What Assets Should be Capitalised

What does this mean?

To begin an asset is something of value that is owned or controlled, and the company expects will provide future benefit.
To capitalise an asset is to put it on your balance sheet instead of “expensing" it in the Profit and Loss. So, if you spend €1,000 on a piece of machinery or equipment, rather than declare a €1,000 expense, you list the machinery or equipment on the balance sheet as an asset worth €1,000. You then begin to depreciate the asset over its useful life. This is done by taking a depreciation expense each year and reducing the balance sheet value of the asset by the amount of the expense.
Essentially the process of capitalisation allows your company to spread the full cost of the asset over its useful life. This prevents a drastic impact in the Profit and Loss account for the period the asset was purchased in.

When to apply

An item of expenditure is recorded in the balance sheet as an asset, rather than an expense when both factors are met below.
  • Capitalisation limit is exceeded
It is normal for businesses to apply a materiality threshold.  Although there is no set value for capitalisation thresholds, items will normally only be capitalised if their value is over a certain amount. The amount depends on the size of the company and what capitalisation policy they have in place. Small items are expensed if they fall under the threshold as they are deemed too immaterial to capitalise. The purpose of the threshold is to prevent immaterial expenses being placed on the balance sheet when they should be recognised as an expense in the P&L.
  • The asset has a useful life of at least one year
If the company makes an expenditure that is expected to benefit the business and generate revenues for a long period of time, then this expense should be capitalised and depreciated over its useful life.


In some cases, major inspections are required of the asset even if no parts are replaced (e.g. Busses, airplanes). The cost of the inspection is recognised in the carrying amount of the item of property when the two factors above are met. Land and buildings are separable assets, and an entity shall account for them separately even when they are acquired together.

Initial measurement

A brief overview of what makes up the cost of an asset is outlined below:
  • Its purchase price
  • Any cost directly attributable to bringing the asset to the location/condition necessary
  • The initial estimate of the costs of dismantling and removing the item and restoring the site
  • Any borrowing costs capitalised which meet certain conditions
Items which cannot be included in the cost of an asset include:
  1. Cost of opening a new facility
  2. Advertising/promotional activities
  3. Staff training
  4. Administration or other general overhead costs

Financial Reporting Standard 

“Under FRS 102, if expenditure maintains the life of an asset or maintains its earning capacity then it is revenue expenditure.  If the expenditure provides incremental future benefits, that is, it improves the earning capacity or extends the life of the asset then it is capital expenditure.  This may require some judgement” (FRS 102). Replacing some parts in a machine may not lengthen the life of the machine but can make it more efficient and so make is a long-term future benefit for the company. Deciding to capitalise or not to capitalise is not straightforward and depends on how you argue the case. If replacement parts are capitalised, then the old parts should be derecognised as we are not using them anymore.
Under IAS 16 rules a different approach is taken. Maintenance and servicing on a day-to-day basis of an asset is still a revenue expense but any addition is capitalised. These additions do not need to show an incremental future benefit and so there is no more judgement. The risk of fraud is reduced.
Reach out to our team of experts for more information at info@cooneycarey.ie.