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 ACCOUNTING 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 Accounting .................................................................................................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 companys Investment and Commitment
Authorization Policy, Contract Review, Execution and Administration Policy, purchase authorization
process and other control processes that address the companys expenditures, financial
commitments and obligations.
The Corporate Finance Department is authorized to administer the CAR Policy. This manual
provides guidelines for the administration of the Companys 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 years approved capital budget that
exceed $1 million.
2) Maintenance capital expenditures* included in the current years 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 joint 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 affiliates to a current or future capital
expenditure and before a purchase order for a capital asset is executed irrespective of whether
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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 Companys Contract Review, Execution and Administration Policy.
When it appears that a projects 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 joint 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 TETRAs 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 TETRAs net ownership interest. TETRAs 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 TETRAs Corporate Purchasing Policy
and Procedures Manual.

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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 Companys 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 supported. 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 Accounts
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 Companys 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 Companys 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 verify 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 projects 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 TETRAs 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 Accounting 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

accountability. 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 Companys 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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APPENDIX - Capital Accounting 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
account classifications:
Account 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 Support
(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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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/Accounting/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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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 support 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 accounted 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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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 sellers 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 Divisions operating units financial statements.

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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 accounting 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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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 accounting 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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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
accounted 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
administration research and development expense account. 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
TETRAs 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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E. Leases
1. Authorization and Accounting
Authorization levels are identified in Section II and also apply to lease commitments and
renewals. Accounting should be consistent with SFAS # 13 Accounting 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 account 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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