What Is a Capitalization Policy?

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:

1. A useful life of more than one year
2. The asset costs more than a certain amount

Fixed assets are long-term items. They might include:

• Land
• Equipment
• Vehicles
• Furniture
• Buildings
• Improvements

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.

Free eBook: Fixed Assets Management for Churches and Nonprofits

When it comes to managing, tracking, and depreciating fixed assets, such as land, furniture, vehicles, computers, or other equipment, you want to be sure your nonprofit or church is managing everything correctly. This eBook will give you a holistic understanding of what a fixed asset is and how you and your organization can track, manage, and depreciate it throughout the course of its useful life. (Don’t worry, this is going to make a lot of sense soon!)

This eBook will teach you about:

• Calculating and comparing different methods of asset depreciation
• Allocating fixed asset costs according to GAAP (generally accepted accounting principles)
• Maintaining a record of depreciation for each fixed asset