Yesterday, my girlfriend asked me why I like to buy expensive furniture but am conservative in everything else, I told her because I can capitalize furniture. 🙂
Capitalization is a complex topic and can sometimes be difficult to keep track of, especially during large construction projects. The first part of understanding capital assets is understanding the concept of the capitalization threshold.
The capitalization threshold is the minimum cost at which an item is recognized as a capital asset on the balance sheet as opposed to an expense on the income statement.
Capitalization thresholds are determined by regulatory bodies and policies such as GASB 34 and OMB A-133. Organizations can also create their own capitalization thresholds if they are equal to or greater than the regulatory requirements. The Enterprises and Tribal Governments I work with typically use a Capitalization threshold of either $3,000 or $5,000. In my experience, most clients also use aggregate amounts; for example, ten $500 computers purchased under the same order would be capitalized under equipment.
Once the capitalization threshold is established, it is important to either create an excel fixed asset tracking document or implement fixed asset software to keep track of the items that exceed the capitalization threshold. I strongly suggest creating an excel workpaper that is updated at least monthly with new additions in both capital assets and accumulated depreciation, disposals of assets, and transfers of assets from the construction in progress accounts. When the audit comes around, they will greatly appreciate a document that brings everything together.
For Governments (and extra credit with your auditors):
An issue that I’ve noticed several times this year is items being added to the fixed asset listing, but not being recorded as capital outlay on the general ledger. It is important to remember that capital asset additions should be recorded as capital outlay, instead of non-capital outlay expenditures. Although there will not be no impact on your net position, finding each capital outlay amount at year end can be a time-consuming exercise.
The capital outlay amounts are required to do the conversion entry reconciling your fund statements to the government-wide statements. Without the appropriate amount recorded as capital outlay, the two Governmental Financial Statements will not reconcile.
*The above is the fundamentals of a capitalization threshold. Fixed Assets are highly complex. Below are some great videos / articles to understand better.