capitalization issues

Acquisitions are not always black and white, and it can be tough to determine when to capitalize and how much to capitalize. However, the asset classes in which we most commonly encounter capitalization issues are buildings, building improvements, and infrastructure. Below you’ll find some of our top recommendations when it comes to each class. Reach out to us if you have any further questions about these or if we can be of any assistance. 

Capitalization issues: buildings 

The construction costs of a new building are typically clear and should be capitalized, but be sure to follow these tips:

Capture the engineering, design, and architectural costs as part of the building’s cost. 

Review the invoices for the construction. Many times, moveable equipment will be purchased with the construction funds, but should be reclassified in your asset system. You do not want to carry the costs of equipment for 50 years when they should have been depreciated for 10 years or less. 

Consider building componentization. Componentization is the practice of segregating construction costs by components of the building. A new building’s roof will not last 50 years, therefore it is appropriate to segregate that portion of the construction cost to a shorter useful life. Componentization not only allocates the costs to appropriate useful lives, but it also allows for clearer accounting practices when replacements and retirements are needed. If your building’s roof needs a complete replacement in 20 years, the accountants can simply retire the original roof component and add the roof replacement as a new capital entry.

Capitalization issues: building improvements 

Any time a project will occur for an existing capital asset, you should ask if it will improve the asset or if it is a repair or maintenance. 

An improvement provides additional value—it either extends the useful life or increases the service capacity. Some examples: 

  • Painting the interior of a facility is maintenance. 
  • Redoing the tuckpointing of the exterior increases the useful life. 
  • A complete interior renovation will increase the useful life.

Some additional tips:

Capture the design and planning costs as well as the construction, as with new building construction.

Review construction invoices for furnishing and fixtures as well as capital moveable equipment.

Capitalization issues: infrastructure

This category includes roads, bridges, sidewalks, sewer lines, water lines, electrical utilities,

and more. The difficulty with infrastructure accounting is that the upgrades and replacements are seldom a clear one-for-one replacement. 

Many entities are great about capturing additions in these categories, but they rarely retire any portions. It is important to always ask if this is an addition to our total category or a replacement of existing infrastructure. 

For example, when a section of sewer line is replaced, the accountant needs to know how old the replaced section was. They can then enter a proportional retirement amount for the original pipe entry.

At HCA, we’re here to guide you through the entire capitalization process. When it comes to your Capital Asset Management, we offer the services you want with expertise you need. From external audit requirements to financial reporting and the control of fixed assets, we are proven performers that know how to get the job done right. Don’t hesitate to reach out to us with any questions on when and how to capitalize your assets.