Lets start with a definitions here (forgive if the definitions in this reply are not word perfect as done from memory).
An Asset An asset is a resource controlled by the entity as a result of past events which is expected to generate future economic benefits which will flow to the entity.
There is no mention there as to the asset being too small to recognise. So the discussion should not be about whether someothing is or is not an asset. If it meets that definition then it is.
So why don't all assets appear in the statement of Financial position (balance sheet) you ask.
Well, lets take a look at another definition.
Depreciation An asset shall be depreciated on a systematic basis over it's useful economic life
Such implies that short life assets should be expensed as if it's expected to last less than a year then one would have 100% first year depreciation.
But of course a stapler is an asset used over more than one period but we would not capitalise that. Why not.
Well that comes down to the next definition.
Materialarity An item is Material if its ommission or mistatement might reasonably be expected to influence the decisions of the addressee of the financial statements
What is material to an entity varies from one business to another. Gerneral accepted principles are that material balances in agregate are
Immaterial (any one of) : < 0.5% of turnover < 1.0% of total assets < 5.0% of profit before tax
Material (any one of) : > 1.0% of turnover > 2.0% of total assets > 10.0% of profit before tax
Anything between those figures is a matter of professional judgement.
The key to the above is material in agregate.
If you purchased a single small printer then it is unlikely to be material to the non current asset balance and should hence be expensed.
If you purchased 50 printers so that every desk in a small business had a personal printer in aggregate the purchase is likely to be material to the business and should hence be capitalised even though individually the purchases would not have been.
What is material to one business may be very immaterial to another.
The key is that the financial statements must present fairly the entities affairs as at the period end so careful judgement should be made as to when to capitalise an asset, individually or in agregate and when not to.
Simply setting an individual limit is not enough. The purchase needs to be viewed in the larger context of turnover, profit and toal assets combined with whether the asset was part of a larger program or was it a one off and what effect that purchase will have on the financial statements.
P.S.2 edited because as Mark rightly pointed out I has the arrows for materialarity the wrong way around. (doh)
-- Edited by Shamus on Thursday 7th of June 2012 12:22:06 PM
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I am a bit confused by assets - there was a discussion at work yesterday about whether something was an asset or not.
I'm quite new so I just listened. The gist of the conversation was that maybe the usual, if a item is over £ 100 it should be an asset, should really be increased as they have been using this amount for over 5 years.
When I started recently, I was told to use the asset nominal code for anything (not including purchases) over £ 100 so thats what i've done so far.
The limit for fixed assets is what ever you want, I have it set at £250. What I read was that if it was to have a useful life of over 2 years then it needs to be capitalised, however I also learnt that anything that has a useful life of less than a year should be an expense . Someone on here once said that a stapler has a useful life of longer than 1 year yet you wouldn't capitalise it.
I'm sure someone will tell you where to find the exact rules on capitalisation, however for me if it costs more than £250 and will last longer than a year, and isn't bought for stock then it gets capitalised. Also if we buy say £1000 worth of individual tools they generally get bunched together and put in tools as an asset.
The limit will vary by business - a company with a turnover of £10 million will capitalise items at a higher level than a sole trader who barely earns enough to pay tax.
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
. Someone on here once said that a stapler has a useful life of longer than 1 year yet you wouldn't capitalise it.
