A capitalization policy will help determine whether an item your organization buys is a regular expense or a fixed asset. Organizations use a capitalization policy to set a threshold for their expenses. If your organization buys an item over a certain amount that you have established, and it has lasting value, it will be a fixed asset. When an item is considered a fixed asset, that means it will be depreciated to spread the cost of it out over time. In contrast, an item below that amount is a normal expense on your income statement.
Typically, the policy will state that fixed assets must meet two criteria:
- A useful life of more than one year
- The asset costs more than a certain amount
Fixed assets are long-term items. They might include:
Capitalization policies will differ by organization. But every organization must select a lifespan for a fixed asset that is within reason and best represents an asset’s true economic usefulness. Industry guidelines and a nonprofit or church’s maintenance and replacement policies can also help with this determination.
For more information on asset depreciation examples and how to determine a capitalization policy, download our free eBook on managing fixed assets.