Fixed Asset Capitalization Policy

Fixed Asset Capitalization Policy refers to the guidelines set by an organization to determine when to Capitalize a fixed Asset rather than expensing it. This policy outlines the criteria for recognizing fixed Assets on the balance sheet, including the cost threshold for Capitalization, useful life estimates, and the processes for Asset acquisition, Depreciation, and disposal.

The main objectives of a fixed Asset Capitalization policy are to ensure consistency in financial reporting, comply with accounting standards, and accurately reflect the organization’s Asset base.

Examples:

• Cost Threshold: An organization may decide that any Asset costing $5,000 or more will be Capitalized, while costs below this amount will be expensed.
• Useful Life: The policy might state that a fixed Asset should have a useful life of more than one year to qualify for Capitalization.
• Depreciation Methods: The policy could specify using straight-line Depreciation over the Asset’s useful life.

Cases:

• Company A purchases a machine for $10,000, which it expects to use for 10 years. According to its Capitalization policy, this machine is Capitalized and depreciated over its useful life.
• Company B buys office supplies costing $3,000. Since this amount is below the Capitalization threshold of $5,000, it is expensed in the current period.