6. In determining the depreciation of the fixed asset, the set of policies should provide the following as considerations for calculations:
- The amount expected as residual value or book value or scrap value of the asset; and
- The estimated useful life of the asset.
7. Other costs related to acquisition, construction, or development of the asset, i.e. shipping, storage, licensing, interests, and other similar expenditures should have definite policies on how they should be treated, whether as part of the acquisition cost or as outright expenses.
8. Some assets like computer equipment comprise components and peripherals in order to make the asset operational. Varying acquisition costs are involved and thus technically present the overall acquisition value of the asset. Hence there should be specific guidelines as to which component or peripheral shall be capitalized or treated as outright costs.
9. The same considerations shall be made for buildings and each building's service components, although this aspect should focus on how the components shall be depreciated, whether as intangible fixed assets or as part of the building’s construction costs. It would be best practice to have a separate chart of estimated useful life for the building and building service components, according to what actually exists in the company’s premises.
10. Defining the capitalization and depreciation of improvements on leasehold is also important, in case the company is operating in a leased property.
12. Repairs, renovations, and overhauls must be clearly distinguished as to when such expenses are capitalizable, in order to preserve the consistency by which the assets are valued.
13. Policies to establsih the procedures by which obsolete and retirable assets are determined should state who determines if the assets are due for retirement, the procedural actions involved from point of determination, to point of final asset disposition. The rules and the designation of authorized personnel must be clearly stated to avoid the misuse or abuse of this particular procedure.
These are the main areas of consideration when developing and creating capitalization policies for fixed assets for a business organization. Readers will find a related article, entitled: Example of Corporate Capitalization Policy for Fixed Assets, in which they can find a link to a free downloadable template for fixed assets capitalization policies.