Plant Capital Campaign Recognition
Situation
Teachum State University recently established a capital fund drive for plant and fixed assets. Since there are no other resources available for the campaign costs, the university plans to deduct the costs from the drive's receipts. Wayne Cate, the university's business officer, wants to know where the proceeds of the fund drive should be deposited. How are the expenditures for the fund-raising costs to be reflected? What costs may be capitalized?
Response
Let us respond to the last question first. Normally, all costs that are associated with a capital (construction) project are capitalized. For example, the cost to raise an old structure on the site of a new construction, contouring the land, concrete pads to support specialized equipment, shipping and freight charges for capital equipment, etc., are added to the construction costs and are capitalized. Fees for special consultants and even interest expense during construction as provided in SFAS Nos. 34 and 62 lead to the conclusion that all costs associated with construction should be capitalized.
On the other hand, fund-raising costs are normally considered a part of current operations and appear to be no different than other overhead costs, such as construction or plant fund accounting. Normal operating expense of the development function typically would occur in the current fund. While there is precedent and GAAP for capitalizing certain current fund expenditures, fund-raising costs typically would not be capitalized.
If all the funds raised are restricted for capital activities, the gifts should be recognized as revenue in the plant fund subgroup "unexpended plant." A nonmandatory transfer would be necessary from the unexpended plant fund to current funds to offset the fund-raising costs associated with the campaign. Rather than transferring funds, some public institutions record the fund raising costs directly in the unexpended plant fund group under the premise that the fund-raising cost associated with the campaign will be discontinued when the campaign ends and are therefore incremental to the institution's ongoing development efforts.
If the funds raised are not specifically restricted for capital activities, the gifts would be recognized as revenue in the current fund. When plant expenditures are recorded, a nonmandatory transfer would move the resources from the current fund to the unexpended plant fund to match the expenditures. Depending upon the institution's capitalization policy, the plant items acquired or constructed would then be capitalized in the "investment in plant" subfund within the plant funds.