Additions to fixed assets

[QRS]

I have a quick question on the capitalisation of fixed assets.

I know that if the cost of an item for example a computer is less than R7000, it can be expensed directly to the income statement.

Now I have a problem - What if a truck is bought in seperate parts - all below R 7000 - and then put together in the workshop. Total cost of all parts = R 150 000. Do I capitalise the R 150 000, or do I expense each part to the income statement?

Thank you

[Dave A]

The small item write-off allowance can't be applied to individual items of a set and the dining room set example comes to mind.

You can't buy each chair and the table seperately and use the small item write-off allowance on each item. You have to apply the full cost when assessing if you can apply the allowance.

[CLIVE-TRIANGLE]

You should capitalise the R150,000

The decision to expense or capitalise is seldom taken on the basis of value, rather on nature. The practise of expensing smaller acquisitions is actually based on the presumption that within one year, it will be worthless (have zero economic benefit), not on it's insignificant value, so to speak.

Off the top of my head, your R7000 limit is somewhat high, possibly way high

[Dave A]

Off the top of my head, your R7000 limit is somewhat high, possibly way high

Per interprative note 47 the small item write-off allowance threshold is R7 000.00 for the 2012 tax year.

[CLIVE-TRIANGLE]

Agreed Dave. But note that it is a capital allowance that allows you to write off wear and tear in full in the first year, which presumes that the spend was capitalized.

The financial decision whether to capitalise or expense a spend is taken on other factors and I don't believe it would be appropriate to expense anything less than R7000 for most small businesses. Without knowing anything about the business concerned my view might be pedantic; it might well be immaterial in this case.

[Dave A]

Ok - interesting point. And thinking about it, it's ultimately a contest between tax efficiency and simplicity.

I suppose there is nothing preventing a business from capitalising the small items, but claiming the full write-off allowance in the first year for tax purposes.
However, it does make tracking the tax position a little more complex.

Not a problem where there is reasonably sophisticated financial accounting management in place, but does that generally apply to typical small businesses?
Most often in small business KISS keeps them out of trouble.

[CLIVE-TRIANGLE]

Haha, it is never really simple.

You need to distinguish, and keep separate record, of assets and their depreciation, and assets and their tax allowances. The resultant difference between book values and tax values, multiplied by the tax rate, is accounted for as a deferred tax liability, or asset.

An example that we are all familiar with is the SBC concession where you can write off the full value of manufacturing plant and equipment on acquisition, and the remaining categories at 50/30/20.

To do that in your financial records would be wholly inappropriate. If you make use of the concession you should account for the tax effect of the difference as deferred tax.

The IFRS for SME's is the same in this regard as the normal IFRS, because the nature of capital expenditure (versus operating) is unaffected.

[Dave A]

You've got me looking at my IT infrastruture now. I keep buying new bits and bobs and expensing them straight away because they're below the threshold - but they certainly add up to a fair chunk of change over the course of a year.

[jasonpat]

A truck have the parts of different costs and when you combine it will become very costly because of depends upon the performance and labor cost.

[iessa]

Ok, what if the individual assets that do not make up a bigger assets ie they are stand alone assets are individually below R7000 but the total invoice is greater that R7000 eg. I purchase 20 screens at R2000. Individually below, cumulatively R24000. Do I still write it off?