To ensure compliance with applicable federal financial accounting standards, the CFO conducts reviews of property and equipment (P&E) on a monthly basis. Each month, adjustments are made to the accounts to reflect capitalization and depreciation of P&E in accordance with this policy; disposals are reviewed monthly for loss materiality. Disposals are considered material if the cumulative loss exceeds a materiality of $1 million during the year.

The IRS established a base cost for all property and equipment as of September 30, 1999, based on the statistical analysis report, Estimation of the Net Book Value of Property and Equipment of the IRS as of September 30, 1999. Subsequently, all property and equipment is recorded at actual cost.

Useful lives of property and equipment were established as of September 30, 1999, and were reviewed and revised in fiscal year 2004. The IRS will continue to periodically review the useful lives of property and equipment and make changes as appropriate.

The CFO only capitalizes items that the IRS owns. Each item must have a useful life of greater than two years. Depreciation is calculated using the straight-line method. A half-year of depreciation is recorded in the first year and in the final year for all P&E, except for assets under capital lease.

Unless otherwise noted, the IRS does not have a separate capitalization threshold for individual items or bulk purchases.

The CFO is responsible for the servicewide accountability of property, equipment, and capital leases.

The Beckley Finance Center (BFC), under IFM, is responsible for conducting monthly reviews of property, equipment, and maintenance for a subset of transactions.

The Office of Financial Reports, under IFM, is responsible for:

All automated data processing (ADP) equipment is capitalized regardless of the price unless it is specifically exempted as expendable equipment. Equipment that is instrumental in the functioning of a larger piece of ADP equipment is grouped with larger equipment and capitalized when purchased at the same time as the larger piece of equipment. Associated commercial off-the-shelf software is grouped with the ADP equipment and capitalized.

Expendable equipment such as monitors, keyboards, mice, hard drives, memory upgrades, braille equipment, and other miscellaneous internal and peripheral devices, is expensed when purchased separately.

ADP equipment generally consists of computer and telecommunications equipment. ADP equipment is subdivided into five sub-classifications of computer equipment and telecommunications equipment as follows:

Tier I, Tier II, and Tier IV asset categories have an estimated useful life of seven years with no residual value.

LAN servers have an estimated useful life of four years with no residual value.

Tier III asset category has an estimated useful life of three years with no residual value.

Only material dispositions of ADP equipment are recorded. The Office of Financial Reports reviews disposals recorded on the IRS Information Technology Asset Management System (ITAMS) on a monthly basis to assess materiality and to record adjustments. The adjustments reduce both the asset and accumulated depreciation accounts, and record any gains or losses as the result of the disposal.

The IRS capitalizes furniture and non-ADP equipment costing over $5,000 per item.

Furniture has an estimated useful life of eight years with no residual value. An example of capitalized furniture is an automated file storage system.

Non-ADP equipment has an estimated useful life of ten years with no residual value. Non-ADP equipment includes items such as mail sorters, photocopiers, radio equipment, and miscellaneous office equipment other than ADP equipment.

Only material dispositions of furniture and non-ADP equipment are recorded. The Office of Financial Reports reviews disposals recorded and provided from the IRS ITAMS on a monthly basis to assess materiality and to record adjustments. The adjustments reduce both the asset and accumulated depreciation accounts, and record any losses.

The IRS capitalizes investigative equipment costing over $5,000 per item.

Investigative equipment has an estimated useful life of ten years with no residual value.

Investigative equipment includes forensic laboratory equipment.

Only material dispositions of investigative equipment are recorded. The Office of Financial Reports reviews disposals recorded on the IRS Criminal Investigation Management Information System (CIMIS) database on a monthly basis to assess materiality and to record adjustments. The adjustments reduce both the asset and accumulated depreciation accounts and record any gains or losses as the result of the disposal.

Vehicles are capitalized, and have an estimated useful life of five years with no residual value.

Only material dispositions of vehicles are recorded. The Office of Financial Reports reviews disposals recorded on the IRS CIMIS database on a monthly basis to assess materiality, and to record adjustments. The adjustments reduce both the asset and accumulated depreciation accounts, and record any gains or losses as the result of the disposal.

Internal use software is capitalized in accordance with SFFAS No. 10, Accounting for Internal Use Software, and is amortized over projects estimated useful lives with no residual value.

The internal use software estimated useful life is determined for each project. The useful lives currently range between 7 and 17 years.

The Office of Financial Reports conducts monthly reviews of internal use software costs. These reviews are performed using project life cycle milestones to accumulate costs in compliance with SFFAS No. 10. Project life cycle milestones are monitored and certified by the IRS Modernization and Information Technology Services Enterprise Governance Committee (MEG).

The costs of major internal use software projects are capitalized. Four criteria are applied to identify major projects:

As specified in SFFAS No. 10, the IRS capitalizes costs incurred for the development phase of a project. The development phase includes developing the software configuration and interfaces, coding, installation of hardware and software, and testing.

As specified in SFFAS No. 10, costs incurred for the design phase (prior to the development phase), and the operations phase (after the development phase) are expensed. The design phase includes conceptual formulation of alternatives, determination and testing of alternatives, determination of the existence of needed technology, and final selection of alternatives. The operational phase begins upon successful completion of testing.

The IRS capitalizes direct and indirect costs of internal use software as defined in SFFAS No. 10, using the following methods:

Any ADP or non-ADP equipment assets purchased in conjunction with a capitalized internal use software project are capitalized as equipment or other assets.

Capitalized costs for internal use software are accumulated in a work-in-process account until final acceptance testing has been successfully completed and the software is in use. Once completed, the costs are transferred from the work-in-process account to the deployed systems account and depreciation begins. Costs incurred after deployment are expensed.

In accordance with SFFAS No. 10, disposals are recognized when software is determined to be obsolete or nonfunctional. The IRS treats terminated projects and/or subprojects as 100 percent obsolete. Obsolete projects are adjusted to reduce both the asset and accumulated depreciation accounts, and record any losses as the result of the disposal.

The IRS capitalizes costs of all alterations and major repairs to leased property and land.

Leasehold improvements have an estimated useful life of ten years with no residual value.

Leasehold improvements do not include routine maintenance, minor repairs, or landscaping services. There is no dollar threshold for leasehold improvements; the nature of the repair or improvement is evaluated to make the determination.

Disposals are not recorded for leasehold improvements.

The IRS capitalizes leases in accordance with SFFAS No. 5, Accounting for Liabilities of the Federal Government, and OMB Circular A-11, Preparation, Submission, and Execution of the Budget.

The amount capitalized is the lesser of the Net Present Value (NPV) or the fair market value of the asset. The NPV is calculated using the nominal interest rates published in OMB Circular A-94, Appendix C, in effect at the time of acquisition. The asset under capital lease is depreciated over the term of the lease.

For a lease to be classified as a capital lease, the lease must meet the capitalization threshold of $50,000, and satisfy at least one of the following criteria:

The IRS does not capitalize property and equipment purchased and held by the Treasury Working Capital Fund (WCF). Although WCF property may be acquired for exclusive use by the IRS, these assets remain accountable under Treasury records. Each quarter, depreciation of WCF property is included in the expenses allocated to the IRS by Treasury based on pro rata share of usage.