Capitalization and Depreciation Guidelines
Saints John and Paul Catholic Church
Created: January 30, 2015
Created by: David Ortega, Business Manager. Finance Council.
Reviewed:David Ortega & Finance Council
Revised: May 21, 2015
Introduction
Our parish operates on a cash basis accounting system. Capitalization and depreciation are practices that are more appropriate for an accrual accounting system. However, our parish must account for purchased fixed assets. Fixed assets are capitalized rather than expensed.Ss. John and Paul Parish follows the Diocesan recommendation to capitalize assets and record depreciation schedules on its financial statements. The Diocesan capitalization policy is found in section 305.1 on pp. 29-36 of the 2014 Parish and School Resource Manual for Finance and Technology.Our parish, under the advisement of the Finance Council and Pastor, has the ability to develop a local policy that best suits our needs and is in conformity with the Generally Accepted Accounting Principles as well as IRS guidelines for Financial Accounting found in Chapter 35 of the Internal Revenue Manual(IRM) available at
Discussion of Terms
The Resource Manual provides the best discussion and definition of terms. A summary of some of the key terms are discussed here:
Capitalized costs-include the costs associated with the purchase of equipment and property that is used over an extended period of time. These costs are categorized as "fixed assets" and include more than just the purchase price of the assets. The costs include the labor associated with putting the equipment or property into use. The following is a list of costs that can be capitalized:
- Cost of the fixed asset:What you paid for the equipment, furniture, structure, vehicle, or other asset.
- Sales tax:What you were charged in sales tax to buy the fixed asset.
- Shipping and delivery:Any shipping or delivery charges you paid to get the fixed asset.
- Labor & Installation charges: The IRS and standardized accounting rules allow for the cost of putting property and equipment into service to be added to the direct cost of purchasing the property and equipment for the purpose of capitalization. This is because the equipment is not usable until it is properly set up and in working order. Include any charges you paid in order to have the equipment, furniture, or other fixed asset installed on your business’s premises. Common labor costs that you can capitalize include the cost of assembly, construction and architecture. The key to including the labor as part of the fixed asset cost is that the labor must be directly related to putting the property or equipment into service, and the labor costs are tracked separately from any other work that may be done by the employee or contracted labor personnel.
- Other costs:Any other charges you need to pay to make the fixed asset usable for your business. For example, if you buy a new computer and need to set up certain hardware in order to use that computer for your business, those setup costs can be added as part of the cost basis of the fixed asset (the computer).
- Note: As per Diocesan discussion, painting is normally not capitalized. However, if the painting product is designed to preserve and extend the life of the building surface, it should be considered for capitalization. Our parish capitalized the water sealant and painting of the bell tower in FY 2014-2015. During a Diocesan business meeting it was stated that carpet is a grey area. For additional examples of items that can be capitalized, refer to the Resource Manual.
Dollar threshold-The Resource Manual states that, “The Finance Council should establish a dollar threshold for the capitalization of fixed assets” p. 29.The Finance Council has advised our parish to capitalize assets equal to or greater than $2500. Threshold should be evaluated every 5 years to determine if an adjustment is needed.
Fixed asset- includes the equipment and property that a company uses over an extended period of time. The costs of the assets are capitalized and then expensed on the books through depreciation, depletion and amortization over the useful life of the assets.
Useful life-Internal Revenue ServiceManual details how long each asset is considered to have a useful life (Section 6, part 5).Property and equipment is useful over the course of producing many products and services, and a bit of the costs of the property and equipment is expensed indirectly against each product and service.Useful life must be greater than one year.