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Best practices and resources for setting up a Fixed Asset Capitalization/Depreciation policy? Relevant Tax Issues?

Answers

Marc Schwartz
Title: Partner
Company: Schwartz International
(Partner, Schwartz International) |

The answer is very industry-specific. For instance, the mining industry would be significantly different from a more typical manufacturer. Suppose you have a mining company where machinery and equipment could be in an underground salt mine, given the large cost of replacing parts there may be a tendency to capitalize because of the large dollars associated with replacement. However, the items may be more appropriately associated with repairs and maintenance. You may have a different result in other industries.

The policy needs to be based on the industry and your particular company's business objectives. We have seen tax auditors attack company's policies on depreciation, etc. without a full knowledge of the industry. Once we are able to take the time to educate them on why specific policies exist, we have had success.

Regardless, once a policy is created, it should be consistently followed. If there are changes to the business model, the policy may need to be updated.

I hope this general answer is helpful.

Kevin Roones
Title: Senior Accounting Professional
Company: In-between
(Senior Accounting Professional, In-between) |

Excellent answer Marc. I would say that the answer is not only industry-specific, but company-specific as well. For a small company a $500 to $1,000 minimum threshold for capitalization could be appropriate, but for a larger company that amount would be too low. It depends on how active the company is in purchasing capital equipment and what their total assets are. You have to weigh the benefits of immediately expensing items (no employee costs associated with tracking the fixed assets through a subledger or spreadsheet, calculating depreciation, taking physical inventory, reviewing for impairment, etc.) versus capitalizing items (spreading the P&L hit over several years). Of course your decision has to stand up to scrutiny by an auditor also and has to be applied consistently.

The useful life of a fixed asset would be very industry-specific also. A company that is technology driven would probably assign a shorter life to computer equipment or software that a company that purchases such items infrequently to run their backoffice.

Hope this helps.

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