes b) Costs incurred to make the land ready for use by Fraser Health including: i) Legal fees ii) Survey costs iii) Rezoning costs iv) Clearing of the land (includes demolition of existing buildings) 1.3 If land is purchased and held for future specified development financing costs may be eligible to be capitalized as an addition to the cost of the land. 1.4 Improvements made to the land to prepare it for construction have a finite useful life and, therefore, are capitalized separately and amortized over the useful life as per Accounting Policy Rates and Methods of Capital Amortization. 1.5 The capitalized cost of land improvements includes: a) Municipal development cost charges b) Drainage systems c) Fencing d) Paving of roads or parking lots e) Landscaping

5 Page 5 of 14 POLICY TITLE 4.03 Buildings and Building Service Equipment 1.0 Buildings and Building Service Equipment 1.1 Buildings include the cost of the building shell and building components. 1.2 Building service equipment includes equipment affixed to buildings and required to make the structure useable. Examples include elevators, HVAC systems and boilers. 1.3 Wherever possible the service equipment should be segregated from the building at the time of recording the asset. 1.4 The cost of the building does not include the land on which the building sits or improvements to the land. The land has a different accounting treatment as discussed in Accounting Policy 4.02 Land and Land Improvements. 2.0 Renovations (Buildings versus Repairs) 2.1 During the life of a building, renovations are incurred with respect to that asset. These expenditures should be analyzed to determine whether they are a betterment to be added to the cost of the building or repairs and maintenance of the building. 2.2 Renovations to a building are capitalized as a betterment if they are over $50,000 and significantly meet any one of the following criteria: a) Extends the useful life 2 of the building; b) Adds to the output or service capacity 3 of the building; c) Reduces the associated operating costs of the building; or d) Improves the quality 4 of the services provided by the building Useful Life: Period over which the capital asset is expected to be used. Output or Service Capacity: Determined by reference to attributes related to physical output capacity such as increase in patients seen or procedures performed. Quality: Attributes such as improvements to care provided.

6 Page 6 of 14 POLICY TITLE 2.3 These renovations are capitalized separately from the original building and amortized as per Accounting Policy 5.03 Rates and Methods of Capital Amortization. 2.4 Expenditures that do not meet the criteria in 2.2 above simply maintain the asset in an ordinarily efficient operating condition and are therefore operating repair or maintenance expenses. EXAMPLE #1: Capital Renovation Fraser Health renovated space within an existing building to enable expansion of Medical Imaging Services. This renovation is capitalized because it: a) increased the service capacity (number of patients seen) b) improved the quality of services (the entire procedure is now done in one location) EXAMPLE #2: Building Service Equipment Fraser Health renovated an existing 20 year old concrete office building with an original useful life of 40 years. The renovation included the replacement of the building s original HVAC system, now 20 years old. The HVAC system is building service equipment and is capitalized separately from the rest of the building. The renovation is capital because the asset (the HVAC system) is being disposed of and replaced with a new asset. The new system is capitalized separately from the building and amortized over its useful life of 15 years. EXAMPLE #3: Operating Renovation (Repairs) As part of the renovation described in Example #2, Fraser Health also replaced the roof of the building, replaced the carpets and painted the interior. These renovations are treated as repairs or operating expenses because the renovations do not extend the useful life of the building, add to its service capacity, reduce its operating costs or improve the quality of the service provided. A roof is a significant repair but it does not extend the life of the building beyond the original 40 year estimate.

7 Page 7 of Leasehold Improvements 1.0 Accounting Policies 1.1 Leasehold improvements are defined as permanent improvements constructed or installed on property that is leased to Fraser Health under an operating lease or rental agreement. 1.2 Permanent improvements to leased property are those items that cannot be removed without causing substantial damage to the leased premises such as wiring, walls, carpeting, etc. 1.3 Equipment and furnishings that can be removed at the termination of the lease must be accounted for as per Accounting Policy 4.05 Equipment. 1.4 Leasehold improvements with an aggregate cost of $50,000 or more are capitalized and amortized over the lesser of the remaining life of the lease or the estimated useful life of the improvements. 1.5 Leasehold improvements with an aggregate cost of less than $50,000 are an operating expense.

8 Page 8 of 14 POLICY TITLE 4.05 Equipment 1.0 Accounting Policies 1.1 Equipment acquired for use by Fraser Health may be classified as capital providing it meets all of the following criteria as per Accounting Policy Capital Assets Defined: a) The item has a useful life 5 expectancy continuing beyond one year, b) The item is held for the purpose of rendering a service, rather than for the consumption, and c) The cost of the item is more than $5,000. Equipment valued under $5,000 is an operating expense. Items cannot be grouped together so that their collective value exceeds $5,000. (See Point 1.4 below) 1.2 Equipment costs include: a) Purchase price and net applicable taxes b) Foreign exchange c) Freight d) Brokerage fees e) Software and/or software license fees that are necessary to the functioning of the equipment in its intended purposes. f) Installation: i) Labour and ancillary equipment required to make the equipment operational and that have no value when the equipment is disposed of. ii) Building renovations that would have no value if that or like equipment were removed. g) Travel expenses related to initial training for maintenance and operations. 5 Useful Life: Period over which the capital asset is expected to be used.

9 Page 9 of Equipment costs do not include the following which must be recorded as operating expenses: a) Staff compensation and local travel expenses for training b) Any costs related to project, vendor or equipment approval, planning or selection c) Extended warranties d) Supplies used in the normal operation of the equipment e) Service/maintenance contracts 1.4 Grouped Items versus Components of a System: a) Generally grouped items are multiple orders of the same equipment. If the total cost of each individual item is less than $5,000, then the entire order is an operating expense. However, orders of extreme magnitude may be considered capital where all the criteria of capital are met other than the dollar threshold. (See Point 1.2 above) b) A system is comprised of components that work together to create a single working asset. When determining whether a system meets the $5,000 threshold and is a capital asset, the combined cost of all of the components must be considered. An example of a system is a physiological monitoring system which is comprised of a central station and a number of patient monitors. NOTE that OR instrument sets, because the individual pieces can be used independently, are NOT a system. Instruments are only capital if the individual items cost more than $5,000 each and have a life expectancy of greater than one year.

10 Page 10 of Software and Software License Fees 1.0 Accounting Policies 1.1 Software acquired by purchase or pursuant to the terms of a licensing agreement may be classified as capital providing it meets all of the following criteria as per Accounting Policy Capital Assets Defined: a) The software has a useful life expectancy continuing beyond one year, b) The software is to be used solely for Fraser Health s internal needs and is not for resale, and c) Components of an integrated systems project are considered capital if the combined costs of the project are greater than $50, Upgrades, interfaces and enhancements should only be capitalized if they result in significant increases in functionality. Routine upgrades included in maintenance agreements are not normally segregated and capitalized unless they provide an extraordinary enhancement in software functionality. 1.3 Equipment purchases and renovations related to software systems are capitalized separately and only if they meet the requirements under Accounting Policy Buildings and Building Service Equipment and Accounting Policy Equipment.

11 Page 11 of The capital cost of major software systems include: a) Purchase price of software or license fees, including related interfaces, and net applicable taxes b) Software development costs c) Foreign exchange d) Freight e) Brokerage fees f) Cost of installation and testing: i) Professional fees for incremental resources (not required after installation) ii) Out of town travel for site visits and vendor meetings related to installation iii) Incremental staff compensation (over and above normal operating levels) to install and test the system iv) Vendor travel expenses for on-site training 1.5 Software costs do not include the following which must be recorded as operating expenses: a) Staff compensation and local travel expenses for training b) Any costs related to project, vendor or software approval, planning or selection c) Service/maintenance contracts d) Catering, office supplies and other costs associated with software implementation not specifically mentioned in Point 1.2 above e) Intangibles where the expenses incurred do not directly result in an identifiable asset, owned by Fraser Health, that has future benefit or embodies the talent or intellectual capital of Fraser Health employees such as a program redesign, data clean-up, policies and procedures.

12 Page 12 of Assets Under Capital Lease 1.0 Accounting Policies 1.1 The Fraser Health Authority enters into various leasing agreements for the use of equipment and facility space. Accounting guideline (PSG-2) requires that leases be defined as capital or operating leases. If the lease meets one or more of the following five criteria at the beginning of the lease agreement, it is classified as a capital lease. Otherwise, it may be classified as an operating lease or a rental agreement. The accounting guideline includes qualitative criteria that requires the use judgement. Each lease must be reviewed in detail and classified on a balance of probabilities. Final judgement will be made by the. The five criteria indicating a lease is capital in nature are: a) The lease transfers ownership of the property to the lessee by the end of the lease term, or b) The lease contains a bargain purchase option, or c) The lease term is equal to 75% or more of the estimated economic life of the leased asset, or d) The net present value of the minimum lease payments exceeds 90% of the fair value of the leased asset at the inception of the lease, or e) The overall effect of the transaction is that all the benefits and risks are substantially transferred to Fraser. 1.2 A lease of land by Fraser Health is an operating lease unless the lease transfers ownership of the property to Fraser Health at the end of the lease term.

13 Page 13 of Accounting for leases: a) A lease that meets the definition of a capital lease as per Point 1.1 above is recorded as an asset and a lease liability at the beginning of the lease. The value of the asset and liability set up in the accounts is the lesser of the fair value of the equipment or property at the start of the lease or the net present value of the minimum lease payments. The liability is reduced as the payments are made. The asset is amortized according to the appropriate asset class. The interest portion of capital lease payments is expensed and does not affect the recorded liability. Only the principal portion of payments reduces capital lease liabilities. b) Operating lease/rental agreement payments are recorded as an operating expense at the time the payments are made. 1.4 Leases for the use of equipment or real property must be reviewed and approved to by the prior to acceptance of the lease.

14 Page 14 of Rates and Methods of Capital Amortization 1.0 General Amortization or depreciation is the process of allocating the cost of capital assets over their service lives on a rational and systematic basis. 2.0 Accounting Policies The straight-line method is used to calculate capital amortization (depreciation) expense. The annual amortization (depreciation) is calculated by subtracting the salvage value 7 of the asset from the purchase price and then dividing this number by the estimated useful life 8 of the asset. 2.2 Assets under capital leases will be amortized (depreciated) over the term of the lease unless ownership passes to Fraser Health or there is a bargain purchase option, in which case the leased assets will be amortized (depreciated) over their estimated useful life. 2.3 Leasehold improvements will be amortized (depreciated) over the term of the lease. 2.4 The estimated useful life is normally determined by reference to the Management Information Systems (MIS) Guidelines produced by the Canadian Institute for Health Information (CIHI). 2.5 The amortization (depreciation) method and estimates of the useful life of a capital asset should be reviewed regularly. Significant events that may indicate a need to revise any of these components include: a) A change in the extent the capital asset is used b) A change in the manner in which the capital asset is used c) Removal of the capital asset from service for an extended period of time d) Physical damage e) Significant technological developments f) A change in the MIS Guidelines estimated useful life Straight-line Method of Depreciation: A process that assumes the asset will lose an equal amount of value each year. Salvage Value: The estimated value of an asset at the end of its useful life. Where the useful life of a capital asset is expected to exceed 40 years but cannot be estimated and clearly demonstrated, the amortization period should be limited to 40 years.