What is a fixed asset capitalization policy?
A fixed asset capitalization policy is an internal accounting policy within a specific company or organization that explains how to capitalize fixed assets and what it takes for an asset to qualify as a fixed asset. Technically, once an asset is put on the balance sheet, it's capitalized, but the fixed asset capitalization policy decides if fixed assets are treated as such and expensed over time or if they're treated as shorter-term assets and expensed all at once.
For example, a Fortune 500 company might purchase a new copy machine for $25,000 that year, which is, by definition, a fixed asset. But for a business of that size, it might not make sense to designate such a small purchase as a fixed asset, so it would instead be treated as a regular asset and expensed all at once. A new multimillion-dollar facility, however, would definitely be considered a fixed asset, and the fixed asset capitalization process within the company would apply.
What kinds of companies need fixed asset capitalization policies?
Every company should have a fixed asset capitalization policy, even if it's a very small company with few fixed assets. The purpose of a fixed asset capitalization policy is to remove any confusion about what qualifies as a fixed asset for that company and how it is handled in accounting.
This helps to reduce confusion, increase consistency within the company's accounting team, and ensure that assets are being treated the same across years or decades. Changing how you're expensing the same item halfway through its life will certainly look suspicious, even if it doesn't somehow trigger an audit.