Questions to Ask When Determining Whether or Not to Capitalize Acquisitions

July 21, 2021

Capital Asset Management
capitalize acquisitions

The concept behind capitalization is to spread out the expense of the benefit throughout the duration the benefit is received. The useful life represents the anticipated duration of the benefit the acquisition will provide. However, it’s not always very clear whether you should capitalize or expense an acquisition. 

Questions to ask yourself when determining whether or not to capitalize acquisitions: 

  1. Should the purchase have been recorded as a repair or supplies? 

Just because the acquisition cost far exceeds the capitalization threshold it does not make it a capital asset.

Bulk purchases, supplies, and repairs to equipment should not be capitalized.

  1. Is the acquisition an upgrade to an existing asset? 

If the purchase is an improvement or upgrade to an existing asset, the original cost of the existing asset should be adjusted to properly depreciate the additional costs.

  1. Is this a stand-alone asset? 

One item that can operate independently of others should be segregated and tracked as a unique asset.

One item with add-ons that allow it to function should be capitalized together as one asset.

  1. Will the asset provide benefit for longer than one year or one accounting period? 

If yes, then it should be capitalized as a unique asset. Assets with indefinite useful life (Land, works of art) are to be capitalized with 0 useful life and not depreciated.

If you’re still curious about whether your acquisitions should be capitalized, you can learn more in our white paper: When to Capitalize Vs. Expense.