Current through Register Vol. 63, No. 9, September 1, 2024
(1) Definitions:
(a) For purposes of centrally-assessed
property, the term "improvements" means changes in the value of property (as
defined in 1997 OR Law Ch. 541, Sect. (7)(1)(b)) as the result of new
construction, reconstruction, major additions, remodeling, renovation,
rehabilitation or acquisition of property except on-going maintenance and
repair. "Improvements" are measured by changes in Oregon net capitalized
additions as defined below.
(b) The
term "capitalized" refers to company expenditures for certain assets with a
useful life typically extending beyond one year. These assets are aggregated in
fixed asset accounts subject to annual depreciation charges, rather than repair
and maintenance expense accounts. Examples include acquisitions of or changes
to buildings, equipment, and personal property such as furniture and
fixtures.
(c) The term "net
additions" means the difference between the aggregate costs of Oregon assets in
the prior and current years. For the 1997-98 implementation year, additions
include the change from the 1995-96 base year. In all subsequent years,
additions include the change from the prior year.
(d) The term "net capitalized additions"
means "net additions" as calculated using capitalized costs in the company's
annual reports.
Examples:
(A) For the
current year, a new transformer is added for $100,000 and there are no
retirements. The net addition is $100,000.
(B) A seven-year old transformer with a
ten-year life expectancy (net book value of $30,000) is retired from service
and replaced by a new transformer (cost $100,000). The net addition is $70,000,
reflecting the additional 7 years' life expectancy. (The remaining $30,000 is
considered maintenance).
(C) Same
as (B) above, except that the new transformer is added to the existing number
of transformers. No other transformers are retired; however, $30,000 of other
capitalized equipment is retired. The net addition is still $70,000.
Typical fixed asset accounting procedures provide for annual
removal of retired assets. Using successive years' account totals to determine
maximum assessed value will result in a netting of retirements against true
improvements.
(D) Same as
(B) above, except that no new transformer is added. The net capitalized
addition is $0, since there have been no improvements.
(E) If the change in Oregon assets can only
be determined by an allocation of system additions, then these changes shall be
allocated to Oregon in the same manner as other company property.
(F) In the case of mobile property, additions
shall also include the change in presence in the state as measured by the
change in allocation factors.
(e) The term "ongoing maintenance and repair"
means expenditures which the company has elected to record as an expense in
repair and maintenance accounts rather than aggregate in a fixed asset account
as described (1)(b). Items may be expensed because the useful life of the
expenditures does not extend over one year, or because their associated dollar
amounts are too small to qualify as a capital asset under company
capitalization threshold guidelines. Typical examples include spare parts and
maintenance supplies.
Example: A private car company maintains a capitalization
threshold for its equipment accounts of $2000. The company frequently makes
purchases of spare parts for its repair shops. One of these was a bulk purchase
of miscellaneous car bearings for $1000, and the company expensed this item.
The company also decided to upgrade half of its fleet with a $20,000 investment
in specialized bearings which would allow the cars to travel at significantly
higher speeds. This investment was capitalized. The expenditure of $1000 would
be considered "ongoing maintenance and repair." The expenditure of $20,000
would be considered an "improvement." The fact that each expenditure is for
bearings is not controlling.
(2) Application of Definitions:
(a) In the case of companies which do not
keep fixed asset accounts, the department may make a reasonable analysis of
reported assets using capitalization practices under accepted accounting
principles.
(b) In cases where the
Department of Revenue annual company reporting is based on aggregate account
balances, the department will not undertake an item-by-item analysis of the
amount and purpose of each expenditure within statutory appraisal timelines.
Expensed items shall be considered "ongoing maintenance and repair" and net
capitalized additions shall be considered "improvements." The department may
undertake an item-by-item analysis when the appraisal is challenged by the
taxpayer in litigation or otherwise.
(c) Typical accounting policies include a
"capitalization threshold" of a certain dollar amount for different types of
expenditures. The department recognizes that certain assets which qualify as
improvements under the law may be expensed as a matter of company policy. In
these cases, the department shall presume that the minor construction
thresholds defined in ORS
308.149 are addressed by this
accounting convention. The department may make a reasonable adjustment when the
application of this approach results in a material error.
(3) For purposes of computing maximum
assessed value for centrally-assessed property, the aggregate Oregon net
capitalized additions shall be adjusted to reflect their real market value as a
result of wear, aging, and the impact of market conditions since placement in
service. The net capitalized additions shall then be multiplied by the
statewide maximum assessed value to real market value ratio for
centrally-assessed property (always 1.00 or less). The maximum assessed value
shall be compared to the real market value, and the lesser of the two shall be
placed on the roll as the company's assessed value.
