Is It Time to Raise Your Capitalization Threshold?

For every purchase made, an organization must decide whether to expense it or capitalize it. Expensing an item is when the cash outlay for the purchase is charged once to the income statement in the period it was made. However, if a purchase is for something that typically has a life of one year or more from the date of purchase, it would be deemed a capital asset.  

Additionally, organizations that are recipients or subrecipients of federal awards need to look to the definition of capital assets in the Code of Federal Regulations, Title 2, Subtitle A, Chapter II, Part 200 which defines capital assets as “tangible or intangible assets used in operations having a useful life of more than one year which are capitalized in accordance with Generally Accepted Accounting Principles (GAAP).”   

The term “life” refers to how long an organization will receive value from a purchase, either from its use or a benefit received, including the betterment and restoration of existing capital assets. For example, a laptop would be used for more than one year, so it is a capital asset, whereas toilet paper would be used within a year of purchase.  

What Are Capitalization Thresholds?  

Once a purchase is determined to be a capital asset, the next step is determining if it meets the dollar amount threshold to be capitalized in the books. Capitalization thresholds are those dollar amounts that an organization, whether it be public, private, or government, can use as a hard cutoff when determining whether to expense a purchase or place it on the list of capitalized assets. 

Determining the capitalization threshold levels should occur on an asset class basis. An asset class is a group of similar assets that are used for similar purposes. Computer equipment could be deemed an asset class and used to set a threshold level; however, it could be split into more detailed, individual asset classes: servers, laptops, tablets. Organizations need to take the time to discuss the level of these thresholds and whether going into more detailed asset classes is of any benefit.  

Assessing Capitalizations Thresholds 

As each asset offers unique options, organizations navigating capitalization thresholds often ask: 

• What dollar amount should the threshold be?  
• Are we allowed to make it whatever we want and as high as we want? 

While it’s difficult to know the right answer, several sources dive into deep detail on what a capitalization threshold policy is, including the Government Finance Officers Association (GFOA) and the Government Accounting Standards Board (GASB). 

Common Capitalization Threshold Policies 

Likely, there is an overarching policy that legally requires an organization to adhere to the upper limit of the capitalization threshold. This policy can originate from many sources; it can be from a governing body policy, mandated by the federal or state government, or simply the purchasing department’s internal policy.   

For instance, Arkansas requires its state agencies and entities to capitalize all land costs no matter the dollar amount, whereas land improvements under $5,000 can be expensed. If there is no required maximum threshold level that must be followed, organizations should look outwards to similar entities to determine if the capitalization threshold is excessively high. 

Recipients and subrecipients of federal awards who use those funds to purchase capital assets must capitalize those that cost $10,000 or more. Additionally, recipients and subrecipients of federal awards need to be careful of excluding individual capital assets that cost less than $10,000 based on the guidance in GASB’s Implementation Guide No. 2021-1, which provided revised guidance concerning the capitalization of a group of assets with individual values less than a capitalization threshold.  

The revised guidance is effective for fiscal years beginning after June 15, 2023. It provides guidance related to when an organization should capitalize assets if individual acquisition costs are less than the threshold for an individual asset if those assets in the aggregate are significant as follows:  

“Capitalization policies adopted by governments include many considerations such as finding an appropriate balance between ensuring that all significant capital assets, collectively, are capitalized and minimizing the cost of recordkeeping for capital assets. A government should capitalize assets whose individual acquisition costs are less than the threshold for an individual asset if those assets in the aggregate are significant. Computers, classroom furniture, and library books are examples of asset types that may not meet a capitalization policy on an individual basis yet could be significant collectively. In this example, if the $150,000 aggregate amount (100 computers costing $1,500 each) is significant, the government should capitalize the computers.” 

Benefits and Limitations of Capitalization Thresholds 

The primary reason behind raising the threshold is the advantage of expensing it and forgetting it. Expensing an item is generally a one-time event that requires minimal effort compared to capitalizing an item, which entails putting it on a fixed asset list and then maintaining it on that list over the life of the asset. Expensing eliminates extra work related to keeping the capitalized item properly updated until the software is replaced. 

So, if less work is better, why would anyone want a lower capitalization threshold? An organization’s internal system is set up to track capitalized assets by answering “why, how, where, who, and what.” Certain assets that fall below any required max threshold amount need heightened tracking and therefore extra effort to maintain them on an asset list. For example, tracking laptops and tablets may benefit from a lower threshold due to a high theft rate. This allows organizations to accurately assess and monitor tools and prepare for future appropriations and budgets.  

How EisnerAmper Can Help 

To help organizations and government entities identify external requirements for capitalization thresholds and how to apply them, EisnerAmper is dedicated to implementing strategies through examining historical expenditures and current economic and budgetary positions. Contact us below to discuss important considerations for leveraging capital thresholds.