Developing a Uniform Policy for Capital Assets

It is important for a company to follow a uniform policy with respect to the acquisition, capitalization, management and disposition of equipment and other capital assets for financial statement purposes. Assets acquired by a company are either expensed or capitalized. Companies develop specific guidelines about which purchases of assets will be expensed and which must be capitalized. Typically, a company will develop a formula that will be used to determine which asset acquisitions are to be capitalized. The variables that are considered in determining whether or not to capitalize an asset are:

The nature of the product that has been acquired along with its intended use

The normal useful life of the asset. [For an asset to be capitalized, it must provide economic benefit over a number of years]

The unit acquisition cost. [Below a certain dollar threshold it simply not rational to go to the time and trouble to capitalize an asset that has been purchased]

Property acquired by the company under review that does not meet each of these tests will be expensed in the accounting period in which the acquisition took place. Otherwise, the amount

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Category: Economics - D