Hi folks, Just curious what kind of thresholds your companies use - to decide whether to capitalize an asset or not - record a prepaid expense - force a PO to be created vs charged on a card or submitted as a T&E expense Trying to standardize how we treat these items here. I know every industry is different, just curious to see what the values are. Thank in advance.
What kind of thresholds are you folks using for CapEx, Prepaids, PO's?
Answers
I've used:
Capitalize: $5k
Prepaid: Since there has been minimal pre-paids, what ever came in
CC/PO: Not so much a dollar amount, but a classification: Air Fair/Hotel (Trip), Equipment vs expendables, etc.
We use $2K for prepaids and $1K for fixed assets. Everything goes on a PO, unless its a transaction deemed appropriate for a P-Card. This is for a manufacturing company.
I went with same threshold for capex and prepaids - $1k. For a recurring revenue subscription business.
Cap ex we use twenty five hundred. Prepaids a thousand, although we base them more on the nature of the expenditure; annual software support, insurance, service contracts are the majority of ours. We use purchasing cards when they fit the situation; one time vendor, online e purchase, no established credit and track them in a log. Otherwise POs across the board.
We use $5K for both capitalization and prepaids. Credit cards are used for travel expenditures.
Size matters here. The threshold should have some relationship to company size.
Lyle, great point -- any ideas for rules of thumb on threshold-to-size ratios?
We use $100 per month for prepaids. so if the expense will be less than $100 per month if we pre-pay it, then we expense it, If the expense will be greater than $100 per month, we prepay and recognize the expense over time.
We use $3k for cap ex and prepaid at $1k. Everything goes onto a PO. I also work for a manufacturing company.
Cap ex was $1K. I tried to no avail to get it raised. Prepaids were $5K. Mostly maintenance agreements, advertising and promotions, conferences, etc.
We use $5K for CapEx. On prepaids, I only do it if the expense crosses into future fiscal years.
CC/PO: We have credit cards for T&E and fuel. Most items that are purchased outside of this require a purchase req to be approved by the supervisor or project manager.
When setting CapEx capitalization limits, one important factor to consider is company valuation as expressed through EBITDA. For small companies (under $10 million revenue), a lower capitalization limit increases EBITDA by moving expense to the balance sheet. This is especially true for a small growing company with substantial CapEx. This is even more important if the company is anticipating being sold in the near future as EBITDA is a key driver of the company's sale price.
I use $2,500 as my capitalization floor for a single asset and $5,000 for a group asset purchase. For prepaid assets the quarterly spend must exceed $1,500 and one-time expenditure for an annual prepayment is $6,000.
Generally, credit cards are used for all T&E expenses and employee home office equipment and supplies (controlled via budget process) without POs, but any other non-recurring expenditure requires a PO.
One thing I would add about credit cards: where individuals have to pay the card you are more likely to get timely expense claims with accurate paperwork than if the company automatically pays the card's balance each month and asks the employee to justify the expense later.
We use 2.5k for capitalization, PP if expense is in the same quarter we expense otherwise we have greater than 2.4k for the year, T&E we don't have limits - managed through the trip authorization policy, P-Cards depends on the authorized purchaser anywhere from 1-10k. Currently all items under 500 are done without purchase orders, but with SAP implementation that will be going away. All items will require a purchase order unles purchased on a P-Card.
$5K for capital expenditures.
Cap limit at $5 K, pre-pay/cc limit $2 K but convenience items (ie office furniture) are prohibited.