Definition
Under ASC 360-10, the cost of property, plant, and equipment includes all costs necessary to bring the asset to condition and location for its intended use: purchase price, freight, installation, and testing. Repairs and maintenance that merely keep the asset in operating condition are expensed. Costs that extend life or increase capacity are generally capitalized. Most entities also set a documented capitalization threshold, for example $2,500 per item, as an accounting policy so that immaterial items are expensed.
Why it matters in an audit or review
Capitalization drives income, assets, and covenants. Auditors vouch additions, test cutoff, and look for repairs capitalized to improve earnings, and for capitalizable costs expensed. Self-constructed assets also require capitalized interest in qualifying cases.
Example
(Illustrative) A company pays $48,000 to replace a roof, extending its life by ten years, and $1,800 to patch leaks. The first is capitalized and the second expensed.
Dr Building improvements 48,000 Dr Repairs expense 1,800 Cr Cash 49,800
Common mistakes
- Capitalizing routine repairs.
- Applying a threshold that is not documented or not consistent.
Sources
- FASB ASC 360-10-30, Property, Plant, and Equipment, Overall, Initial Measurement
- FASB ASC 835-20, Capitalization of Interest
- FASB ASC 250-10-50 and ASC 235-10 (disclosure of accounting policies)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error