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?

Comments

[anonymous]

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

[Steven Bragg]

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.

[anonymous]

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.

[Steven Bragg]

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