Setting a capitalisation threshold for a client
Whether a client should expense asset purchases below a set amount, how to choose the level without borrowing someone else's, and how to write the policy.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Open the fixed asset register of a small client that has never had a capitalisation policy and you will often find a stapler, three extension cords and a kettle, each depreciating faithfully over five years. Open another and you will find a delivery bakkie expensed because "it was paid in cash". Both registers are telling the firm the same thing: nobody decided where the line sits between an asset and an expense.
A capitalisation threshold is that decision written down. It saves the client effort, keeps the register meaningful and gives the firm something to test against. It also needs care, because a threshold chosen badly can distort the statements as easily as no threshold at all.
Why businesses draw the line
Investopedia notes that most businesses set a minimum amount below which purchases are expensed immediately rather than depreciated, and gives examples in US dollars for small businesses and larger corporations. The reason is practical. Tracking, tagging, depreciating and eventually disposing of every low-value item costs more in time than the information is worth to anyone reading the statements.
The underlying standard does not mention a threshold. IAS 16 recognises the cost of an item of property, plant and equipment as an asset if, and only if, it is probable that future economic benefits associated with it will flow to the entity and its cost can be measured reliably. ACCA's article on depreciation adds that the same recognition test applies to costs incurred later, and that day-to-day servicing, repairs and maintenance are expensed. A kettle passes the IAS 16 test as easily as a truck does. What allows a client to expense it is materiality.
Materiality reaches recognition, not just disclosure
It is easy to think of materiality as something that governs what goes in the notes. IFAC's article Making Sense of Materiality makes the wider point: the concept is pervasive and applies not only to the presentation and disclosure of information but also to decisions about recognition and measurement.
That is the justification for a threshold. Expensing items below a set level is a recognition decision made on the grounds that, taken together, those items could not reasonably affect what users of the statements conclude. It follows that the threshold is only acceptable while that remains true. A threshold that sends a large share of the year's capital spending to profit or loss has stopped being a materiality judgement and become a distortion.
Choosing a level for this client
Resist the temptation to copy a figure from another client, a textbook or a website. A useful level depends on:
- The size of the business. What is trivial for a manufacturer may be a meaningful asset for a two-person consultancy.
- The pattern of spending. A client that buys many similar low-cost items each year, such as tools, chairs or tablets, can expense a lot without noticing. Test the total, not just the single item.
- Who relies on the statements. A bank lending against assets, or a funder that reviews capital spending, may expect a lower level.
- Tax. The tax rules on writing off small items in the client's country may not match the accounting threshold. That is a matter for the tax computation; it should not drive the accounting choice.
A practical test: apply the proposed level to last year's purchases and see what would have been expensed. If the total is small against profit and against total assets, the level is probably sensible. If it is not, the level is too high.
Applying it the same way every time
A threshold only helps if it is applied consistently. The policy should answer the questions that come up in practice:
- Single items or groups? Twenty identical desks bought for a new office may each fall below the level while being clearly material together. Many policies treat a bulk purchase as one asset.
- Repairs and upgrades. A repair that restores an asset is expensed whatever it costs. An upgrade that extends its life or capacity is tested against the recognition criteria, and then against the threshold.
- Small tools and spares. Decide whether these are expensed, held as stock or capitalised in pools.
- Components of a bigger project. Cabling, fittings and installation that form part of a larger asset are capitalised with it, even if each invoice is small.
- Who decides borderline cases. Name the role, usually the financial manager, and keep a note of the decision.
Writing the policy and cleaning up the register in Achekam
Achekam's Studio includes standard accounting policy wording based on IFRS for SMEs, labelled for review before issue. Staff can also write their own policies, which is where a client-specific threshold belongs. The wording should state the level, whether it applies per item or per purchase, and how repairs and upgrades are treated. Notes take their figures from the mapped trial balance, so details the trial balance does not hold, such as the threshold itself, are left as "[to be completed]" until someone types them.
When a new threshold is introduced, the register usually needs cleaning. Items already capitalised below the level are typically small and fully or largely depreciated; writing off what remains is usually a current-year adjustment rather than a restatement, unless the amounts are material. Achekam's Studio lets staff post a year-end adjusting entry for this, and an adjusting entry that proves wrong is reversed with a record of who did it and why, never deleted.
Depreciation needs attention too. Achekam does not calculate depreciation; it presents the charge from the client's trial balance and flags when the charge does not agree with the movement in accumulated depreciation. After a clean-up, that flag helps confirm the register and the ledger tell the same story.
Revisiting the threshold
Treat the level as a judgement to review, not a rule to forget. Each year end, ask:
- Did the business grow or shrink enough to change what is trivial?
- What was the total expensed under the threshold this year?
- Were bulk purchases handled as the policy says?
- Is the written policy still what the client actually does?
Capitalise or expense covers the item-by-item recognition questions, and four steps for materiality judgements helps when testing whether the total expensed is still immaterial. Agree the threshold with each client in writing before the first year it applies, so the register and the policy start together.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
