Capital Authorization Request Policy l5gw
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Adopted by the Executive Committee on 1/13/12
CAPITAL AUTHORIZATION REQUEST POLICY EFFECTIVE FROM JANUARY 1, 2012
03-29-12 Final
CAPITAL AUTHORIZATION REQUEST POLICY
Table of Contents I.
INTRODUCTION ........................................................................................................................... 3
II.
AUTHORIZATION POLICY .......................................................................................................... 3
A. B. C.
D. E.
F. G. H. I. J. III.
Definition of Major and Non-Major Investments ...........................................................................3 Scope ...........................................................................................................................................3 Types of Expenditures Subject to CAR Approval Process ...........................................................4 1. Capital Expenditures and Acquisitions .....................................................................................4 2. Leases ......................................................................................................................................5 3. Long Term Supply or Service Contracts ...................................................................................5 Approval Process .........................................................................................................................5 Position Responsibilities ...............................................................................................................6 1. All Cost Center and Business Unit Managers...........................................................................6 2. Division Controller ....................................................................................................................6 3. Capital Coordinator ...................................................................................................................6 4. Global Supply Chain and Procurement ....................................................................................6 5. Corporate Finance Department ................................................................................................6 Economic Justification/Investment Analysis .................................................................................7 Update of the Rolling Forecast .....................................................................................................7 Post Completion Audit/Look-back Analysis ..................................................................................7 Finance Issues Relating to Significant Transactions ....................................................................7 Asset Transfers, Disposals and Retirements ...............................................................................7 CREATING A CAPITAL AUTHORIZATION REQUEST .............................................................. 8
APPENDIX - CAPITAL ING POLICIES AND PROCEDURES............................................... 9 A.
B.
C.
D.
Capitalized Expenditures ..............................................................................................................9 1. Classification ............................................................................................................................9 2. Machinery and Equipment 1110 ...........................................................................................10 3. Automobiles and Trucks 1300 .............................................................................................10 4. Land and Building 1390 ......................................................................................................10 5. O&G Producing Assets 1450 ...............................................................................................10 6. Chemical Plants 1400 .........................................................................................................10 Costs to be Capitalized ..............................................................................................................12 1. Assets Acquired by Purchase .................................................................................................12 2. Self Constructed Assets .........................................................................................................13 3. Other Costs ............................................................................................................................14 4. Assets Acquired by Transfer from Other Divisions or Subsidiaries ........................................14 Expensed/Capitalized Cost Incurred During Ownership and Operation ....................................15 1. Ordinary Repairs and Maintenance ........................................................................................15 2. Extraordinary Repairs .............................................................................................................15 3. Replacements .........................................................................................................................16 4. Additions, Betterments, Renovations, Reconditions ...............................................................16 Special Areas .............................................................................................................................16 1. Spare Parts .............................................................................................................................16 2. Capitalized Interest .................................................................................................................16 3. R&D Expenditures ..................................................................................................................17 4. Asset Retirement Obligations (FAS 143) ................................................................................17
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CAPITAL AUTHORIZATION REQUEST POLICY E.
Leases ........................................................................................................................................18 1. Authorization and ing .................................................................................................18 2. Capitalization ..........................................................................................................................18 3. Valuation .................................................................................................................................18
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CAPITAL AUTHORIZATION REQUEST POLICY I.
INTRODUCTION The purpose of the Capital Authorization Request Policy (CAR Policy) is to address the procedures for dealing with capital expenditures. The policies and procedures governing the capital expenditure authorization process work in conjunction with the company’s Investment and Commitment Authorization Policy, Contract Review, Execution and istration Policy, purchase authorization process and other control processes that address the company’s expenditures, financial commitments and obligations. The Corporate Finance Department is authorized to ister the CAR Policy. This manual provides guidelines for the istration of the Company’s capital investments, however, it is recognized that these policies and procedures may not address every circumstance. In such cases, the Corporate Finance Department will exercise its judgment whether additional or different analysis or exceptions are required. Modifications to this policy may be made from time to time to streamline procedures and to clarify issues as they arise.
II. AUTHORIZATION POLICY A. Definition of Major and Non-Major Investments “Major Investments” are: 1) Growth capital expenditures* included in the current year’s approved capital budget that exceed $1 million. 2) Maintenance capital expenditures* included in the current year’s approved capital budget that exceed $2 million. 3) Unbudgeted capital expenditures (growth or maintenance) exceeding $1,000,000. 4) Capital expenditures in excess of $500,000 that involve the introduction of a new product or service line. 5) All investments that were previously reviewed under this Policy whose total costs are later expected to exceed the original amount of the investment reviewed by the EC by 10% or more, and such excess is greater than $250,000. 6) The establishment of operations in a foreign country where the Company does not currently have operations and (a) the anticipated total costs of establishment of such operations exceed $500,000, (b) the anticipated revenues to be derived from such new operations within 12 months exceed $500,000 or (c) a new legal entity will be established. 7) The establishment of a formal partnership or t venture with an unrelated entity. 8) All acquisitions and divestitures of businesses and assets that exceed $1,000,000. * “Maintenance capital expenditures” are capitalized expenditures for the maintenance, repair or replacement of existing assets without substantially changing the original character or functionality of the asset. All other capital expenditures are “growth capital expenditures”. “Non-Major Investments” are those that do not meet the definitions of Major Investments. B. Scope A Capital Authorization Request (CAR) form must be completed in full and approved before a commitment is made that binds TETRA or one of its s to a current or future capital expenditure and before a purchase order for a capital asset is executed irrespective of whether Effective from January 1, 2012 Page 3 of 19
CAPITAL AUTHORIZATION REQUEST POLICY the asset being purchased has been approved in the annual capital budget. A CAR is also required for all supply or service contracts that will require the company to purchase or construct capital assets to meet its contractual obligations, as defined below in Section II.C.3. Non-binding bids do not require an approved CAR in advance of bid submission, though bids may be subject to the Company’s Contract Review, Execution and istration Policy. When it appears that a project’s actual costs will exceed the authorized amount by 10 percent or more, a new capital authorization request must be submitted and approved before any additional purchase order commitments will be released. However, the overage must exceed $50,000 before the additional CAR is required. If the overage exceeds $250,000, then the additional expenditure must be submitted to the EC for review. C. Types of Expenditures Subject to CAR Approval Process 1. Capital Expenditures and Acquisitions A capital expenditure is defined by TETRA to be the construction, development, purchase or improvement of a long-term asset or integrated group of assets such as hydrocarbons, property, plant, machinery, equipment, vehicles, office furniture, the stock of a company, ownership interest in a t venture, etc. that has (1) a useful life of more than one year and (2) an investment value greater than $3,000. The investment value is defined as the cash paid and debt and other liabilities assumed (or cash received and debt assigned in the case of a divestiture) in exchange for capital assets, a business, working capital or other investment asset at the time of the investment commitment, plus all future cash payments and all obligations, net to TETRA’s ownership interest, including incremental working capital requirements, maintenance capital expenditures, future liabilities, commitments, guarantees, earn-out payments, royalty interests, asset retirement obligations and other obligations discounted to the date of first commitment (normally the earlier of the closing date of the transaction and the date of first significant cash outlay). All future payments and obligations must be brought forward to a present value as of the commitment date by discounting at the after-tax rate TETRA pays under its revolving credit agreement. In instances in which TETRA does not or will not own 100% of the investment, the investment and associated cash flow must be presented for TETRA’s net ownership interest. TETRA’s net ownership interest will be used to determine the appropriate approval level. Future growth capital expenditures associated with an acquisition should generally be excluded from the analysis so that the base investment stands on its own merits without having to be subsidized or justified by speculative future growth investment opportunities. All assets and services required to perform a complete operating function must be included in a single CAR; assets and services cannot be divided into multiple CARs in an effort to circumvent certain steps in the review and approval process. If it is determined that an expenditure request, other than the exceptions listed below (e. g. long-term service contracts), should not be capitalized, the CAR must be voided and the transaction submitted for approval in accordance with TETRA’s Corporate Purchasing Policy and Procedures Manual.
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CAPITAL AUTHORIZATION REQUEST POLICY 2. Leases Capital and operating leases are subject to the policies and procedures set forth in this manual. The CAR process cannot be avoided by entering into an operating lease. However, operating leases for equipment directly associated with a contracted job commitment or operating leases with a term of less than 24 months are excluded from this policy, though they may be subject to the Global Supply Chain and Procurement Policy. In calculating a return on investment when significant assets are leased or contracted, the Finance Department will replace lease payments with an imputed investment. Lease term and total lease payments are the two criteria for determining the approval level required on all leases including machinery and equipment, vehicles, building, office space, etc. 3. Long Term Supply or Service Contracts All supply or service contracts that will require the company to purchase capital assets in order to meet the contracted obligations must be authorized pursuant to the policies presented in this manual. D. Approval Process – NON-MAJOR INVESTMENTS All capital authorization requests must be routed through the Company’s electronic CAR system (see Section III), ending with the Capital Coordinator. The approval process is as follows: (a)
Divisional CARs. The CAR must be approved by the originator, the business unit manager, the regional manager (if one exists), the product line manager (if one exists), the division controller and the division head.
(b)
IT and Vehicle CARs. In addition to the divisional approvals discussed in (a), the Vice President of IT must approve IT and communications related expenditures (including desktop and laptop PCs), and the Director of Global Supply Chain and Procurement must approve all vehicle, forklift and office equipment expenditures.
(c)
Corporate CARs. All corporate CARs must be approved by the CFO except that PC and vehicle purchases under $50,000 require only the approval of the VP of Finance and the VP of IT in the case of PCs and the Director of Global Supply Chain and Procurement in the case of vehicles.
(d)
Expenditures in excess of $300,000. In addition to the above approvals, the approval of the CEO, CFO, COO (if one exists) and the VP of Finance are required.
E. Approval Process – MAJOR INVESTMENTS (a)
In addition to the above approvals, Major Investments as defined in Section II.A. are subject to the Investment and Commitment Authorization Policy and must be presented to the Executive Committee (EC) for review.
(b)
All major investments must originate through the electronic CAR system. A separate routing path will be used to stop the routing at the division head. The Capital Coordinator will notify the EC of the major investment CAR to add to
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CAPITAL AUTHORIZATION REQUEST POLICY their agenda Once the EC has approved the CAR, the approval signature page will be filed with the CAR, and the originator will be notified that the CAR is ready to be released. (c) The CEO has the approval authority for expenditures up to $3.0 million. All expenditures above $3.0 million require approval of The Board of Directors prior to making the commitment. The capital coordinator will prepare a monthly report of all capital expenditures, which will be available for review by senior management. F. Position Responsibilities 1. All Cost Center and Business Unit Managers Each manager is to make sure that all expenditures in his/her area of responsibility are prudent and that authorized funds will be used in a responsible and appropriate manner. 2. Division Controller Each Controller is to ensure that the financial analysis is complete and accurate and assumptions and projections are reasonable and properly ed. Furthermore, the Controller is to validate the capital nature of the approved expenditure and ensure it is properly classified as a capital expenditure in accordance with GAAP. The Controllers are also responsible for reviewing the CARs to ensure that all assets required to perform a complete operating function are included on a single CAR (and not spread across several individual CARs). 3. Capital Coordinator The Capital Coordinator is to make sure that the CAR form has been correctly filled out, the proper approvals have been obtained, and capital expenditures are recorded against the appropriate capital budget item. In addition, when an approved CAR is received a copy is to be forwarded to the appropriate individuals to include but not limited to the originator, Purchasing, Tax and s Payable. 4. Global Supply Chain and Procurement Global Supply Chain and Procurement is to make sure that proper approvals have been obtained before issuing any purchase orders. 5. Corporate Finance Department The Corporate Finance Department is to review all economic analyses and justifications to ensure accuracy and consistency of presentation. The Corporate Finance Department has the right to require additional information.
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CAPITAL AUTHORIZATION REQUEST POLICY G. Economic Justification/Investment Analysis All CARs over $300,000 must include an economic analysis and justification. However, any expenditure for the replacement of existing equipment that exceeds this threshold will not require an economic analysis but will require a qualitative write-up justifying the expenditure. All economic analyses must be prepared using the Company’s standard financial model. The Corporate Finance Department is responsible for maintaining the standard model, authorizing any modifications to it and modifying this policy to fit the unique circumstances of a particular investment. See the section of the Investment and Commitment Authorization Policy entitled “Standard Financial Model and Calculation Methodology” for a description of the standard financial model. H. Update of the Rolling Forecast The Company’s rolling 15-18 month forecast must be updated to reflect the new investment in the next monthly forecast cycle. I.
Post Completion Audit/Look-back Analysis Every CAR exceeding $1 million must be audited 24 months following its economic start-up to whether the objectives of the project were met. CARs for lesser amounts may also be audited at the discretion of the CEO and CFO. This post completion audit will be the responsibility of the Division Controller and should address the following issues: a) Was the project completed within budget? Explain any variances greater than 10 percent. b) Have the project’s objectives been met and does the investment perform as expected? If not, are further expenditures required to bring the equipment up to standards? c) Have the expected cash flows been realized?
J. Finance Issues Relating to Significant Transactions The Finance Department is to be involved in all decisions on how acquisitions and asset investments are to be financed, as well as all decisions involving corporate guarantees, derivatives, and the establishment of new TETRA entities, partnerships, alliances and participation agreements. The method of financing (e.g. cash, leasing, debt, stock) all capital expenditures and acquisitions will be the decision of the CFO, with the additional approval of the CEO required for any transactions financed with equity. K. Asset Transfers, Disposals and Retirements An asset transfer or disposition form (see Exhibits) found on TETRA’s Intranet should be used to document the sale, transfer or retirement of any asset from its original location or cost center. Any assets transferred to a new physical location or cost center must be identified and reported to Corporate ing using this form. Additionally, any asset that is disposed, either through a sale or retirement, should also be reported on this form. The reporting of these movements is vital to ensure accurate recording of depreciation expense, property taxes and asset
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CAPITAL AUTHORIZATION REQUEST POLICY ability. If an asset being sold, transferred or retired needs to be impaired, an impairment analysis must be provided with the asset transfer or disposition form. A divisional SVP must approve all disposals. Any asset disposal with a market value of greater than $50,000 or results in a net loss of greater than $25,000 requires the approval of either the COO (if one exists) or CEO. Additionally, a divisional SVP and the CEO must authorize any disposal that results from the exit of a line of business. The sale of items that are salvaged from offshore P&A and Decommissioning projects are subject to the approval of the responsible SVP or his designee. III. CREATING A CAPITAL AUTHORIZATION REQUEST The Company uses an electronic system for creating a capital authorization request (CAR) and routing the request to the appropriate approvers of a CAR. The CAR system is a component of the procurement module of the Company’s Enterprise One ERP system and is accessed by logging onto Enterprise One. Instructions for using the CAR system can be obtained from Corporate IT or the Capital Coordinator.
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CAPITAL AUTHORIZATION REQUEST POLICY APPENDIX - Capital ing Policies and Procedures A. Capitalized Expenditures 1. Classification Capital assets are those assets that provide future economic benefit and, therefore, their costs are depreciable over those future periods. Expenditures that materially increase the capacity, efficiency, lifespan, or economy of operation of an asset unit are also capitalized as part of a capital asset. Costs related to a capital asset are generally divided into two categories: (1) costs incurred at the time of acquisition or construction of a property unit, and (2) costs incurred during the period or ownership and operation. Capitalization of any expenditure must meet both of the following guidelines: cost a minimum of $3,000 and have a useful life greater than one year. Any expenditure not meeting these criteria will be expensed as incurred. Assets will be recorded individually on the detailed fixed asset records, except in the case of major asset units. Major asset units, a group of assets integrated to perform an operating function, will be recorded as a single asset. A major asset unit is a related group of components performing a complete operating function, as distinguished from individual pieces of equipment which are essential parts or segments of a facility performing a complete operating function. A major asset unit is comprised of one or more items functioning (and generally described) as an operating unit. Such assets are practical to control from the standpoint of continued existence, transfers, rebuilding and retirement. They should be recorded individually in the detail fixed asset records with descriptions that are brief yet factual to identify the unit, including size, capacity, model or serial number, operating nomenclature or other data by which the unit can be described adequately. The following are examples of major asset units that are individually controlled: Each land site or parcel Each building structure Machine units or a group of equipment integrated to function as a unit (such as a group of equipment operating as a product or process line; the liquid plant, dry plant and acid plant at Lake Charles would each be considered a major asset unit). Tanks which generally function independently, such as storage for raw material or finished goods Tanks which are an integral part of a system or process are generally included with the total cost of the system, which is treated as a major asset unit.
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CAPITAL AUTHORIZATION REQUEST POLICY Company assets are recorded at historical cost and typically included in one of the following classifications: Codes Useful Life - Years 2. Machinery and Equipment 1110 a) b) c) d) e) f) g) h) i) j) k) l)
Tanks Pumps and engines Filtration units Mix pits Other property & equipment Self constructed assets Office furniture Office equipment Computers Communications equipment Rigs, barges and boats (crew & tugs) Oilfield equipment
3. Automobiles and Trucks a) b) c) d) e)
1120 1130 1140 1150 1160 1180 1185 1190 1195 1200 1205 1210
1310 1320 1330 1340 1350
4. Land and Building
1390
5. O&G Producing Assets a) b) c) d)
5 5 3 5 10 5
1300
Autos Light trucks Heavy trucks Trailers Other vehicles
a) Land b) Buildings c) Leasehold improvements
10 5 10 10 5
1391 1392 1393
4.2 4.2 5 5 5
N/A 25 5
1450
O&G Production Assets Leasehold Tangible Equipment Intangible Drilling Costs
1451 1455 1460 1465
As appropriate Est. reserves & UOP Est. reserves & UOP Est. reserves & UOP
e) Platform & Related Facilities
1470
As appropriate
6. Chemical Plants
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1400
CAPITAL AUTHORIZATION REQUEST POLICY Chemical Blending Plants Plants Useful Life - Years a) Construction contracts (1) (2) (3) (4)
Civil/Mechanical/Electrical Instrumentation Architectural/Buildings/Warehouse Other
20 10 30 20
15 5 20 15
20 10 5 20 10 5 20 20 10 20 20 10 20 20 5 5 5
10 7 5 5 5 5 10 10 5 15 10 5 15 15 5 5 5
c) Freight
20
10
d) Other direct costs (1) Field (2) Misc. Direct Costs (3) Equipment Field Costs (4) Backcharges (5) Internal Laboratory Costs (6) Sales Tax (7) Commissions
20
10
b) Equipment (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)
Vessels/Tanks (Corrosion Resistant) Vessels/Tanks (Used/Reconditioned) Vessels/Tanks (Carbon Steel) Pumps/Mech. equip (Corrosion Resistant) Pumps/Mech. equip (Used/Reconditioned) Pumps/Mech. equip (Carbon Steel) Packaged Systems Piping Piping Specialties Civil/Earthwork/Foundations Filters/Proprietary equipment Instruments Electrical Direct Consumable Supplies Mobile equip. (trucks, trailers, lifts) Office Equipment/Furniture Safety Equipment
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CAPITAL AUTHORIZATION REQUEST POLICY e) Professional services (1) Testing/Laboratory (2) Consultants (3) Design Architects (4) Outside Civil Engineer (5) Outside Mechanical Engineer (6) Outside Instrumentation Engineer (7) Legal/ing/Customs (8) Other Professional Services
20
10
f) Engineering g) Field service and startup h) Travel and living
20 20 20
10 10 10
B. Costs to be Capitalized The following costs are incurred at the time of the asset purchase and should be capitalized: 1. Assets Acquired by Purchase a) Machinery and Equipment (1) Contract or invoice cost (2) Freight, import duties, handling and storage costs (3) Specific in-transit insurance charges (4) Federal excise taxes (5) Costs of foundations (6) Costs of erection and/or installation (7) Costs of reconditioning used equipment when purchased to make it available for the purpose for which it was acquired (8) Initial complement of spare parts specifically related to a machine; these parts are unique to a particular piece or category of machinery (9) Architectural, engineering, and consulting fees for design and supervision (10) Charges of testing and preparation for use (11) Sales, use and other taxes imposed on the purchase b) Furniture and Fixtures (1) Furniture and fixtures are generally the same as machinery and equipment; the cost of an entire purchase or remodeling project, as opposed to individual invoice components, should be measured against the $3,000 threshold. (2) Leasehold improvements at the inception of the lease period. Subsequent expenditures should be considered remodeling projects and expensed
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CAPITAL AUTHORIZATION REQUEST POLICY c) Land (1) Original contract price (2) Real estate commissions (3) Legal fees for examining and recording title (4) Costs of title guarantee insurance, surveys, and appraisals (5) Costs of a purchase option, if exercised (6) Costs of razing an old building, if property acquired with intent to demolish (7) Site preparation, including general grading, clearing and filling of land to make it usable or marketable as land d) Building (1) Contract price, if purchased (2) Cost of construction, if self constructed (3) Expenditures incurred in remodeling, reconditioning or altering a purchased building to make it available for the purpose for which it was acquired (4) Costs of excavation, grading or filling of land for a specific building (5) Expenditures incurred for the preparation of plans, specifications, blueprints, etc. (6) Cost of building permits (7) Architect's and engineer's fees for design and supervision (8) Other costs, such as temporary building and trailers used during construction (9) Guard services during construction (10) Leasehold improvements (11) Costs of cancellation of unexpired leases (12) Payment of non-current taxes accrued on the building at date or purchase, if payable by purchaser e) Improvements (1) Includes roads, walks, fencing and landscaping (2) Site clearance and demolition costs (3) Drainage work (4) Parking areas (5) Lighting on roadways and parking lots (6) Sewage and storm sewer lines (7) Wells and water supply lines (8) Additions, improvements and alterations made to leased property which cannot be moved when the lease property is vacated 2. Self Constructed Assets a) Capitalized costs detailed in any of the above instances should be capitalized b) All overhead directly identifiable with the construction likewise should be capitalized (i. e. all indirect costs required to those working on the project) c) General overhead should be capitalized, only if such overhead is additional and directly attributable to the construction (general overhead cannot be capitalized) d) Laboratory costs incurred to engineer and design the asset e) Interest expense incurred during the construction and startup periods. (see E. 2. ) f) All self-constructed assets which are to be sold to another division/subsidiary or operation within the consolidated companies should be ed for using the above mentioned costing. After all costs have been accumulated in this manner, the asset can be transferred with the appropriate gain recognized.
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CAPITAL AUTHORIZATION REQUEST POLICY 3. Other Costs a) Pre-operating or start-up costs The pre-operating phase of an asset is the time between when substantially all construction is complete and the time the operation is commercially running as planned. Pre-operating costs are expensed as incurred. The following types of expenditures should be considered start-up costs and should be capitalized, if they occur during the pre-operating period: (1) (2)
Equipment testing, modification, or adjustment; Redesign costs, including on-site equipment relocation; Personnel training costs should be expensed, unless the company is entering a new trade or business or implementing a new process or technology.
Costs to correct mechanical, design or constructor deficiencies, which prevent the facility from meeting operating criteria, should be capitalized if identified during the preoperating phase and corrected at the earliest opportunity, even if several months later (during a scheduled shutdown). b) Demolition, removal and moving costs Demolition charges should be capitalized to land where the land is purchased with the intent to demolish and the existing structure is of no value to the Company. THE COSTS OF RELOCATING EXISTING INSTALLED MACHINERY FROM ONE CITY TO ANOTHER, FROM ONE PLANT TO ANOTHER, OR FROM ONE PART OF A PLANT TO ANOTHER IS TO BE EXPENSED. c) Site preparation costs Site preparation costs for the grading, clearing and surveying of the land are to be capitalized. Relocation of any existing structures or storage facilities should be expensed if no value is added by their relocation; i. e., no increased capacity or life. d) Pollution control equipment Pollution control equipment is deemed to be a cost of preparing an asset for use and should be capitalized if the control equipment meets the asset unit criterion 4. Assets Acquired by Transfer from Other Divisions or Subsidiaries These assets are recorded at their original cost and related accumulated depreciation, unless transferred at a gain. When assets are transferred at a price greater than their book value, the resulting gain on the seller’s books must be eliminated. The resulting increase in depreciation expense on the buyers’ books (i. e. the intercompany gain built into the asset cost) must also be eliminated over the life of the asset. These eliminations must occur within the appropriate Division’s operating unit’s financial statements.
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CAPITAL AUTHORIZATION REQUEST POLICY C. Expensed/Capitalized Cost Incurred During Ownership and Operation These are four major types of expenditures incurred during ownership: 1) ordinary repairs and maintenance, 2) extraordinary repairs, 3) replacement and 4) additions, betterments or renovations. The proper ing treatment for each of these expenditures is contingent upon the proper identification of the asset or major asset unit. Consequently, the item to be repaired must first be evaluated to determine if it is an individual asset or a component of a major asset unit. The determination of whether value has been added (the major criteria for capitalization) is then made as it relates to the individual asset or major asset unit, as noted below. Generally speaking, “Maintenance capital expenditures” are capitalized expenditures for the maintenance, repair or replacement of existing assets without substantially changing the original character or functionality of the asset. All other capital expenditures are “growth capital expenditures”. More specifically, 1. Ordinary Repairs and Maintenance The costs of incidental repairs, which neither prolong the assets useful life beyond that originally expected nor materially add to the value of the asset (or major asset unit), should be expensed. Expenditures resulting in increased productivity, expanded capabilities or uses of existing assets, improved efficiencies or product quality would be of the type to add value to an existing asset and are covered in sections 2 and 4, below. Scheduled plant shutdowns are generally performed on a cyclical basis for maintenance that otherwise could not be performed due to such factors as marketing conditions, safety, cool downs of equipment and vacation schedules. This type of maintenance involves a major work effort but, should be expensed if the work is of a type that is normal for the major asset unit and was reasonably anticipated at the time of acquisition as necessary to allow the asset unit to reach its expected useful life. 2. Extraordinary Repairs Extraordinary repairs are generally capitalized. They involve a major work effort, are not recurring in nature and would not have been preplanned when the asset was acquired. The major asset unit may be out of service for an extended period of time such work tends to materially increase the use, value or service life of the major asset unit. An extraordinary repair has many of the characteristics of betterment (see #4 below). The original cost of the major asset unit should be adjusted to reflect these additional expenditures with the resulting net book value of the asset depreciated over the newly extended useful life of the asset.
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CAPITAL AUTHORIZATION REQUEST POLICY 3. Replacements The cost of replacing a component part of a major asset unit is normally expensed. Replacement involves the removal of a component or major part of a major asset unit and the substitution of another part or component of essentially the same type and performance capabilities. The major asset unit's life is not prolonged, its productivity not increased or its capability or uses expanded. The fact that the new component has a life in excess of one year is of no consequence under these circumstances. 4. Additions, Betterments, Renovations, Reconditions A functional addition to an existing major asset unit is capitalized, since it represents a modification which would have been capitalized had it been done at the time the related asset was created. Betterments often involve the removal of a major part or components of a major asset unit and the substitution of a different part or component having significantly improved and superior performance capabilities. The result of the substitution is a material increase in the overall efficiency of the primary asset and tends to increase its useful life and value. Other indications of betterment include improved product quality, increased capacity or reduced operating expenses. The proper ing for the replacement is to write off the net book value of the replaced part and capitalize the new component. The costs of renovating or reconditioning an asset that are nonrecurring in nature should be capitalized due to a presumption that the asset's life has been extended, similar to an extraordinary repair. Routine expenses and replacements, normally considered a repair expense, must be capitalized if they are performed as part of a specific plan of reconditioning, rehabilitation, alteration or modernization of a major asset unit. Such expenditures contribute to the overall improvement of the major asset and are a necessary part of the effort. D. Special Areas 1. Spare Parts Spare parts used for repair and maintenance purposes are frequently inventoried and charged to operations when used. However, certain spare parts, referred to as capital spares, should be capitalized, since these parts are unique to a particular piece or category of machinery and are critical to its operation and will only be used in the event of a breakdown. It is desirable to capitalize the initial complement of capital spares as part of the underlying cost of the asset. 2. Capitalized Interest Interest costs incurred during the period in which a qualifying asset is being constructed and prepared for its intended use should be capitalized as part of the historical cost of the asset. This applies to any real or tangible personal property produced by or for The Company. The production period begins when construction commences and ends when the property is ready to be placed into service.
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CAPITAL AUTHORIZATION REQUEST POLICY Debt that can be specifically traced to construction expenditures for property is first allocated to that property. If construction expenditures exceed the amount of that debt, then interest on other company debt (excluding capital leases) will be attributed to such construction. The rate of interest to be used is the average rate of interest on outstanding company debt (excluding debt specifically traceable to the construction). 3. R&D Expenditures Research and development qualifying for R&D tax credits is limited to scientific experimentation or engineering activities designed to aid in the development of a new or improved product, process, technique, formula invention or computer software program held for sale, lease or license or used by The Company in its trade or business. It is not required that an improvement be significant to qualify nor are routine or periodic improvements excluded, as long as they otherwise meet the requirements for qualified research. Qualified research includes a special rule in which any plant process, machinery, or technique for commercial production of a product is treated as a separate business consideration from the product itself. Thus where the development or improvement of the manufacturing process is undertaken through a process of experimentation which relies on scientific or engineering principles such process improvements or development would qualify as R&D credits. Research relating to style, taste, cosmetic or seasonal design factors is generally not treated as qualified research regardless of whether such research relates to product improvements or to new products. All qualifying R&D expenditures must be reviewed by the Corporate Tax Department and ed for using the project cost system. Upon approval for such expenditures, a project is opened to accumulate all the related costs. All R&D costs are expensed monthly as incurred by recording each projects accumulated expenditure to a general and istration research and development expense . These expenses are charged against the cost center of the manager responsible for the project. The tax code limits the amount of qualifying R&D expenditures based on the size of the corporation. Given TETRA’s size, it is unlikely that the company will accumulate enough qualifying expenditures to realize any significant tax credits 4. Asset Retirement Obligations (FAS 143) FAS 143 requires that a liability be recorded for any asset retirement obligation the company assumes in connection with the acquisition of a fixed asset. These obligations are capitalized as part of the carrying amount of the long-lived asset. Asset retirement obligation amounts should be indicated separately on the CAR. However, they should be excluded from the quarterly initial capital expenditure requirements reported on the CAR.
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CAPITAL AUTHORIZATION REQUEST POLICY E. Leases 1. Authorization and ing Authorization levels are identified in Section II and also apply to lease commitments and renewals. ing should be consistent with SFAS # 13 “ing for Leases”. 2. Capitalization A lease must be capitalized if it meets any one of the following criteria: The lease transfers ownership of the property to the lessee by the end of the lease term. The lease term is defined as the fixed non-cancelable term of the lease. The lease contains an option to purchase the property at a bargain price. The lease term is equal to 75 percent or more of the estimated economic life of the property, or The present value of the rentals and other minimum lease payments, as defined, is equal to 90 percent or more of the fair value of the leased property. A lease will be considered an operating lease if it does not meet any of the above. 3. Valuation A lease should be capitalized according to any one of the methods below, which are listed according to the priority by which they should be selected. The net present value of the lease payments discounted at the financing charge rate specified by the lessor, if available. The net present value of the lease payments discounted at the prevailing long-term borrowing rates available to The Company under normal business circumstances as determined by the Treasurer. The capitalized value of the lease is debited to the relevant asset and capital leases payable is credited. Total interest payable is represented as a financing charge from the lessor. It equals the difference between the capitalized value and the undiscounted lease payments over the lease term.
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CAPITAL AUTHORIZATION REQUEST POLICY EFFECTIVE FROM JANUARY 1, 2012
03-29-12 Final
CAPITAL AUTHORIZATION REQUEST POLICY
Table of Contents I.
INTRODUCTION ........................................................................................................................... 3
II.
AUTHORIZATION POLICY .......................................................................................................... 3
A. B. C.
D. E.
F. G. H. I. J. III.
Definition of Major and Non-Major Investments ...........................................................................3 Scope ...........................................................................................................................................3 Types of Expenditures Subject to CAR Approval Process ...........................................................4 1. Capital Expenditures and Acquisitions .....................................................................................4 2. Leases ......................................................................................................................................5 3. Long Term Supply or Service Contracts ...................................................................................5 Approval Process .........................................................................................................................5 Position Responsibilities ...............................................................................................................6 1. All Cost Center and Business Unit Managers...........................................................................6 2. Division Controller ....................................................................................................................6 3. Capital Coordinator ...................................................................................................................6 4. Global Supply Chain and Procurement ....................................................................................6 5. Corporate Finance Department ................................................................................................6 Economic Justification/Investment Analysis .................................................................................7 Update of the Rolling Forecast .....................................................................................................7 Post Completion Audit/Look-back Analysis ..................................................................................7 Finance Issues Relating to Significant Transactions ....................................................................7 Asset Transfers, Disposals and Retirements ...............................................................................7 CREATING A CAPITAL AUTHORIZATION REQUEST .............................................................. 8
APPENDIX - CAPITAL ING POLICIES AND PROCEDURES............................................... 9 A.
B.
C.
D.
Capitalized Expenditures ..............................................................................................................9 1. Classification ............................................................................................................................9 2. Machinery and Equipment 1110 ...........................................................................................10 3. Automobiles and Trucks 1300 .............................................................................................10 4. Land and Building 1390 ......................................................................................................10 5. O&G Producing Assets 1450 ...............................................................................................10 6. Chemical Plants 1400 .........................................................................................................10 Costs to be Capitalized ..............................................................................................................12 1. Assets Acquired by Purchase .................................................................................................12 2. Self Constructed Assets .........................................................................................................13 3. Other Costs ............................................................................................................................14 4. Assets Acquired by Transfer from Other Divisions or Subsidiaries ........................................14 Expensed/Capitalized Cost Incurred During Ownership and Operation ....................................15 1. Ordinary Repairs and Maintenance ........................................................................................15 2. Extraordinary Repairs .............................................................................................................15 3. Replacements .........................................................................................................................16 4. Additions, Betterments, Renovations, Reconditions ...............................................................16 Special Areas .............................................................................................................................16 1. Spare Parts .............................................................................................................................16 2. Capitalized Interest .................................................................................................................16 3. R&D Expenditures ..................................................................................................................17 4. Asset Retirement Obligations (FAS 143) ................................................................................17
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CAPITAL AUTHORIZATION REQUEST POLICY E.
Leases ........................................................................................................................................18 1. Authorization and ing .................................................................................................18 2. Capitalization ..........................................................................................................................18 3. Valuation .................................................................................................................................18
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CAPITAL AUTHORIZATION REQUEST POLICY I.
INTRODUCTION The purpose of the Capital Authorization Request Policy (CAR Policy) is to address the procedures for dealing with capital expenditures. The policies and procedures governing the capital expenditure authorization process work in conjunction with the company’s Investment and Commitment Authorization Policy, Contract Review, Execution and istration Policy, purchase authorization process and other control processes that address the company’s expenditures, financial commitments and obligations. The Corporate Finance Department is authorized to ister the CAR Policy. This manual provides guidelines for the istration of the Company’s capital investments, however, it is recognized that these policies and procedures may not address every circumstance. In such cases, the Corporate Finance Department will exercise its judgment whether additional or different analysis or exceptions are required. Modifications to this policy may be made from time to time to streamline procedures and to clarify issues as they arise.
II. AUTHORIZATION POLICY A. Definition of Major and Non-Major Investments “Major Investments” are: 1) Growth capital expenditures* included in the current year’s approved capital budget that exceed $1 million. 2) Maintenance capital expenditures* included in the current year’s approved capital budget that exceed $2 million. 3) Unbudgeted capital expenditures (growth or maintenance) exceeding $1,000,000. 4) Capital expenditures in excess of $500,000 that involve the introduction of a new product or service line. 5) All investments that were previously reviewed under this Policy whose total costs are later expected to exceed the original amount of the investment reviewed by the EC by 10% or more, and such excess is greater than $250,000. 6) The establishment of operations in a foreign country where the Company does not currently have operations and (a) the anticipated total costs of establishment of such operations exceed $500,000, (b) the anticipated revenues to be derived from such new operations within 12 months exceed $500,000 or (c) a new legal entity will be established. 7) The establishment of a formal partnership or t venture with an unrelated entity. 8) All acquisitions and divestitures of businesses and assets that exceed $1,000,000. * “Maintenance capital expenditures” are capitalized expenditures for the maintenance, repair or replacement of existing assets without substantially changing the original character or functionality of the asset. All other capital expenditures are “growth capital expenditures”. “Non-Major Investments” are those that do not meet the definitions of Major Investments. B. Scope A Capital Authorization Request (CAR) form must be completed in full and approved before a commitment is made that binds TETRA or one of its s to a current or future capital expenditure and before a purchase order for a capital asset is executed irrespective of whether Effective from January 1, 2012 Page 3 of 19
CAPITAL AUTHORIZATION REQUEST POLICY the asset being purchased has been approved in the annual capital budget. A CAR is also required for all supply or service contracts that will require the company to purchase or construct capital assets to meet its contractual obligations, as defined below in Section II.C.3. Non-binding bids do not require an approved CAR in advance of bid submission, though bids may be subject to the Company’s Contract Review, Execution and istration Policy. When it appears that a project’s actual costs will exceed the authorized amount by 10 percent or more, a new capital authorization request must be submitted and approved before any additional purchase order commitments will be released. However, the overage must exceed $50,000 before the additional CAR is required. If the overage exceeds $250,000, then the additional expenditure must be submitted to the EC for review. C. Types of Expenditures Subject to CAR Approval Process 1. Capital Expenditures and Acquisitions A capital expenditure is defined by TETRA to be the construction, development, purchase or improvement of a long-term asset or integrated group of assets such as hydrocarbons, property, plant, machinery, equipment, vehicles, office furniture, the stock of a company, ownership interest in a t venture, etc. that has (1) a useful life of more than one year and (2) an investment value greater than $3,000. The investment value is defined as the cash paid and debt and other liabilities assumed (or cash received and debt assigned in the case of a divestiture) in exchange for capital assets, a business, working capital or other investment asset at the time of the investment commitment, plus all future cash payments and all obligations, net to TETRA’s ownership interest, including incremental working capital requirements, maintenance capital expenditures, future liabilities, commitments, guarantees, earn-out payments, royalty interests, asset retirement obligations and other obligations discounted to the date of first commitment (normally the earlier of the closing date of the transaction and the date of first significant cash outlay). All future payments and obligations must be brought forward to a present value as of the commitment date by discounting at the after-tax rate TETRA pays under its revolving credit agreement. In instances in which TETRA does not or will not own 100% of the investment, the investment and associated cash flow must be presented for TETRA’s net ownership interest. TETRA’s net ownership interest will be used to determine the appropriate approval level. Future growth capital expenditures associated with an acquisition should generally be excluded from the analysis so that the base investment stands on its own merits without having to be subsidized or justified by speculative future growth investment opportunities. All assets and services required to perform a complete operating function must be included in a single CAR; assets and services cannot be divided into multiple CARs in an effort to circumvent certain steps in the review and approval process. If it is determined that an expenditure request, other than the exceptions listed below (e. g. long-term service contracts), should not be capitalized, the CAR must be voided and the transaction submitted for approval in accordance with TETRA’s Corporate Purchasing Policy and Procedures Manual.
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CAPITAL AUTHORIZATION REQUEST POLICY 2. Leases Capital and operating leases are subject to the policies and procedures set forth in this manual. The CAR process cannot be avoided by entering into an operating lease. However, operating leases for equipment directly associated with a contracted job commitment or operating leases with a term of less than 24 months are excluded from this policy, though they may be subject to the Global Supply Chain and Procurement Policy. In calculating a return on investment when significant assets are leased or contracted, the Finance Department will replace lease payments with an imputed investment. Lease term and total lease payments are the two criteria for determining the approval level required on all leases including machinery and equipment, vehicles, building, office space, etc. 3. Long Term Supply or Service Contracts All supply or service contracts that will require the company to purchase capital assets in order to meet the contracted obligations must be authorized pursuant to the policies presented in this manual. D. Approval Process – NON-MAJOR INVESTMENTS All capital authorization requests must be routed through the Company’s electronic CAR system (see Section III), ending with the Capital Coordinator. The approval process is as follows: (a)
Divisional CARs. The CAR must be approved by the originator, the business unit manager, the regional manager (if one exists), the product line manager (if one exists), the division controller and the division head.
(b)
IT and Vehicle CARs. In addition to the divisional approvals discussed in (a), the Vice President of IT must approve IT and communications related expenditures (including desktop and laptop PCs), and the Director of Global Supply Chain and Procurement must approve all vehicle, forklift and office equipment expenditures.
(c)
Corporate CARs. All corporate CARs must be approved by the CFO except that PC and vehicle purchases under $50,000 require only the approval of the VP of Finance and the VP of IT in the case of PCs and the Director of Global Supply Chain and Procurement in the case of vehicles.
(d)
Expenditures in excess of $300,000. In addition to the above approvals, the approval of the CEO, CFO, COO (if one exists) and the VP of Finance are required.
E. Approval Process – MAJOR INVESTMENTS (a)
In addition to the above approvals, Major Investments as defined in Section II.A. are subject to the Investment and Commitment Authorization Policy and must be presented to the Executive Committee (EC) for review.
(b)
All major investments must originate through the electronic CAR system. A separate routing path will be used to stop the routing at the division head. The Capital Coordinator will notify the EC of the major investment CAR to add to
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CAPITAL AUTHORIZATION REQUEST POLICY their agenda Once the EC has approved the CAR, the approval signature page will be filed with the CAR, and the originator will be notified that the CAR is ready to be released. (c) The CEO has the approval authority for expenditures up to $3.0 million. All expenditures above $3.0 million require approval of The Board of Directors prior to making the commitment. The capital coordinator will prepare a monthly report of all capital expenditures, which will be available for review by senior management. F. Position Responsibilities 1. All Cost Center and Business Unit Managers Each manager is to make sure that all expenditures in his/her area of responsibility are prudent and that authorized funds will be used in a responsible and appropriate manner. 2. Division Controller Each Controller is to ensure that the financial analysis is complete and accurate and assumptions and projections are reasonable and properly ed. Furthermore, the Controller is to validate the capital nature of the approved expenditure and ensure it is properly classified as a capital expenditure in accordance with GAAP. The Controllers are also responsible for reviewing the CARs to ensure that all assets required to perform a complete operating function are included on a single CAR (and not spread across several individual CARs). 3. Capital Coordinator The Capital Coordinator is to make sure that the CAR form has been correctly filled out, the proper approvals have been obtained, and capital expenditures are recorded against the appropriate capital budget item. In addition, when an approved CAR is received a copy is to be forwarded to the appropriate individuals to include but not limited to the originator, Purchasing, Tax and s Payable. 4. Global Supply Chain and Procurement Global Supply Chain and Procurement is to make sure that proper approvals have been obtained before issuing any purchase orders. 5. Corporate Finance Department The Corporate Finance Department is to review all economic analyses and justifications to ensure accuracy and consistency of presentation. The Corporate Finance Department has the right to require additional information.
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CAPITAL AUTHORIZATION REQUEST POLICY G. Economic Justification/Investment Analysis All CARs over $300,000 must include an economic analysis and justification. However, any expenditure for the replacement of existing equipment that exceeds this threshold will not require an economic analysis but will require a qualitative write-up justifying the expenditure. All economic analyses must be prepared using the Company’s standard financial model. The Corporate Finance Department is responsible for maintaining the standard model, authorizing any modifications to it and modifying this policy to fit the unique circumstances of a particular investment. See the section of the Investment and Commitment Authorization Policy entitled “Standard Financial Model and Calculation Methodology” for a description of the standard financial model. H. Update of the Rolling Forecast The Company’s rolling 15-18 month forecast must be updated to reflect the new investment in the next monthly forecast cycle. I.
Post Completion Audit/Look-back Analysis Every CAR exceeding $1 million must be audited 24 months following its economic start-up to whether the objectives of the project were met. CARs for lesser amounts may also be audited at the discretion of the CEO and CFO. This post completion audit will be the responsibility of the Division Controller and should address the following issues: a) Was the project completed within budget? Explain any variances greater than 10 percent. b) Have the project’s objectives been met and does the investment perform as expected? If not, are further expenditures required to bring the equipment up to standards? c) Have the expected cash flows been realized?
J. Finance Issues Relating to Significant Transactions The Finance Department is to be involved in all decisions on how acquisitions and asset investments are to be financed, as well as all decisions involving corporate guarantees, derivatives, and the establishment of new TETRA entities, partnerships, alliances and participation agreements. The method of financing (e.g. cash, leasing, debt, stock) all capital expenditures and acquisitions will be the decision of the CFO, with the additional approval of the CEO required for any transactions financed with equity. K. Asset Transfers, Disposals and Retirements An asset transfer or disposition form (see Exhibits) found on TETRA’s Intranet should be used to document the sale, transfer or retirement of any asset from its original location or cost center. Any assets transferred to a new physical location or cost center must be identified and reported to Corporate ing using this form. Additionally, any asset that is disposed, either through a sale or retirement, should also be reported on this form. The reporting of these movements is vital to ensure accurate recording of depreciation expense, property taxes and asset
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CAPITAL AUTHORIZATION REQUEST POLICY ability. If an asset being sold, transferred or retired needs to be impaired, an impairment analysis must be provided with the asset transfer or disposition form. A divisional SVP must approve all disposals. Any asset disposal with a market value of greater than $50,000 or results in a net loss of greater than $25,000 requires the approval of either the COO (if one exists) or CEO. Additionally, a divisional SVP and the CEO must authorize any disposal that results from the exit of a line of business. The sale of items that are salvaged from offshore P&A and Decommissioning projects are subject to the approval of the responsible SVP or his designee. III. CREATING A CAPITAL AUTHORIZATION REQUEST The Company uses an electronic system for creating a capital authorization request (CAR) and routing the request to the appropriate approvers of a CAR. The CAR system is a component of the procurement module of the Company’s Enterprise One ERP system and is accessed by logging onto Enterprise One. Instructions for using the CAR system can be obtained from Corporate IT or the Capital Coordinator.
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CAPITAL AUTHORIZATION REQUEST POLICY APPENDIX - Capital ing Policies and Procedures A. Capitalized Expenditures 1. Classification Capital assets are those assets that provide future economic benefit and, therefore, their costs are depreciable over those future periods. Expenditures that materially increase the capacity, efficiency, lifespan, or economy of operation of an asset unit are also capitalized as part of a capital asset. Costs related to a capital asset are generally divided into two categories: (1) costs incurred at the time of acquisition or construction of a property unit, and (2) costs incurred during the period or ownership and operation. Capitalization of any expenditure must meet both of the following guidelines: cost a minimum of $3,000 and have a useful life greater than one year. Any expenditure not meeting these criteria will be expensed as incurred. Assets will be recorded individually on the detailed fixed asset records, except in the case of major asset units. Major asset units, a group of assets integrated to perform an operating function, will be recorded as a single asset. A major asset unit is a related group of components performing a complete operating function, as distinguished from individual pieces of equipment which are essential parts or segments of a facility performing a complete operating function. A major asset unit is comprised of one or more items functioning (and generally described) as an operating unit. Such assets are practical to control from the standpoint of continued existence, transfers, rebuilding and retirement. They should be recorded individually in the detail fixed asset records with descriptions that are brief yet factual to identify the unit, including size, capacity, model or serial number, operating nomenclature or other data by which the unit can be described adequately. The following are examples of major asset units that are individually controlled: Each land site or parcel Each building structure Machine units or a group of equipment integrated to function as a unit (such as a group of equipment operating as a product or process line; the liquid plant, dry plant and acid plant at Lake Charles would each be considered a major asset unit). Tanks which generally function independently, such as storage for raw material or finished goods Tanks which are an integral part of a system or process are generally included with the total cost of the system, which is treated as a major asset unit.
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CAPITAL AUTHORIZATION REQUEST POLICY Company assets are recorded at historical cost and typically included in one of the following classifications: Codes Useful Life - Years 2. Machinery and Equipment 1110 a) b) c) d) e) f) g) h) i) j) k) l)
Tanks Pumps and engines Filtration units Mix pits Other property & equipment Self constructed assets Office furniture Office equipment Computers Communications equipment Rigs, barges and boats (crew & tugs) Oilfield equipment
3. Automobiles and Trucks a) b) c) d) e)
1120 1130 1140 1150 1160 1180 1185 1190 1195 1200 1205 1210
1310 1320 1330 1340 1350
4. Land and Building
1390
5. O&G Producing Assets a) b) c) d)
5 5 3 5 10 5
1300
Autos Light trucks Heavy trucks Trailers Other vehicles
a) Land b) Buildings c) Leasehold improvements
10 5 10 10 5
1391 1392 1393
4.2 4.2 5 5 5
N/A 25 5
1450
O&G Production Assets Leasehold Tangible Equipment Intangible Drilling Costs
1451 1455 1460 1465
As appropriate Est. reserves & UOP Est. reserves & UOP Est. reserves & UOP
e) Platform & Related Facilities
1470
As appropriate
6. Chemical Plants
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1400
CAPITAL AUTHORIZATION REQUEST POLICY Chemical Blending Plants Plants Useful Life - Years a) Construction contracts (1) (2) (3) (4)
Civil/Mechanical/Electrical Instrumentation Architectural/Buildings/Warehouse Other
20 10 30 20
15 5 20 15
20 10 5 20 10 5 20 20 10 20 20 10 20 20 5 5 5
10 7 5 5 5 5 10 10 5 15 10 5 15 15 5 5 5
c) Freight
20
10
d) Other direct costs (1) Field (2) Misc. Direct Costs (3) Equipment Field Costs (4) Backcharges (5) Internal Laboratory Costs (6) Sales Tax (7) Commissions
20
10
b) Equipment (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)
Vessels/Tanks (Corrosion Resistant) Vessels/Tanks (Used/Reconditioned) Vessels/Tanks (Carbon Steel) Pumps/Mech. equip (Corrosion Resistant) Pumps/Mech. equip (Used/Reconditioned) Pumps/Mech. equip (Carbon Steel) Packaged Systems Piping Piping Specialties Civil/Earthwork/Foundations Filters/Proprietary equipment Instruments Electrical Direct Consumable Supplies Mobile equip. (trucks, trailers, lifts) Office Equipment/Furniture Safety Equipment
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CAPITAL AUTHORIZATION REQUEST POLICY e) Professional services (1) Testing/Laboratory (2) Consultants (3) Design Architects (4) Outside Civil Engineer (5) Outside Mechanical Engineer (6) Outside Instrumentation Engineer (7) Legal/ing/Customs (8) Other Professional Services
20
10
f) Engineering g) Field service and startup h) Travel and living
20 20 20
10 10 10
B. Costs to be Capitalized The following costs are incurred at the time of the asset purchase and should be capitalized: 1. Assets Acquired by Purchase a) Machinery and Equipment (1) Contract or invoice cost (2) Freight, import duties, handling and storage costs (3) Specific in-transit insurance charges (4) Federal excise taxes (5) Costs of foundations (6) Costs of erection and/or installation (7) Costs of reconditioning used equipment when purchased to make it available for the purpose for which it was acquired (8) Initial complement of spare parts specifically related to a machine; these parts are unique to a particular piece or category of machinery (9) Architectural, engineering, and consulting fees for design and supervision (10) Charges of testing and preparation for use (11) Sales, use and other taxes imposed on the purchase b) Furniture and Fixtures (1) Furniture and fixtures are generally the same as machinery and equipment; the cost of an entire purchase or remodeling project, as opposed to individual invoice components, should be measured against the $3,000 threshold. (2) Leasehold improvements at the inception of the lease period. Subsequent expenditures should be considered remodeling projects and expensed
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CAPITAL AUTHORIZATION REQUEST POLICY c) Land (1) Original contract price (2) Real estate commissions (3) Legal fees for examining and recording title (4) Costs of title guarantee insurance, surveys, and appraisals (5) Costs of a purchase option, if exercised (6) Costs of razing an old building, if property acquired with intent to demolish (7) Site preparation, including general grading, clearing and filling of land to make it usable or marketable as land d) Building (1) Contract price, if purchased (2) Cost of construction, if self constructed (3) Expenditures incurred in remodeling, reconditioning or altering a purchased building to make it available for the purpose for which it was acquired (4) Costs of excavation, grading or filling of land for a specific building (5) Expenditures incurred for the preparation of plans, specifications, blueprints, etc. (6) Cost of building permits (7) Architect's and engineer's fees for design and supervision (8) Other costs, such as temporary building and trailers used during construction (9) Guard services during construction (10) Leasehold improvements (11) Costs of cancellation of unexpired leases (12) Payment of non-current taxes accrued on the building at date or purchase, if payable by purchaser e) Improvements (1) Includes roads, walks, fencing and landscaping (2) Site clearance and demolition costs (3) Drainage work (4) Parking areas (5) Lighting on roadways and parking lots (6) Sewage and storm sewer lines (7) Wells and water supply lines (8) Additions, improvements and alterations made to leased property which cannot be moved when the lease property is vacated 2. Self Constructed Assets a) Capitalized costs detailed in any of the above instances should be capitalized b) All overhead directly identifiable with the construction likewise should be capitalized (i. e. all indirect costs required to those working on the project) c) General overhead should be capitalized, only if such overhead is additional and directly attributable to the construction (general overhead cannot be capitalized) d) Laboratory costs incurred to engineer and design the asset e) Interest expense incurred during the construction and startup periods. (see E. 2. ) f) All self-constructed assets which are to be sold to another division/subsidiary or operation within the consolidated companies should be ed for using the above mentioned costing. After all costs have been accumulated in this manner, the asset can be transferred with the appropriate gain recognized.
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CAPITAL AUTHORIZATION REQUEST POLICY 3. Other Costs a) Pre-operating or start-up costs The pre-operating phase of an asset is the time between when substantially all construction is complete and the time the operation is commercially running as planned. Pre-operating costs are expensed as incurred. The following types of expenditures should be considered start-up costs and should be capitalized, if they occur during the pre-operating period: (1) (2)
Equipment testing, modification, or adjustment; Redesign costs, including on-site equipment relocation; Personnel training costs should be expensed, unless the company is entering a new trade or business or implementing a new process or technology.
Costs to correct mechanical, design or constructor deficiencies, which prevent the facility from meeting operating criteria, should be capitalized if identified during the preoperating phase and corrected at the earliest opportunity, even if several months later (during a scheduled shutdown). b) Demolition, removal and moving costs Demolition charges should be capitalized to land where the land is purchased with the intent to demolish and the existing structure is of no value to the Company. THE COSTS OF RELOCATING EXISTING INSTALLED MACHINERY FROM ONE CITY TO ANOTHER, FROM ONE PLANT TO ANOTHER, OR FROM ONE PART OF A PLANT TO ANOTHER IS TO BE EXPENSED. c) Site preparation costs Site preparation costs for the grading, clearing and surveying of the land are to be capitalized. Relocation of any existing structures or storage facilities should be expensed if no value is added by their relocation; i. e., no increased capacity or life. d) Pollution control equipment Pollution control equipment is deemed to be a cost of preparing an asset for use and should be capitalized if the control equipment meets the asset unit criterion 4. Assets Acquired by Transfer from Other Divisions or Subsidiaries These assets are recorded at their original cost and related accumulated depreciation, unless transferred at a gain. When assets are transferred at a price greater than their book value, the resulting gain on the seller’s books must be eliminated. The resulting increase in depreciation expense on the buyers’ books (i. e. the intercompany gain built into the asset cost) must also be eliminated over the life of the asset. These eliminations must occur within the appropriate Division’s operating unit’s financial statements.
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CAPITAL AUTHORIZATION REQUEST POLICY C. Expensed/Capitalized Cost Incurred During Ownership and Operation These are four major types of expenditures incurred during ownership: 1) ordinary repairs and maintenance, 2) extraordinary repairs, 3) replacement and 4) additions, betterments or renovations. The proper ing treatment for each of these expenditures is contingent upon the proper identification of the asset or major asset unit. Consequently, the item to be repaired must first be evaluated to determine if it is an individual asset or a component of a major asset unit. The determination of whether value has been added (the major criteria for capitalization) is then made as it relates to the individual asset or major asset unit, as noted below. Generally speaking, “Maintenance capital expenditures” are capitalized expenditures for the maintenance, repair or replacement of existing assets without substantially changing the original character or functionality of the asset. All other capital expenditures are “growth capital expenditures”. More specifically, 1. Ordinary Repairs and Maintenance The costs of incidental repairs, which neither prolong the assets useful life beyond that originally expected nor materially add to the value of the asset (or major asset unit), should be expensed. Expenditures resulting in increased productivity, expanded capabilities or uses of existing assets, improved efficiencies or product quality would be of the type to add value to an existing asset and are covered in sections 2 and 4, below. Scheduled plant shutdowns are generally performed on a cyclical basis for maintenance that otherwise could not be performed due to such factors as marketing conditions, safety, cool downs of equipment and vacation schedules. This type of maintenance involves a major work effort but, should be expensed if the work is of a type that is normal for the major asset unit and was reasonably anticipated at the time of acquisition as necessary to allow the asset unit to reach its expected useful life. 2. Extraordinary Repairs Extraordinary repairs are generally capitalized. They involve a major work effort, are not recurring in nature and would not have been preplanned when the asset was acquired. The major asset unit may be out of service for an extended period of time such work tends to materially increase the use, value or service life of the major asset unit. An extraordinary repair has many of the characteristics of betterment (see #4 below). The original cost of the major asset unit should be adjusted to reflect these additional expenditures with the resulting net book value of the asset depreciated over the newly extended useful life of the asset.
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CAPITAL AUTHORIZATION REQUEST POLICY 3. Replacements The cost of replacing a component part of a major asset unit is normally expensed. Replacement involves the removal of a component or major part of a major asset unit and the substitution of another part or component of essentially the same type and performance capabilities. The major asset unit's life is not prolonged, its productivity not increased or its capability or uses expanded. The fact that the new component has a life in excess of one year is of no consequence under these circumstances. 4. Additions, Betterments, Renovations, Reconditions A functional addition to an existing major asset unit is capitalized, since it represents a modification which would have been capitalized had it been done at the time the related asset was created. Betterments often involve the removal of a major part or components of a major asset unit and the substitution of a different part or component having significantly improved and superior performance capabilities. The result of the substitution is a material increase in the overall efficiency of the primary asset and tends to increase its useful life and value. Other indications of betterment include improved product quality, increased capacity or reduced operating expenses. The proper ing for the replacement is to write off the net book value of the replaced part and capitalize the new component. The costs of renovating or reconditioning an asset that are nonrecurring in nature should be capitalized due to a presumption that the asset's life has been extended, similar to an extraordinary repair. Routine expenses and replacements, normally considered a repair expense, must be capitalized if they are performed as part of a specific plan of reconditioning, rehabilitation, alteration or modernization of a major asset unit. Such expenditures contribute to the overall improvement of the major asset and are a necessary part of the effort. D. Special Areas 1. Spare Parts Spare parts used for repair and maintenance purposes are frequently inventoried and charged to operations when used. However, certain spare parts, referred to as capital spares, should be capitalized, since these parts are unique to a particular piece or category of machinery and are critical to its operation and will only be used in the event of a breakdown. It is desirable to capitalize the initial complement of capital spares as part of the underlying cost of the asset. 2. Capitalized Interest Interest costs incurred during the period in which a qualifying asset is being constructed and prepared for its intended use should be capitalized as part of the historical cost of the asset. This applies to any real or tangible personal property produced by or for The Company. The production period begins when construction commences and ends when the property is ready to be placed into service.
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CAPITAL AUTHORIZATION REQUEST POLICY Debt that can be specifically traced to construction expenditures for property is first allocated to that property. If construction expenditures exceed the amount of that debt, then interest on other company debt (excluding capital leases) will be attributed to such construction. The rate of interest to be used is the average rate of interest on outstanding company debt (excluding debt specifically traceable to the construction). 3. R&D Expenditures Research and development qualifying for R&D tax credits is limited to scientific experimentation or engineering activities designed to aid in the development of a new or improved product, process, technique, formula invention or computer software program held for sale, lease or license or used by The Company in its trade or business. It is not required that an improvement be significant to qualify nor are routine or periodic improvements excluded, as long as they otherwise meet the requirements for qualified research. Qualified research includes a special rule in which any plant process, machinery, or technique for commercial production of a product is treated as a separate business consideration from the product itself. Thus where the development or improvement of the manufacturing process is undertaken through a process of experimentation which relies on scientific or engineering principles such process improvements or development would qualify as R&D credits. Research relating to style, taste, cosmetic or seasonal design factors is generally not treated as qualified research regardless of whether such research relates to product improvements or to new products. All qualifying R&D expenditures must be reviewed by the Corporate Tax Department and ed for using the project cost system. Upon approval for such expenditures, a project is opened to accumulate all the related costs. All R&D costs are expensed monthly as incurred by recording each projects accumulated expenditure to a general and istration research and development expense . These expenses are charged against the cost center of the manager responsible for the project. The tax code limits the amount of qualifying R&D expenditures based on the size of the corporation. Given TETRA’s size, it is unlikely that the company will accumulate enough qualifying expenditures to realize any significant tax credits 4. Asset Retirement Obligations (FAS 143) FAS 143 requires that a liability be recorded for any asset retirement obligation the company assumes in connection with the acquisition of a fixed asset. These obligations are capitalized as part of the carrying amount of the long-lived asset. Asset retirement obligation amounts should be indicated separately on the CAR. However, they should be excluded from the quarterly initial capital expenditure requirements reported on the CAR.
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CAPITAL AUTHORIZATION REQUEST POLICY E. Leases 1. Authorization and ing Authorization levels are identified in Section II and also apply to lease commitments and renewals. ing should be consistent with SFAS # 13 “ing for Leases”. 2. Capitalization A lease must be capitalized if it meets any one of the following criteria: The lease transfers ownership of the property to the lessee by the end of the lease term. The lease term is defined as the fixed non-cancelable term of the lease. The lease contains an option to purchase the property at a bargain price. The lease term is equal to 75 percent or more of the estimated economic life of the property, or The present value of the rentals and other minimum lease payments, as defined, is equal to 90 percent or more of the fair value of the leased property. A lease will be considered an operating lease if it does not meet any of the above. 3. Valuation A lease should be capitalized according to any one of the methods below, which are listed according to the priority by which they should be selected. The net present value of the lease payments discounted at the financing charge rate specified by the lessor, if available. The net present value of the lease payments discounted at the prevailing long-term borrowing rates available to The Company under normal business circumstances as determined by the Treasurer. The capitalized value of the lease is debited to the relevant asset and capital leases payable is credited. Total interest payable is represented as a financing charge from the lessor. It equals the difference between the capitalized value and the undiscounted lease payments over the lease term.
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