Financial Management of Property, Plant and Equipment - Appendix D

Detailed Guidance on Disposals and Impairments

Basic rules for disposals and impairments: when an asset has been sold, demolished, is no longer in service or its
value has been permanently impaired, any remaining value of the asset, net of accumulated depreciation, less any salvage
value, must be written off or written down to its net realizable value. This involves removing both the asset and the
accumulated depreciation from the general ledger, and recognizing a gain or loss for the difference. Additionally, any
remaining plant equity is transferred to operating net assets. Any outstanding loans on debt-financed assets that are
being written off must be settled before impairments can be written off.

Types of disposals:

SALES OF ASSETS

External – Sales of assets to third parties will result in either a gain or loss on sale. Where proceeds are greater than the
net book value of the asset (historical cost less accumulated depreciation), credit the gain to object code 5772, “Gain on
sale, Capital Asset^Miscellaneous Income, External.” Conversely, where proceeds are less than the net book value of the
asset, debit the loss to object code 8722, “Loss on sale of capital asset.” In either case, the local fixed asset manager or
Tub finance office must write off the asset through Oracle Fixed Assets. If the asset is not yet fully depreciated, Financial
Accounting and Reporting (FAR) must transfer any remaining plant equity to operating net assets as a below-the-line
internal transfer (non-operating activity). See the University’s Internal Transfer Policy for further information: http://vpf-
web.harvard.edu/documents/fa_intrans104.pdf. When selling assets, any outstanding loans relating to the assets must be
settled; consult the Office of Treasury Management (OTM) in these cases.

Internal – When an asset is sold or transferred between tubs or departments, no gain or loss on the transaction may be
recorded since the asset is still owned by the University, and gains or losses may not be internally generated. The asset is
transferred at the net book value at the time of sale. Transfer request must be done through FAR as the assets need to be
reassigned between the two Tubs in Oracle Fixed Assets. Any amount exchanged in excess of the net book value is
recorded through the 9300 range of object codes as a below-the-line internal transfer (non-operating activity), and would
not affect the net book value of the asset. Tubs transferring assets should contact FAR to ensure that the corresponding
plant equity is transferred along with the asset. See the University’s Internal Transfer Policy for further information:
http://vpf-web.harvard.edu/documents/fa_intrans104.pdf. For buildings, the root number remains the same; FAR
updates the root’s attributes to reflect the building’s new owner and any change to the building’s primary use.

DEMOLITION

Partial demolition – In cases where part of a structure is being demolished so that a new addition may be built, the costs
related to the partial demolition are capitalized to the new capital project by coding invoices to the CIP object code 1254,
“CIP, Demo+Site Prep.” The historical costs associated with the asset that is being partially demolished must be written off
in Oracle Fixed Assets. The write-down of a partially demolished capital asset must be done in Oracle Fixed Asset by the
Tub’s Financial Office or Fixed Asset Manager. No additional entries are required as Oracle Fixed Assets will record the
corresponding loss on disposal and transfer of plant equity.

Full demolition – When an entire building or piece of equipment is demolished, the asset and accumulated depreciation
are written off, and a loss on demolition is recorded to object code 8722, “Loss on Sale/Disposal of Capital Asset” for the
difference. The costs associated with the demolition are expensed as incurred. The write-off of a capital asset must be
done in Oracle Fixed Asset by the Tub’s Financial Office or Fixed Asset Manager. No additional entries are required as
Oracle Fixed Assets will record the corresponding loss on disposal and transfer of plant equity. When disposing of assets,
any outstanding loans relating to the assets must be settled; contact OTM in these cases.

Financial Management of Property, Plant and Equipment – Appendix D Page 1 of 8

 DEPARTING STAFF/FACULTY TRANSFERS
Equipment assets that are transferred with a departing faculty or staff member are handled based on how the assets have
been accounted for and who has title to the assets. Note that school or other local policy may apply.
 If the assets are recorded in Oracle Fixed Assets at zero value for the purposes of tracking, then local asset
managers write-off these assets on Oracle Fixed Assets. Typically this is done when faculty members
transfer to the University and bring equipment with them. If the University does not have title to these
assets, no gain or loss is recorded.
 If the assets belong to the University, then the assets need to be disposed of, with a subsequent gain or
loss recorded. Depending on the type of transaction (gift or sale to the faculty or staff member) Payroll
should be contacted to ensure any benefit to the faculty or staff member is properly recorded. If cash is
exchanged for the asset, FAR must be contacted in order to transfer the corresponding plant equity.
 Questions on how to determine fair market value can be directed to Financial Accounting and Reporting.

SPONSORED ASSETS
 Sponsored assets may require prior approval from the sponsoring agency before disposal or removal from service.
For any type of disposal, departments must complete the Notification of Disposal Form or equivalent
documentation and provide it to their school’s equipment management office. Disposal of sponsored equipment
is subject to the approval and conditions of the federal sponsoring agency.
 If the title of the asset belongs to someone other than Harvard, no gain or loss should be recorded on the
transaction. These assets should have a zero value in Oracle Fixed Assets.
 See Appendix A for more information on sponsored assets.

WRITING OFF WORK IN PROGRESS/CONSTRUCTION IN PROGRESS (WIP/CIP)

Equipment work in progress and/or construction in progress costs that have been on the General Ledger for an extended
period of time (i.e., more than one year) where the project has been either abandoned or significantly altered from its
original plan must be written off. A loss is recorded to object code 8722, “Loss on sale/disposal of capital asset.”

ASSETS NO LONGER IN SERVICE

If assets are no longer in service, they must be written down to their estimated remaining value or, in some cases, written
off entirely. This write-down or write-off is accounted for in the same manner described in the “Sales of assets” and
“Demolition” sections of this document.

ACCOUNTING FOR FULLY DEPRECIATED ASSETS

Assets that are fully depreciated (i.e., the net book value of the historical cost less accumulated depreciation is zero) and
that are no longer in use must be written off. This process is performed at the Tub level in Oracle Fixed Assets.

PHYSICAL INVENTORIES
Discrepancies noted during a physical inventory are to be recorded in conjunction with the completion of the physical
inventory. Any inventory discrepancies noted during the inventory must be written off in Oracle Fixed Assets. The
corresponding loss will be recorded to object code 8722, “Loss on sale/disposal of capital asset.” In addition, any assets
that are found to be impaired must be written down to their estimated remaining value.

DISPOSITION
Disposition is the process of removing equipment from inventory that has no further University use. Any piece of capital
equipment that no longer functions or for which Harvard has no further use must be disposed of and removed from
University records. Disposition is required when equipment is:
 No longer in use nor expected to have future use;
 No longer the responsibility of Harvard University (e.g., transferred or sold); or
 No longer part of the inventory of active items

Equipment purchased with federal or other external sponsor funds are often subject to sponsor-specific disposition
restrictions and cannot be disposed of without prior approval. Typically, the “Notification of Disposal Form” or equivalent

Financial Management of Property, Plant and Equipment – Appendix D Page 2 of 8

documentation is required for disposition of sponsored equipment. Contact the Office for Sponsored Programs for more
information.

Impairment: If assets have been permanently impaired, whether by damage, neglect, obsolescence or a change in the
economic landscape, such that future expected cash flows from the assets are less than their net book value on the
balance sheet, the assets must be written down to their estimated remaining value or, in some cases, written off entirely.
Account for this write-down or write-off in the same manner as described in the “Sales of assets” and “Demolition”
sections of this document.

Impairment is defined as the condition that exists when the carrying amount of a long-lived asset exceeds its fair value.
Assets should be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable. The following are examples of such events from ASC 360-10 Property, Plant and Equipment:

1. A significant decrease in the market price of a long-lived asset (asset group)

2. A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its
physical condition
3. A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived
asset (asset group), including an adverse action or assessment by a regulator
4. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or
construction of a long-lived asset (asset group)
5. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a
projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset
group)
6. A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed
of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level
of likelihood that is more than 50 percent.

Common reasons for impairment include, but are not limited to: missing equipment noted during a physical inventory;
damaged or obsolete equipment disposed of; and building renovations of space that impair prior construction projects.

Timing of recording: account for disposals due to sale or demolition and transfers of assets in the month of the
disposal or transfer, and no later than quarter end.

Tub annual review: Tubs are encouraged to review all tub assets (both capital and equipment) at least annually for
potential impairments and must record any known write-offs or adjustments of their net book values to the remaining
realizable value.

Financial Management of Property, Plant and Equipment – Appendix D Page 3 of 8

 Examples of Proper Coding for Disposals and Impairments

1. On January 15, 20X1, HRES (tub 580) sold a building for $1,000,000 to an external party. The building had an
original cost of $700,000 and accumulated depreciation of $210,000 as of January 15, 20X1. This building was
debt-financed and there were outstanding loans at the time of disposal.

The University begins depreciation in the month the asset was purchased or placed into service, with a full month of
depreciation expense recorded at the month-end close. When an asset is disposed, no depreciation expense is
recorded in the month of disposal. In addition, since this asset predated the conversion to Oracle Fixed Assets, a full
year of depreciation was taken in the year the building was acquired.

As the building is not fully depreciated, the plant equity (object code 3800, “CO^Funds invested in Facilities (Plant
Equity”) as of December 15, 20X1, is $364,000 ($400,000 - $36,000).

The journal entries HRES will record for this transaction are:

Part 1: To record the sale and cash receipt

Object Code Debit Credit Line Description

Tub: 580 1,000,00 Record cash received
Object code: 0375, “Due 0
to/from Consolidated Tub”*
Tub: 580 1,000,00 Record gross sales price as gain on sale
Object code: 5772, “Gain 0
on Sale, Capital Asset”
Root: 06207
*Since cash is held centrally, HRES’ balance sheet is automatically debited via object code 0375, “Due to/from
Consolidated Tub”

Part 2: To remove the asset and accumulated depreciation from the general ledger, FAR “Retires” the asset from
Oracle Fixed Assets. The following entries are automatically generated:

Object Code Debit Credit Line Description

Tub: 580 210,000 Remove accumulated depreciation
Object code: 1630, “Facility
Building Accumulated
Depreciation”
Root: 06207
Tub: 580 490,000 Oracle Fixed Assets will automatically generate
Object code: 8722, “Loss on the loss. The funds received will be manually
Sale of Disposal of Capital applied in a separate step.
Asset”
Fund: 723001
Root: 06207
Tub: 580 700,000 Remove original cost of building
Object code: 1200, “Facility
Building PIS”
Root: 06207

Financial Management of Property, Plant and Equipment – Appendix D Page 4 of 8

Part 3: To pay off outstanding debt on building asset

Object Code Debit Credit Line Description

Tub: 580 450,000 To charge Principal Prepayment
Object code: 3000,
“Transfers to/from
Unrestricted Designated
Balances”

Tub: 640 450,000 To record loan payment receivable -

Object code: 3000, Prepayment
“Transfers to/from Funds
Invested in Plant”

Tub 580 5,000 To charge interest payment for prepayment

Object Code: 7401,
“Facilities Placed in Service
Loan Pool Interest Expense”

Tub 640 5,000 To record interest receivable prepayment

Object Code: 7401,
“Facilities Placed in Service
Loan Pool Interest Expense”
Tub 580 450,000 To transfer to plant equity for principal
Object Code: 9319, “Trsf prepayment
to/from Funds Invested in
Plant-Debt Pymt-Write off
of Retired Assets”
Fund: 000001
Tub 580 450,000 To transfer plant equity
Object Code: 9301,
“Transfers to/from
Unrestricted Undesignated
Balances”
Fund: 723001

Part 4: To reclassify Loss on Disposal against Gain on Sale.

Object Code Debit Credit Line Description

Tub: 580 490,000 Since there is a net gain of $510,000 for the sale
Object code: 5772, “Gain of this asset, reclassify the system recorded loss
on Sale, Capital Asset” against the gain recorded in Part 1 above of
Root: 06207 $1M.
Tub: 580 490,000 Removes the loss on disposal of the building
Object code: 8722, “Loss on from the CINA, resulting in a net gain of
Sale of Disposal of Capital $510,000
Asset”
Fund: 723001
Root: 06207

Financial Management of Property, Plant and Equipment – Appendix D Page 5 of 8

 Part 5: To transfer plant equity to unrestricted net assets

Object Code Debit Credit Line Description

Tub: 580 490,000 Transfer plant equity to unrestricted net assets
Object code: 9302,
“Transfers to/from
Unrestricted Designated
Balances”
Fund: 723001
Tub: 580 490,000 Transfer plant equity to unrestricted net assets
Object code: 9320,
“Transfers to/from Funds
Invested in Plant - PIS -
Purchases/Sales/Adjs”
Fund: 052760

Summary of above journal entries:

Part 4: To Part 5: To
Part 1 - Part 2 - To reclassify transfer
Record remove asset system plant equity
Sale and and Part 3 - To recorded to
Beginning Cash accumulated pay down loss against unrestricted Ending
Object Code: Balance Receipt depreciation debt gain net assets Balance
0375 1,000 (455) 545
1200 700 (700) -
1630 (210) 210 -
3000 (450) 450 -
40 1,000 (490) (5) - - 545
Plant Equity
Fund: 723001
3880 (40) (40)
8722 490 (490) -
9301 (450) (450)
9302 490 490
Net: (40) - 490 (450) (490) 490 -

Unrestricted
Designated
Fund
5772 (1,000) 490 (510)
7401 5 5
8722
9319 450 450
9320 (490) (490)
- (1,000) - 455 490 (490) (545)

Financial Management of Property, Plant and Equipment – Appendix D Page 6 of 8

2. On October 12, 20X1, HRES (tub 580) transferred land and a building to UOS (tub 180). The land has a book
value of $850,000. The building has a book value of $500,000, and the accumulated depreciation as of
September 30, 20X1 was $25,000. As negotiated by the two tubs, UOS agreed to pay HRES an amount of
$100,000. This building was not debt-financed, and there are no outstanding loans at the time of disposal.
As the building is not fully depreciated, the plant equity (object code 3800, “CO^Funds invested in Facilities (Plant
Equity”) as of September 30, 20X1, is $475,000 ($500,000 - $25,000). Depreciation will be recorded on tub 180’s
books as of October 12, 20X1.
The journal entries required to record this internal transfer/sale are as follows:
Part 1: To transfer the assets and accumulated depreciation from HRES to UOS. These will be system generated
entries as the change of ownership of the asset will be changed in Oracle Fixed Assets.

Object Code Debit Credit Line Description

Tub: 180 850,000 Transfer land from HRES to UOS
Object code: 1230, “Land
Acquisition”
Root: 06195
Tub: 580 850,000 Transfer land from HRES to UOS
Object code: 1230, “Land
Acquisition”
Root: 06195
Tub: 180 500,000 Transfer building from HRES to UOS
Object code: 1200, “Facility
Building PIS”
Root: 06195
Tub: 580 500,000 Transfer building from HRES to UOS
Object code: 1200, “Facility
Building PIS”
Root: 06195
Tub: 180 25,000 Transfer accumulated depreciation from HRES
Object code: 1630, “Facility to UOS
Building Accumulated
Depreciation”
Root: 06195
Tub: 580 25,000 Transfer accumulated depreciation from HRES
Object code: 1630, “Facility to UOS
Building Accumulated
Depreciation”
Root: 06195

Part 2: To transfer plant equity to unrestricted net assets. This is a manual entry processed by FAR.

Object Code Debit Credit Line Description

Tub: 580 475,000 Transfer plant equity from HRES to UOS
Object code: 9320,
“Transfers to/from Funds
Invested in Plant”
Fund: 723001
Tub: 180 475,000 Transfer plant equity from HRES to UOS
Object code: 9320,
“Transfers to/from Funds
Invested in Plant”
Fund: 723001

Financial Management of Property, Plant and Equipment – Appendix D Page 7 of 8

 Part 3: To record the negotiated payment of $100,000

Object Code Debit Credit Line Description

Tub: 180 100,000 Transfer UOS’s negotiated payment to HRES
Object code: 9302,
“Transfers to/from
Unrestricted Undesignated
Balances”
Fund: 052671
Tub: 580 100,000 Transfer UOS’s negotiated payment to HRES
Object code: 9302,
“Transfers to/from
Unrestricted Undesignated
Balances”
Fund: 052760

3. On February 12, 20X2, FAS (tub 370) disposed of a piece of scientific equipment. The equipment had been purchased
in January 20X1 for $40,000. The equipment was disposed of as it was no longer functioning. This piece of
equipment was not debt-financed.

All equipment data is housed in Oracle Fixed Assets, as such, FAS’s Fixed Asset Manager will need to retire the
equipment in Oracle Fixed Assets. Oracle Fixed Assets will automatically calculate the net book value and the
corresponding loss on disposal. This asset was placed in service in January 20X1, using an 8 year useful life with
depreciation starting in the month of purchase. Depreciation is not calculated in the month of disposal. The net book
value of this asset is $40,000 less 13 months of depreciation, $5,417, for a total of $34,583.

The journal entries generated by Oracle Fixed Assets after FAS’s Fixed Asset Manager retires the asset in the
system are automatically posted.
To remove the asset and accumulated depreciation from the General Ledger

Object Code Debit Credit Line Description

Tub: 370 5,417 Remove accumulated depreciation
Object code: 1181,
“Equipment, Scientific,
Nonsponsored,
Accumulated Depreciation”
Tub: 370 34,583 Record offset to net gain on sale
Object code: 8722 “Loss on
Sale or Disposal of Capital
Asset
Fund: 724001
Tub: 370 40,000 Remove original cost of equipment
Object code: 1003,
“Equipment, Scientific,
Nonsponsored”

Financial Management of Property, Plant and Equipment – Appendix D Page 8 of 8