What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Fixed Asset Capitalization Policy

Original post by Justin Johnson of Demand Media

Fixed assets are often the largest purchases that a company will make over the course of a fiscal period. Fixed asset capitalization refers to the process of recording the value of an asset and reducing the value of the item over time through a series of monthly or annual depreciation journal entries. It is important that an organization have a defined policy for the capitalization of fixed assets.

Capitalization Threshold

The capitalization threshold is the minimum purchase amount of an item that would require it to be recorded as an asset and capitalized, rather than expensed as a period cost. Capitalization thresholds vary by company and even by asset type within the company. Common capitalization thresholds for fixed assets range from $1,000 to $5,000 per asset. While the amount of the capitalization threshold may vary from company to company, it is important that a threshold is set and utilized.

Inclusive Costs

The base purchase price of a fixed asset is not always the only amount that is to be capitalized. Generally Accepted Accounting Principles, or GAAP, are the rules and regulations that govern accounting policies in the United States. GAAP states that items such as title fees, surveying costs, closing costs, architect fees and freight charges related to the fixed asset should be included in the capitalized cost of the item.

Accounting Treatment of Repairs & Maintenance

Costs that are associated with the repair and maintenance of an item to keep it operational should not be included in the asset value and should be expensed in the period in which they occur. However, costs for repairs that significantly increase the value or useful life of the fixed asset should be added to the fixed asset list and capitalized.

Capital Expenditure Requests

Capitalization expenditure requests, also known as CAPEX requests, are documents that are prepared by the accounting staff, with input from various operational departments, that request the funds for the fixed asset addition. The CAPEX request should state the purpose of the fixed asset, the benefit that the asset will provide and also a return on investment analysis for management review. The CAPEX request should be reviewed and approved by the appropriate members of the finance department, upper level management and the appropriate department heads within the company.

Asset Useful Life

The organization must determine the useful life of each fixed asset or fixed asset category. The useful life is the determining factor for the number of accounting periods over which the asset must be depreciated. Companies can seek guidance from fixed asset consultants or other companies in its industry to determine proper useful life periods for their assets.

                   

References

About the Author

Based in Somerset, Ohio, Justin Johnson has been writing since 1998. He was a finalist for the 1998 Muskingum County (Ohio) Bar Association Law Day Essay Contest and has also written academic papers on business, finance and political topics. He has a Bachelor of Science in business management from Pensacola Christian College.

Advertisement