When Should Fixed Assets be Capitalized? (Explained)

Fixed assets are classed as assets in the balance sheet of the entity. The common nature of fixed assets is generally different from current assets due to the useful life, the value of assets, and the ways in which assets contribute to the company. The different entities might have different accounting policies on the capitalization of fixed assets.

For example, assets that have a value of more than 1,000 USD and a useful life of more than one year need to be capitalized as fixed assets. Yet, some companies might treat differently as current assets.

The capitalization of all assets of the entity in the financial statements should follow the accounting framework. There are two main principles that we can use as part of the fixed assets capitalization policy. First, fixed assets are expected to provide future benefits to the company and second is the value of assets could be measured reliably.

These principles do not include the fixed assets as the result of the finance lease. You may need to confirm with that accounting standard if your assets are relevant to the finance lease.

The entity could recognize assets as fixed assets only if the entity could establish that the fixed assets will help the entity to increase its value through usage or sales of those assets. For example, the entity could recognize the company’s car as fixed assets in the financial statements only if the entity could assure that the usage of the car will provide the economic inflows to the entity, not the other people or entity.

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If the car is legally owned by the entity but the economic inflows are not into the entity, then the entity should de-recognize the assets from its balance sheet.

To be able to recognize fixed assets in its financial statements, the entity needs to measure the value of those fixed assets at the reliable method. Normally, fixed assets are valued at cost for the initial measurement. And they are revalued to the market value every year to reflect the actual value that the assets could contribute to the entity.

Therefore, the entity should capitalize fixed assets in the financial statements when:

  • Fixed assets are controlled by the entity as the result of past transactions
  • The future economic of fixed assets are expected to inflow into the entity
  • The value of fixed assets could be estimated reliably