Fixed asset accounting spreads a large purchase across the years that benefit from it.
Property, equipment, software and leasehold improvements represent a large capital investment. Sensible capitalization and depreciation policies put the expense where it belongs and keep the balance sheet honest.
What gets capitalized
Set the line between a capital asset and an immediate expense. Thresholds commonly run from a few hundred to a few thousand dollars, depending on company size and materiality.
The policy also has to cover repairs against improvements, whether internal labor is capitalized, and how you treat software development costs.
Choosing a method
Straight-line spreads cost evenly across the useful life and is the usual choice for financial reporting. Accelerated methods load more expense into the early years, for tax reasons or for particular industries.
Set useful lives and salvage values by asset class, and write down the reasoning. An auditor will ask.
- Straight-line: the same expense each period
- Declining balance: more expense early on
- Units of production: tied to usage or output
- Component depreciation for complex assets
The register
Keep a fixed asset register with acquisition date, cost basis, location, custodian and depreciation schedule. Then go and check, physically, that the items are still there and still in use.
Disposals, impairments and transfers have to update the register and the general ledger at the same time.
Leases and intangibles
Right-of-use assets from leases have their own recognition and amortization rules under modern lease standards. Intangibles such as patents and acquired software amortize over their legal or economic life.
Talk to your tax adviser about bonus depreciation and the deductions available where you operate.
Written by the team at Ambivo, a business platform that keeps CRM, accounting and ERP on one customer record. This article is general guidance on the topic rather than a description of Ambivo features.