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    Which costs can I assign to a fixed asset?

    In general, the costs to assign to a fixed asset are its purchase cost and any costs incurred to bring the asset to the location and condition needed for it to operate in the manner intended by management.

    More specifically, assign the following costs to a fixed asset:

    • Purchase price of the item and related taxes
    • Construction cost of the item, which can include labor and employee benefits
    • Import duties
    • Inbound freight and handling
    • Interest costs incurred during the period required to bring an asset to the condition and location necessary for its intended use
    • Site preparation
    • Installation and assembly
    • Asset startup testing
    • Professional fees

    Also, assign to a fixed asset the cost of major periodic replacements. For example, an aircraft requires new engines and a building requires a new roof after a certain usage interval or time period. Upon replacement, the new items are recorded as a fixed asset, and the carrying amounts of any replaced items are derecognized.

    Do not assign the following costs to a fixed asset:

    • Administration and general overhead costs
    • Costs incurred after an asset is ready for use, but has not yet been used or is not yet operating at full capacity
    • Costs incurred that are not necessary to bring the asset to the location and condition necessary for it to operate
    • Initial operating losses
    • New customer acquisition costs
    • New facility opening costs
    • New product or service introduction costs
    • Relocation or reorganization costs

    Do not recognize as a fixed asset the ongoing costs of servicing a fixed asset, which typically includes maintenance labor, consumables, and minor maintenance parts; these costs should instead be charged to expense as incurred.

    Related Topics

    Overview of depreciation
    What does capitalize mean?
    What is a capital expenditure?
    What is the correct capitalization limit?
    When do I stop assigning costs to a fixed asset?

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    Reader Comments (44)

    Can you capitalize employee travel to get to the site to perform the work on top of the labor/benefits?

    August 5, 2010 | Unregistered Commenteranonymous

    It would be a moderate stretch to capitalize employee travel into the cost of a fixed asset. When the FASB set up its guidelines for capitalization, it said that you could include the costs of physically constructing an asset and all steps required to prepare it for its intended use. General practice has construed the guidelines to mean purchased goods and services, interest costs, and in-house labor.

    So, you may run into a skeptical auditor if you capitalize travel costs. If you really want to do so, then document your justification, and keep all of the supporting travel vouchers in one place, because they will probably be reviewed.

    August 6, 2010 | Registered CommenterSteven Bragg

    Can you capitalize travel and labor associated with product placement during a new store or relocating a new store? For example, a team of people specifically there to organize the new product on the new fixtures in either a new building or a remodeled/expanded building.

    September 22, 2011 | Unregistered Commenteranonymous

    No, that is a marketing cost and cannot be capitalized.

    September 23, 2011 | Registered CommenterSteven Bragg

    Can you capitalize travel costs associated with outside consultants who have been hired to build capitalizable software?

    July 14, 2012 | Unregistered CommenterBRJ

    It is an extremely long stretch to capitalize the travel costs of outside consultants, even when the purpose of their travel is to build capitalizable software. Your auditors would probably disallow the capitalization. Instead, charge it to expense as incurred.

    July 15, 2012 | Unregistered CommenterSteven Bragg

    Can the costs of relocating assets be capitalized? The purpose would be site preparation for the installation of a new asset, existing assets would be relocated.

    October 11, 2012 | Unregistered CommenterMW

    Only the cost of site prep for the new asset can be capitalized. you must charge the relocation costs for existing assets to expense as incurred.

    October 12, 2012 | Unregistered CommenterSteven Bragg

    Cable was installed for a capital project. After installation it was discovered that the cable was not the correct cable so it was removed and new cable installed. Per GAAP, can the original cable installation cost remain with the project or should the initial installation (labor) cost, the original cable cost, and the cost of removing the original cable be written off to expense?

    October 17, 2012 | Unregistered CommenterKatherine Longbotham

    Interesting question! This is not covered in GAAP at all. Based on the information that was available when the asset was capitalized, I would leave the capitalized asset alone, and charge the replacement cost to expense as incurred. Since I don't know all of the details of this situation, you may want to consult with your auditors if the amount related to the replacement is significant.

    October 17, 2012 | Unregistered CommenterSteven Bragg

    In order to have an inventory item assembled, we incur labor costs from an outside supplier. Can this labor cost be included in the Inventory account as an "Other Current Asset"? We count our inbound import freight in this way, and in order to be able to sell the assembled jack it needs to be assembled by this outside supplier.

    November 27, 2012 | Unregistered CommenterJody Margetts

    Outside labor costs can be included in the cost of inventory, though I do not see why you need to compile them in an other current asset account. It would normally go into some sort of outsourced production costs account.

    December 7, 2012 | Unregistered CommenterSteve Bragg

    Can you point me to the GAAP literature (ASC reference) that supports capitalizing sales/use taxes? We are having an internal discussion and this was brought up. Also, can you capitalize qualification costs on new machinery?

    January 18, 2013 | Unregistered CommenterWS

    Hi Steven! We had a building renovation at our company and we had to move several employees, their workstations and their equipment to a new building. We incurred additional rent and utilities costs on that new building for several months. Can those costs be capitalized to the cost of the building improvement?

    January 18, 2013 | Unregistered CommenterAl Anthony

    In short, no. Moving someone out of a building does not directly contribute to the inherent value of the renovation that takes place in their absence, so you should charge those costs to expense as incurred.

    January 18, 2013 | Unregistered CommenterSteve Bragg

    Is if fare to say that the total cost on the closing statement can be capitalized?

    January 23, 2013 | Unregistered Commenterbsherchan

    Can qualification costs associated with a new piece of equipment be capitalized as part of the machine? (i.e. we can't sell anything made by that machine until a quality product is proven through test runs)

    March 6, 2013 | Unregistered CommenterDaniel

    The basic rule for including a cost in a fixed asset is that it must involve bringing an asset to the condition and location necessary for its intended purpose. Testing to ascertain functionality is allowed under IFRS, but is not described under GAAP. I think you could probably capitalize the cost of testing under GAAP, but clear it with your auditors first.

    March 7, 2013 | Unregistered CommenterSteve Bragg

    If we have an asset that is not working as intended during asset start up testing and we hire a consultant to help us get it running as it should, can we include those costs in the fixed asset?

    March 12, 2013 | Unregistered CommenterCelesta

    Yes, I would say that you can include this cost in the fixed asset, since the cost is being incurred to bring it to the condition originally intended by management.

    March 13, 2013 | Unregistered CommenterSteve Bragg

    Can the cost of removal and re-installation (including the cabling and connectivity) of telephone equipment from an old building and reinstalling the same equipment in a new building, be capitalized? The equipment is expected to be used for at least a few (2-4) more years.

    April 4, 2013 | Unregistered CommenterMonte Stone

    Yes, you certainly can. You would have to derecognize the equipment from the old building asset and add its net book value to the new building.

    April 5, 2013 | Unregistered CommenterSteve Bragg

    Can your Finance Costs be capitalized when the underlying asset is a heavy truck?

    April 17, 2013 | Unregistered CommenterM Folsom

    So earlier someone asked if employee travel time to the site is capitalizable, and you said it might be a stretch. My question is if the employee is transporting a part that needs to be installed, and the part can be capitalized, can the travel time then be deemed "freight"?

    April 26, 2013 | Unregistered CommenterJB

    Can you capitalize labor from in-house employees whose involvement in a capital project is making decisions on which bid/proposal to use, answering managers questions from the site where the work is being done, and basically consulting from afar, as needed, on projects for the sites? Also, if the employee then has to travel to the site to confirm the work has been done properly and that the project is finished, are their labor hours capitalizable? If so, what about their travel costs?


    April 26, 2013 | Unregistered CommenterAJM
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