Capitalized upgrade -- A capitalized upgrade is defined as an upgrade that costs $200,000 or more.

Downgrade -- The removal of parts from within an original piece of equipment, which decreases the asset's capacity, efficiency, or economic useful life.

Personal Property -- Property that is not classified as either real property or Federal government records. It includes all equipment, materials, supplies, and software. (See NOAA's policy on software for guidance on accounting for software. See NOAA's Personal Property Home Page for definitions of non-expendable and accountable personal property.)

Repairs and Maintenance Expense -- Repairs and maintenance expense is defined as any costs incurred to an asset that maintain the existing level of service and do not significantly increase the capacity, efficiency, or economic useful life of the original asset. These costs, regardless of dollar amount, should be recognized as repairs and maintenance expense (i.e. not added to the depreciable basis of an original capitalized asset, nor capitalized separately).

Net book value - Net book value equals the original acquisition cost plus any upgrades less any downgrades less accumulated depreciation.

If the expenditure is for repairs and maintenance (see above definition), it should be expensed. No change is made to the value of the asset recorded in the property system.

Upgrades of less than $200,000 will be expensed.

For any upgrade that is $200,000 or more, a statement (i.e. memorandum, letter, or email) must be sent to the Personal Property Branch (PPB) indicating whether the item should be capitalized or expensed. The statement should be signed and dated by a knowledgeable person such as the contracting officer and include justification if the item(s) is to be expensed. For items that are $200,000 or more and received by PPB without justification, it will be assumed that the item should be capitalized.

NOAA does not consider a purchase of a component made within six months of the purchase of the main system to be an upgrade, but rather to be a part of the original acquisition required to place the item into service and its costs will be added to the original acquisition cost. In this situation, the acquisition date will be modified to the date the component was accepted. For example, if an office buys a rack from one vendor, which will be used to hold disk drives, and the disk drives are purchased from another vendor within six months of the purchase of the rack, the disk drives will not be considered to be upgrading the rack, but part of the original system acquisition. The date the disk drives were accepted will be used as the date from which depreciation will be calculated.

When dealing with an upgrade, there are two factors that must be taken into consideration: accountability for the property and the financial accounting for the property.

Accountability - An upgrade is accountable and must be tracked in the property system if that upgrade costs $200,000 or more. Any upgrade to a non-capitalized item that costs $200,000 or more is treated as an addition (see below). If the upgrade costs less than $200,000, then it must be accounted for if it costs more than 50% of the cost of the original item being upgraded.

Financial accounting - If an upgrade costs $200,000 or more, it will be capitalized unless justification is presented for expensing the upgrade (see above). If it costs less than $200,000 it will be capitalized only if it is accountable and is an upgrade to an asset that is capitalized. Otherwise, it will be expensed.

Extending the useful life of a non-capitalized asset is not an option since the asset was expensed in the first place.

Additions represent new assets and should be capitalized if the cost meets the capitalization threshold ($200,000 or more). Examples of additions include adding a new internal disk drive to a computer, or installing a new recorder inside an existing wind tunnel.

If a component is added and it meets the capitalization threshold, it must be entered into the Personal Property System (PPS) (Sunflower Assets) with a separate Property Identification Number (PIN) as both an inventory asset and as a financial asset so that it will have its own depreciation schedule and other necessary information. The barcode tag does not have to be placed on the equipment, but may be carried in a notebook or other central location by the Property Custodian. Such components will be entered into Sunflower Assets as a child associated with the parent PIN of the original unit.

If a component is added and it does not meet the capitalization threshold, it will be expensed, and, as long as it meets the above accountability criteria, either be added to the Personal Property System for tracking purposes with a separate PIN as an inventory asset or its value may be added under the PIN of the original item. If it is given its own PIN, the tag does not have to be placed on the equipment, but may be carried in a notebook or other central location by the Property Custodian. If it is tagged, the component will be entered into the PPS as a child associated with the parent PIN of the original unit.

An example of the proper treatment of an addition might be the case of adding a crane to a vessel. If the crane is added to the vessel within the first 6 months of the vessel's acquisition, it would be considered that the intention was that the crane was to be part of the vessel as originally configured, and the cost of the crane would be included within the acquisition cost of the vessel. The crane would not be tracked separately in the property system. If it is acquired after the first 6 months of the vessel's acquisition, it will be considered an upgrade. If it costs $200,000 or more, or if it costs more than 50% of the original cost of the vessel, it will be considered an accountable upgrade. If it costs $200,000 or more, it must receive its own PIN. If it receives its own PIN, it will be entered into the property system as an inventory asset and associated as a child to the parent asset, the vessel. If it does not receive its own PIN, the value of the vessel will be increased by the value of the crane and a note made in the property system to justify the increase in value.

In either case, it is essential that the proper object class codes and other associated acquisition accounting be retained and associated with the value of the item and the upgrade. Documentation for an addition is the same as that required for any other procurement.

NOTE: Loading a software application into a computer is not an upgrade. The software application and the computer are two different items of personal property, and are managed separately.

Improvements (sometimes called betterments, upgrades or retrofitting) and replacements (sometimes called renewals) are substitutions of one asset for another asset. The distinguishing feature between an improvement and a replacement is that an improvement is the substitution of a better asset for the one currently used, while a replacement is the substitution of a similar asset. For example, if a Custodian replaced a 500 MB internal disk drive with a 1 GB internal disk drive, it would be an improvement; however, if a Custodian replaced a 500 MB internal disk drive with a 500 MB internal disk drive, it would be a replacement. Many improvements and replacements result from a general policy to modernize or rehabilitate an older asset.

Improvements acquired to put the property into service are added to the original cost of the property. Examples include site preparation and rustproofing.

Purchases of non-capitalized replacements have no effect on the property record, either in terms of accountability or financial accounting (except in those rare instances where a serial number may need to be corrected). Therefore, no changes should be made to the record and the replacement should be acquired using the appropriate 26XX object class code.

Purchases of improvements (both those that meet the capitalization threshold and those that do not) are recorded in Sunflower Assets to ensure that the total value for the system includes the value of the new component less the original value of the item being removed when known.  Thus, in the example given above, the original acquisition cost of the 500 MB disk drive or an estimate would be subtracted from the original acquisition cost of the system and the original acquisition cost of the 1 GB disk drive would be added to Sunflower Assets.  Again, the 1 GB disk drive may be recorded with its own PIN and tied back to the parent PIN of the original system or it may be subsumed under the PIN of the system.

There are two ways to account for improvements and capitalizable replacements: when the book value of the old component is known and when the book value of the old component is unknown.

A. When the book value of the old component is known:

When the component is improved or replaced by another component, the acquisition cost of the old component should be deducted from the overall acquisition cost of the asset recorded in the Property System. The accumulated depreciation of the basic unit should be reduced by the old component's accumulated depreciation. The difference is recorded as a loss on disposal of the asset unless the old component is sold, in which case there may be either a loss or a gain on disposal. (This entry is recorded by Finance.) The new component should be recorded in the same fashion as an addition (see above) and as a component of the unit being upgraded.

In the following example, NOAA acquired a mainframe computer in 1990 with an 8-year service life for $4,000,000. In 1996, NOAA replaced the disk storage system for $500,000. The book value of the original disk storage system was $200,000. NOAA should reduce the recorded value of the mainframe computer and its accumulated depreciation by the amount of the component being replaced and its respective accumulation.

B. When the acquisition value of the old component is not known:

The acquisition cost of the old component should be estimated. In making the estimation, the amount of time that has elapsed since the purchase of the component and the current condition of the asset should both be taken into consideration. Once an estimate of the acquisition cost has been determined, the accounting for the improvement or replacement should be calculated the same way as when the acquisition value of the old component is actually known (see above).

When components are removed, superseded, or destroyed, the original acquisition cost of the basic unit recorded in the Property System shall be reduced by the acquisition cost of the component removed, and the accumulated depreciation related to the basic unit shall be reduced by the accumulated depreciation related to the component removed, with the difference recorded as a loss on disposal of the asset unless it is sold, in which case either a loss or a gain may be recorded. No other change shall be made, for example, to the acquisition date or the useful life of the basic asset.

When the above rules are applied, and the resulting value of the original item is reduced below the $200,000 threshold, it will continue to be depreciated. The downgrade does not affect the fact that it was originally identified as capitalized equipment.