Excel Balance Sheet Template includes a group of assets labeled as “Property, plant and equipment”. When we have covered the meaning of those assets in our separate blog about property, plant and equipment, in general we want to share with you some issues regarding capitalizing expenses under the abovementioned line.
What often is ignored and neglected are the conditions when expenses are capitalized as assets and when not. It happens more than often that auditors find expenses that should have been capitalized. This is strange when you stop to think about it however. One should be more interested in keeping the costs as low as possible. But to put that aside, we are concentrating more on the possible treatments that should be considered.
Expenses that always need to be classified as property, plant and equipment are those that fall under the category of assets used more than 12 months. So stop for a moment before charging an invoice for a new printer as expense. Since the acquisitions don’t happen as often as day-to-day expenses they are often simply missed. Before charging an invoice as expense, think about two things: are we going to use it for more than 12 months and is the cost above the threshold for recognizing the asset?
As consequence, before capitalizing an expense, think. Is it really an asset or mere expense? What we have seen happen is that routine maintenance expenses have been capitalized to a machine for an example. It may very well be that no part was actually replaced and only fluids were changed. This is not an asset. The conditions for capitalizing an asset are also the following: future economic benefit flows into the company from this very acquisition and the asset must be improved. If only the state is kept, like ordinary maintenance does, it does not fall under the category as an ‘asset’.
Capitalizing expenses as assets is always a two way consideration – if it’s really an asset or expense? It happens unfortunately too often that inappropriate considerations are given and hence the assets and expenses are misstated.