posted September 29, 2015
Best Practices for Capital Assets
by Marvin M. Mendieta, CPA, CGFM, Audit Manager
For most organizations, capital assets tend to make up a significant portion of the organization’s total assets. If your organization maintains substantial capital assets, it is essential that your organization has effective capital asset management.Here are some helpful recommendations to consider.
- Establish a capital asset policy– It is highly recommended to have a capital asset policy that defines what is considered a capital asset. Use appropriate thresholds when developing your capital asset policy. Depending on the size of your organization and the types of assets you purchase, minimum dollar threshold could range from $300 to $5,000, sometimes even more. Assets that have useful lives greater than one year are typically capitalized. Also, repair expenses and betterments that materially prolong the useful lives of assets should be capitalized. The policy should also include guidelines on useful lives by asset type (e.g. building, equipment, furniture, etc.) as well as the method of depreciation to apply. Defining these criteria will make it easier for identifying assets for capitalization.
- Require approval on all capital asset purchases and disposals– Properly accounting for additions and deletions of your capital assets is important for accurate record keeping. Having a separate approval process performed prior to the actual purchase or disposal of the asset helps ensure that assets are validly added and removed. The employee providing the approval should not be the same employee who will actually purchase or dispose of the capital asset or update the capital asset listing.
- Conduct periodic physical counts of capital assets– To ensure the capital asset listing is up-to-date with assets still in use, it is recommended that a physical count of the capital assets is performed on a periodic basis. Assets should be tagged appropriately for identification. Make sure to update the capital assets listing if there are assets that are no longer at the organization’s premises as a result of the physical count. Consider disposing of assets that are no longer functioning.
- Reconcile general ledger capital asset balance to the capital asset system– Most capital assets records are maintained in a separate module from the general ledger to include additional information about the assets. Reconciling the capital asset system to the general ledger records helps ensure that the capital asset system includes all the items recorded in the general ledger that should be capitalized. The reconciliation should be reviewed by someone who did not prepare the reconciliation.
Because capital assets can consist of many different items, it is important to review the capital asset listing regularly and make the appropriate updates to ensure the listing has accurate information. Managing an organization’s capital assets can sometimes be challenging, therefore implementing key procedures can help make the process easier.
The content of these pages is for general information purposes only and does not constitute advice. Heinfeld, Meech & Co., P.C. tries to provide content that is true and accurate as of the date of writing; however, we give no assurance or warranty regarding the accuracy, timeliness, or applicability of any of the contents.