Asset Accounting Policy

by Madison Garcia

An asset accounting policy defines how accountants should record asset procurement, disposals, expenses and changes in value. The policy is generally part of a company's larger set of accounting policies and procedures. A well-defined and documented asset accounting policy ensures that accountants treat asset transactions consistently. Having a policy on hand for outside certified public accountants simplifies the process of audits and tax preparation.

Capitalization Threshold

Companies should decide on criteria to capitalize assets. Accountants track the purchase price, residual value and depreciation amount for capitalized assets over a number of years. Many small to medium-size purchases, such as laptops and printers, meet the technical definition of an asset but aren't worth tracking. Most companies choose to expense small asset purchases immediately and only capitalize big-ticket assets. It's simplest to set a dollar limit for accountants and identify a few characteristics of assets that should be capitalized. For example, the University of Norte Dame requires capitalized assets to be worth $5,000 or more and to be durable and free-standing.

Depreciation Methods

Accountants have a few choices in the way they depreciate assets. U.S. generally accepted accounting principles allow companies to depreciate using straight line, units of production, declining balance and sum of years' digits methods. Straight line depreciates assets evenly over the asset life, whereas declining balance and sum of years' digits depreciate a larger amount in the beginning of the asset's life. The units of production method depreciates assets based on their actual rate of usage. A company can choose to depreciate all assets using one method or assign methods for different types of assets. For instance, a restaurant could require large copiers to be depreciated using units of production but would depreciate kitchen equipment using the straight line method.

Inventory Valuation

Companies can choose how they value their inventory. A company's asset accounting policy should identify the specific inventory valuation method it uses. Accountants can use first in, first out, or FIFO; last in, first out, or LIFO; weighted average; or specific identification to determine monthly cost of goods sold. FIFO uses the oldest inventory for cost of goods sold, whereas LIFO assumes the most recently acquired inventory as cost of goods sold. Weighted average uses an average costs incurred, and specific identification is calculated based on the specific transnational costs for that item. The specific identification makes sense for companies with small, varied inventory items, while companies with more homogeneous and large-scale inventory generally use the other methods.

Intangible Assets

Not all of a company's assets are readily apparent. Depending on its situation, a company could have intangible assets, such as trademarks, patents, deferred tax assets and goodwill. For example, a life sciences company could have research and development patents, and a company that recently acquired a subsidiary could have goodwill. Management should identify relevant intangible assets that the company holds and identify a policy to amortize the assets or test them for impairment on a regular basis.

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