BOP Program Statement 8563.07 § 6

a. M&E. Any M&E acquired that has an initial investment of

$5,000 or more (including transportation and installation less

the discount offered) and that has a useful life of five or more

years is to be capitalized. Additionally, this M&E must be

intended for FPI’s use and cannot be intended for sale in the

ordinary course of operations.

! Such M&E is to be depreciated using a systematic

allocation of expenses as outlined in the Program

Statement on Depreciation of Fixed Assets - FPI.

! Purchases of less than $5,000 per unit, or items having

a life expectancy of less than five years, regardless

of unit cost, are to be charged to the appropriate

expense.

In some cases, good judgment is required to determine whether

an acquisition is to be recorded as M&E, or as Building and

Improvements (B&I). Generally, this type of equipment will be

classified as M&E if it meets the following criteria:

! the equipment is moveable;

! its removal will not damage the structure of the

building;

! the equipment can be used in different centers; and

! the equipment is considered to have an independent

life.

In most cases, shelving in a warehouse or factory and dust

collection systems, are to be classified as M&E.

b. Donated M&E. M&E acquired at nominal cost or without

exchange of funds, and having an appraised value (as determined

by a Board of Survey) of $10,000 or more, is to be capitalized.

c. Special Equipment. Generally, whenever a special tool,

die, jig, or other equipment is purchased or manufactured for a

special job or contract, that equipment’s cost is to be charged

to that job.

However, if it is definite that such equipment will be used on

future contracts or other production, and the equipment meets FPI

capitalization criteria, that equipment is to be capitalized and

depreciated over its useful life.

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d. M&E Enhancements. Machinery repair costs may be either

charged to expense or capitalized depending upon the nature of

the repair.

• Repairs are considered maintenance expenditures and are

charged to expense in the period incurred when they

simply preserve the asset’s existing service potential.

• A maintenance expenditure neither increases nor

decreases the asset’s value.

• Low cost, minor repair expenditures are usually

required throughout an asset’s life to keep it in an

efficient operating condition.

• Repairs are considered enhancements and are capitalized

when they are material in amount ($5,000 or more) and

they increase significantly the asset’s existing

service potential by increasing the useful life or the

asset’s earning capacity.

e. Idle Equipment. Equipment that has either been idle or is

expected to be idle for a period of 90 days or longer must be

classified as idle.

Depreciation must continue on idle equipment unless it has been

removed from the M&E account for disposal, retirement, or removal

from service. Extended idleness indicates that the equipment may

be excess or obsolete, and such equipment is to be evaluated for

possible disposal action.

f. Internal Use Software. Internal use software is software

that is purchased from commercial vendors ‘off-the-shelf,’

internally developed, or contractor-developed solely to meet

internal or operational needs. Software includes the application

and operating system programs, procedures, rules, and any

associated documentation pertaining to operating a computer

system or program.

Internal use software is to be capitalized in accord with

Department of Justice guidance as outlined in the Justice

Property Management Regulations and related directives. Criteria

for capitalization of internal use software is significantly

higher than for M&E.

• Internal use software is to be capitalized when the

software has an estimated useful life of two years or

more; is not intended for sale in the ordinary course

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of operations; and is intended to be used or available

for FPI’s use.

• The dollar threshold for capitalizing internal use

software or enhancements to that software is $500,000

or more.

The FPI Controller may adopt a materiality approach in applying

an alternate dollar capitalization threshold below the DOJ

threshold. In doing so, the FPI Controller must notify the

Director, Finance Staff, Justice Management Division in writing,

of variances from the $500,000 threshold. Notification will:

• identify the category of software for which the exception

pertains;

• provide clear and concise justification for the threshold

variance; and

• identify the fiscal year in which the threshold will be

implemented.

g. M&E Acquired Through a Lease Agreement. Fixed assets may

be acquired under a lease agreement. When this occurs, a

determination must be made whether the lease is a simple rental

agreement (and the periodic payments charged to expense) or a

purchase of a capital asset. A lease is to be considered a

purchase of M&E and capitalized when it meets one or more of the

following four criteria:

• The lease transfers the property’s ownership to FPI by

the end of the lease term.

• The lease contains an option to purchase the leased

property at a bargain price.

• The lease term is equal to or greater than 75 percent

of the leased property’s estimated economic life.

Note: Lease property’s estimated economic life is the

estimated remaining period during which the

property is expected to be economically usable by

one or more users, with normal repairs and

maintenance, for the purpose for which it was

intended at the lease’s inception, without

limitation by the lease term.

• The present value of rental and other minimum lease

payments, excluding that portion of the payments

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representing executory cost, equals or exceeds 90

percent of the leased property’s fair value.

Note: The last two criteria do not apply when the

beginning of the lease term falls within the last

25 percent of the leased property’s total

estimated economic life.