Why a Capitalization Policy is Important

Posted on September 15 2011 by admin

As a Henry & Horne auditor, I am always looking for ways that I can add value to a client’s audit, including providing recommendations for client staff economies in bookkeeping.  In small not-for-profits, an often overlooked item is the establishment of a capitalization policy to ensure that all acquisitions and dispositions of property are consistently treated and recorded from year to year.  To provide uniformity, we suggest that management recommend to the Board of Directors a policy for adoption which encompasses the following:

a)    All property purchases over a specific dollar amount ($500, for example) and having a useful life of one year or more are capitalized.  (Depending upon the size of the entity, a higher dollar threshold may be practical.)

b)    All individual items below that specific dollar amount and having a useful life of less than one year would be expensed.  (The cost of record keeping for small dollar items exceeds the benefits of maintaining those small items on a capital asset/depreciation schedule.)

c)    To provide interim cost monitoring during the year for management and the Board, items which will be capitalized when formal financial statements are prepared, may be temporarily classified to a special  “capital outlay” expense account set up for this purpose.  Items would then be reclassified to capital assets at year-end close, and depreciation will be recorded for the time periods for which the assets were used. Maintaining a specific expense account for capital items will prevent items requiring eventual reclassification from being overlooked in various repair, maintenance and expense accounts.

d)    An internal record (such as an Excel spreadsheet or binder) of all property and equipment additions should be maintained in order to facilitate annual updates of insurance records, audit roll forward schedules, and generally for availability to Board and management.  This record ideally would include a description of the asset, date of purchase, vendor name, serial number, if applicable, and original cost.  It would also be beneficial to include space for disposal date, manner, (sale, trade, scrapped, etc.) and selling price, if applicable.

Jill Collins

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