PROPERTY, PLAN, AND EQUIPMENT POLICY PER5PECTIVE Property, Plant and Equipment (PP&E) are those assets including land and buildings, furniture, computer systems, etc., which the company retains more or less permanently for utilization in the course of normal operations to produce and distribute goods and render services. POLICY Assets, both new and used, which have a useful life of three years or more and a gross cost which meets the standards defined in this policy should be capitalized as property, plant, and equipment. POLICY STATEMENTS Useful Lives and Asset Groups 1. The following asset groups and useful lives apply to new fixed assets: Useful Lives (Additions After Asset Group 1/1/99 US: 12/1/98 Intl) Land Buildings - Masonry Structures - Metal Structures Infinite 45 25 1
Building Components - Acoustic Tile Ceilings, Boiler Package, Fluorescent Lights (Ballasts, Lenses) 20 - Resilient Tile Floors, Roofs, Rooftop Air Conditioning Units, Security Systems, Water Treatment Facilities, Pumps, Paving 15 - Wall Coverings, Blinds, Shades, Drapes, Truck and Rail Dock Shelters Leasehold Improvements. 10 * * Leasehold improvements should be depreciated over the lease period plus any renewal options, not to exceed 20 years. Autos and Trucks 4 Specialized Equipment 5 (medical equipment, outdoor maintenance equipment, photographic equipment, factory electrical trucks, window air conditioning units, circuit board equipment, Semiconductor equipment, SMT equipment, etc.) Tools 5 Test Equipment 5 (Oscilloscopes, circuit testers, non-r&d equipment, etc.) Unique Tooling & Test Equipment 3 (unique to a product or program -R&D or manufacturing) Furniture and Fixtures 10 (desks, carpeting, modular furniture, file cabinets, kitchen equipment) Information Systems Equipment 4 (computer systems, terminal and data entry systems) CAD/CAM/CAE Hardware and Personal Computers 3 Office Equipment 5 (mechanical, copiers, typewriters) Telecommunications Equipment (including Private Branch Exchange instruments, switches, cables, etc., and specific Internet Assets) Other Manufacturing Equipment (Equipment which is not technology driven; e.g., conveyors, drill presses, packing equipment, work benches, etc.) Aircraft 10 5 10 2
Capitalization Criteria 2. The minimum gross cost for capitalization of individual fixed assets is $1,000. When a modular system is purchased, the asset gross cost includes all integrated component parts. 3. Until YE 2003, multiple purchases of like articles exceeding $10,000 should be capitalized as a group asset. For example, if 150 chairs are purchased for $80 each, the total cost of $12,000 should be capitalized (150 chairs @ $80), even though the unit cost is less than $1,000. Modular furniture components are considered to be like articles. After YE 2003, group asset capitalization will not be permitted. 4. Only assets which have a useful life of three years or more can be capitalized as property, plant, and equipment. Initial Capital Expenditure 5. Assets should be recorded at their gross cost, defined as the sum of the following items: - Purchase price or Transfer price. For the company production units transferred to fixed assets, MLB and ICA should be capitalized separately (transfers from U.S. to U.S. units only). - Import duties, freight, insurance, purchase commissions, broker's fees and other costs related to the acquisition of the asset. If the total of these items exceeds $1,000, the costs should be capitalized. - Sales and use tax attributable to the specific items. If the tax is included on the invoice for the acquired assets, it should be capitalized. However, if the charge for tax comes as a separate item, it need not be capitalized if the amount of the tax is less than $1,000 for a specific asset. 3
- Cost of non-corporate installation necessary for placing the asset into operating condition. If the charge for installation is less than $1,000, it may be expensed. - Software included in the price of the hardware. 6. Software separately stated from the price of the hardware should be recorded according to the following criteria: a. Purchased software should be capitalized if it meets the following criteria: 1) The cost of the software is $25,000 or more for an individual software package. The purchase of five packages for $30,000 does not qualify for capitalization. 2) The software's estimated useful life is three years or more. 3) If the initial use is for an R&D project, the software must also have alternative future uses in other R&D or non-r&d projects. b. Costs of developing software for internal use should be expensed as incurred. 7. Equipment which is rented (not a capitalized lease) and subsequently purchased should be capitalized at the net purchase price. 8. The accumulated cost of buildings or machinery under construction and the acquisition cost of equipment acquired that cannot be physically placed into service within one month of the date of acquisition should be recorded as an asset in progress. Assets in progress should be maintained in a sub-account of the applicable fixed asset category until completed and/or placed in service. 4
Subsequent Expenditures 9. Additional expenditures may be incurred subsequent to the purchase of a fixed asset. The accounting treatment for these costs depends upon the nature of the expenditure. - Additions are extensions, enlargements, or expansions made to an existing asset. These include feature additions to a piece of equipment, building annexes, etc. Expenditures for additions are capitalized if they exceed $1,000. - Repair and Maintenance expenses are incurred to keep a fixed asset in efficient operating condition (recurring) or restore fixed assets to productive service after damage, accident, or prolonged use (nonrecurring). These expenses do not increase the asset's previously estimated service life or capacity. Repair and maintenance expenditures often are relatively small expenditures; however, repairs and maintenance may also involve large dollar outlays. For example, roof resurfacing due to prolonged use is classified as a repair because it does not increase the estimated service life or value of the building. These types of expenditures are recorded as Repairs and Maintenance Expense. - Replacements and Betterments involve removing a part or component of a fixed asset and substituting a new part or component. The substitution of a part with significantly improved performance capabilities (e.g., software upgrades) is defined as a betterment, while the substitution of a part with the same performance capabilities is a replacement. These types of expenditures are non- recurring and increase the value and/or the remaining service life of the original, asset. If these expenditures do not exceed $1,000, they should be expensed; otherwise, the costs should be recorded using the following criteria: a. If the book value of the old asset is known, the cost of the old asset and the related accumulated depreciation should be removed and any gain/loss on the old asset recognized. The new asset is then recorded at cost. 5
b. If the book value of the old asset is unknown, costs that primarily increase the value of the asset are recorded as an increase to the asset account balance. Costs that primarily extend the useful life of the asset are recorded as a reduction of the related accumulated depreciation account. The costs of replacing the components of a building containing asbestos with asbestos-free components that qualify as replacements or betterments should be recorded using the above criteria. The costs of ordinary repairs and maintenance performed in conjunction with asbestos-removal programs should be expensed as incurred. Under no circumstances should an amount be capitalized which would cause the net book value of the asset to exceed its fair market value. A project may include both repairs and replacements/betterments. Each expenditure should be classified according to the above criteria. Depreciation and Amortization 10. Property, plant, and equipment is depreciated using the straight-iine method over the appropriate useful life. If management believes that a different useful life or an alternative depreciation method is more appropriate, Corporate Policies and Accounting Research Department must approve its usage prior to implementation. For the company s production units transferred to PP&E, MLB and ICA should be depreciated separately (U.S. to U.S. organizations only). 11. Improvements (i.e., additions and replacements/betterments) to the company owned properties which qualify for capitalization should be depreciated over the remaining useful life of the original asset. If the remaining useful life of the original asset is less than three years (for 6
example, a fully depreciated asset), the improvement may be depreciated over the life of the improvement, not to exceed five years. 12. Used assets should be depreciated over the equipment's remaining useful life, not to exceed the life of similar new equipment. 13. When possible, management should separate building components from the building itself so that the components can be depreciated over shorter lives. 14. Depreciation/amortization of fixed assets should commence in the month following acquisition or completion of construction or improvement (i.e., the general contractor has essentially competed work and the building can be used for its intended purpose). Once depreciation or amortization has commenced, it should continue uninterrupted until the asset is fully depreciated, sold, or permanently retired (e.g., held for sale or scrapped). 15. Assets in process are not depreciated. When an in-process asset is constructively complete (greater than 75%) or is placed in service, depreciation should begin the following month based on an estimate of the total cost upon completion. Once the total actual costs of the asset have been finalized, adjustments to depreciation should be made prospectively. 16. Leasehold Improvements should be amortized by a credit directly to the asset account and a debit to the Amortization -Leasehold Improvements account using the straight- line method. 17. Capitalized software should be amortized on a straight-iine basis over the life of the associated hardware. 7
U.S. Tax Reporting 18. To comply with U.S. tax reporting, fixed assets of both U.S. and international allocations must be layered according to year of acquisition. U.S. tax law also requires that assets be grouped according to the Class Life Asset Depreciation Range System (Accelerated Cost Recovery System). Accounting /Subsidiary Records 19. Each organization/plant that has property, plant, or equipment is responsible for maintaining the accounting and subsidiary records to ensure compliance with the requirements of this policy. Subsidiary records are to be reconciled to the general ledger at least quarterly. Information which should be maintained for all fixed assets includes: - Description of the asset including name of the vendor. - Property, plant and equipment account number and title. - Approval identification. - The company property number and/or serial number. - Acquisition date. - Gross cost. - Useful life. - Depreciation start date. - Accumulated depreciation. - Voucher number of internal transfer information. - Physic allocation including building/department. - Custodian's title/department. - Disposition date or retirement date. Annual Assessment of Depreciable Lives/Impaired Assets 20. Major PP&E assets should be assessed at least annually to evaluate possible exposure due to permanent impairment or inaccurate useful lives. An asset is impaired when its book value is greater than its market value. Adjustments to write- down permanently impaired assets to their market 8
value which exceed $250,000 should be reported during the quarterly risk review process. In addition, the potential financial impact of changes to useful lives should also be reviewed during the quarterly risk review process. Physical Verification of Assets 21. A complete physical verification of fixed assets should be made at least once every three years. A physical inventory is needed more frequently when: - A facility is sold or liquidated or there is a major movement of assets. A complete physical inventory and reconciliation is required at that time. - An organization experiences a substantial overage or shortage during a verification. The organization must conduct complete physical verifications annually until effective internal accounting controls are established. 22. The requirement for a complete physical verification at least once every three years may be met by a one-time (wall-to-wall) total physical count, a rotational program, or by an annual cycle counting program. Approval for substitution of a cycle counting program for a wall-to-wall count must be approved by the appropriate Group Finance Director or Division Controller and will be subject to review and approval by the Corporate Controller and Corporate Auditing. 23. Each organization must develop detailed written instructions defining the procedures to be followed to assure that all assets are counted and asset records are properly updated. 24. Any differences resulting from the physical verification should be promptly researched and reflected in the accounting records. When the total absolute physical inventory adjustment exceeds 5% of the net book value of total assets verified, a summary of the reasons for the material differences 9
between physical and book fixed assets should be prepared and forwarded to the Corporate Controller. 25. In order to support the physical verification, identification tags should be affixed to assets to distinguish the asset as company property and to provide a control number to be used for verification and tracking during the asset's life. If affixing identification tags to the assets is impractical, other evidential matter should be maintained that distinguishes the assets as company property. Alternative Accounting Practices (International) 26. International organizations with gross PP&E assets acquired after November 1, 1975, of less than $2,000,000 which meet the conditions set forth in the policy, "Alternative Accounting Criteria", may follow the local tax accounting practices in lieu of the above statements subject to the following limitations: - The useful lives guidelines may be increased or decreased in accordance with local tax regulations if the tax useful lives are within + or -25% (aggregate) of these guidelines. Variations of greater than 25% require the Corporate Controller's approval. - The Company's policy is to currently expense properties acquired that have a U.S. dollar equivalent cost of less than $1,000. However, where local tax law requires capitalization of lower amounts, the local minimum capitalization standard may be followed. Where local tax laws provide for a method of depreciation other than straight- Iine, the tax regulation may be followed for financial accounting if the annual depreciation expense is within + or -25% (in aggregate). Variations of greater than 25% require the Corporate Controller's approval 10