Making the Case to Increase Fixed Asset Capitalization Levels
How your company sets capitalization thresholds for fixed assets has a significant impact on how large your Fixed Asset department needs to be. When you consider the volume of purchases, typically as the dollar amount increases the number of transactions drops dramatically. However, increasing the threshold, while it might be supported based on reasonable materiality limits and the positive impact of reducing the accounting workload, isn’t a trivial exercise, with a one-time impact on earnings, and a range of personal property tax and income tax-related considerations.
A recent PeercastTM in the General Accounting (R2R) research area on the topic of Capitalization Thresholds featured a $15B company that increased their threshold significantly from USD $500 following an implementation plan that took eighteen months to complete, with the first five months needed to complete the analysis and get approval to proceed. For the featured company, during the prior 12 years revenues had increased by 400%, with an increase in net property and equipment of over 500%. The existing threshold was outdated, requiring too many transactions by the Fixed Assets team for small-dollar purchases.
Some of the lessons learned included:
- Ensuring you have the right stakeholders at the table
- Coordinating early with internal and external auditors
- Partnering with the financial planning team to understand how performance versus the prior year will be evaluated
For many companies, the fixed asset threshold in place today is most likely the same as it was ten years ago. Taking a closer look and making adjustments as needed can have a big impact on the workload of your Fixed Asset team, in addition to being the right decision overall for your company.
Recent iPollingTM questions created to support the Peercast indicate that while 14% of member companies have thresholds of USD $1,000 or less, 59% of member companies have thresholds greater than $3,000, with 38% reporting thresholds that are greater than $5,000. Here are the details:
The second question looked at whether or not the member companies maintained a separate fixed asset listing for property tax purposes versus a listing used for GAAP / Book purposes. Both approaches were used frequently, with a separate listing of the favored approach by 57% of the responding companies.
Here are some of the additional comments from iPolling respondents:
- Our company uses property tax software that is updated each reporting period with changes from the GAAP FA Register.
- We use our GAAP Fixed Asset ledger for property tax purposes.
- Our current capitalization threshold generally follows tax requirements. However, raising the threshold is a question we have recently been considering too. I’m very interested to see the results of this poll.
- We have separate books maintained in SAP for accounting and tax.
- Our general threshold is $5,000. However, if there is a lower threshold for local GAAP/tax purposes, we will use the lower threshold for simplicity, if necessary. Our Tax group maintains offline files for significant differences for property tax purposes, but we try to minimize them as much as possible.
- Our threshold is $10,000. However, if there is a lower threshold for local GAAP/tax purposes, we use the lower threshold for both US GAAP and local GAAP/tax purposes. Separate books are maintained in SAP for US GAAP and property tax purposes. Information is imported to property tax software where additional equipment is added that doesn’t qualify as fixed assets, but must be reported as personal property, i.e. leased equipment, PCs that have been expended, etc.
- Our threshold for capitalizing assets is $5,000.
- We do not maintain a separate asset listing for property taxes, but we do for statutory reporting purposes in other countries where the capitalization threshold for the local country income tax differs from US GAAP. We use the SAP parallel ledger and different depreciation areas to track each basis and depreciation method for the respective needs.
- $5k for a single asset. Over $10k for group of assets.
When was the last time you reviewed the fixed asset capitalization threshold at your company?
Who are your peers and how are you collaborating with them?
“PeercastsTM” are private, professionally facilitated webcasts that feature leading member company experiences on specific topics as a catalyst for broader discussion. Access is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from attending or accessing discussion content. Members can see who is registered to attend in advance, with discussion recordings, supporting polls, and presentation materials online and available whenever convenient for the member. Using Peeriosity’s integrated email system, Peer MailTM, attendees can easily communicate at any time with other attending peers by selecting them from the list of registered attendees.
“iPollingTM” is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from participating or accessing content. Members have full visibility of all respondents and their comments. Using Peeriosity’s integrated email system, Peer MailTM, members can easily communicate at any time with others who participated in iPolling.
Peeriosity members are invited to log into www.peeriosity.com to join the discussion and connect with Peers. Membership is for practitioners only, with no consultants or vendors permitted. To learn more about Peeriosity, click here.