How to set a capitalisation threshold you can defend
A capitalisation threshold that is too low buries finance in immaterial assets. Too high and things worth controlling disappear from the register entirely. The capitalisation threshold decides which purchases become assets on your balance sheet and which are expensed immediately. Set it too low and you drown the register. Set it too high and you understate what the organisation controls. Here is how to choose and how to apply it consistently.
In this article
The capitalisation threshold: the short version
- No standard prescribes a threshold. It is a materiality judgement for your organisation.
- Model candidate thresholds against last year’s purchases before choosing.
- Separate the capitalisation threshold from the tracking threshold. Laptops belong in the gap.
- Apply per item, not per invoice, and include costs of getting the asset working.
- Accounting depreciation and tax capital allowances are different calculations. The register supports both.
What the threshold actually does
Two things at once, and they are worth separating.
Accounting. Above the threshold, expenditure is capitalised and depreciated over the asset’s useful life. Below it, expenditure hits the profit and loss account in the period it is incurred.
Operational. The threshold is usually also what determines whether an item goes into the asset register and gets tagged. That is a convention rather than a requirement, and separating the two is often the right answer, as below.
Choosing the number
There is no universally correct threshold. Reporting standards do not prescribe one, because the relevant test is materiality, which depends on the size of the organisation.
The practical questions to work through with your accountant:
- What is material to us? An amount that would not change any reader’s view of the accounts does not need capitalising.
- How many items would each candidate threshold capture? Model it against last year’s purchases. A threshold that adds a thousand low-value lines a year is the wrong threshold.
- Does anything external constrain us? Public sector bodies, regulated entities and donor-funded organisations may have a threshold set for them.
- Is the administrative cost worth it? Capitalising an item costs something to track and depreciate every year for its life. Below a certain value that cost exceeds the benefit.
Separate the accounting threshold from the tracking threshold
This is the refinement most organisations miss, and it resolves the usual argument.
| Capitalisation threshold | Tracking threshold | |
|---|---|---|
| Purpose | Balance sheet treatment | Physical accountability |
| Set by | Finance, on materiality | Management, on risk of loss |
| Effect | Asset is depreciated | Asset is tagged, has a custodian, is verified |
| Typical items in the gap | Laptops, phones, tablets, power tools, small medical devices |
A laptop may fall below the capitalisation threshold in a large organisation and still be exactly the kind of item that walks out of the building. Tracking it without capitalising it is entirely legitimate: the register simply flags it as tracked-not-capitalised so it appears in verification but not in the depreciation schedule.
Applying it consistently
Per item, not per invoice. Twenty chairs on one invoice are twenty items assessed individually against the threshold, not one purchase of twenty times the value. Otherwise the same chair is capitalised or expensed depending on how procurement batched the order.
Include the costs of getting it working. Delivery, installation, commissioning and directly attributable set-up costs generally form part of the capitalised cost. Training and ongoing support generally do not.
Handle sets deliberately. Items that only function together and would be disposed of together can reasonably be assessed as one asset. Items that are independently usable should not be aggregated to cross the threshold.
Apply it going forward. Changing the threshold does not usually mean revisiting assets already capitalised under the old one. Note the change and the date so the register is explicable.
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Subsequent expenditure
The threshold applies to later spending too, and this is where inconsistency creeps in fastest.
The test is whether the expenditure extends the asset’s life or capability beyond its original assessed standard, in which case it is generally capitalised and added to the asset, or whether it maintains the asset in its existing condition, in which case it is a repair and expensed.
A new engine in a vehicle is typically capital. A service is typically not. Write the rule down, because two identical vehicles treated differently for reasons nobody recorded is the classic finding on this.
A note on tax
Accounting depreciation and tax capital allowances are separate calculations under Kenyan tax law, and they routinely differ in both rate and basis. Your capitalisation policy governs the accounts; the tax computation follows the Income Tax Act and its rules on wear and tear and investment allowances.
What the register has to do is hold cost, acquisition date, category and disposal detail at asset level so both calculations can be prepared and supported. Confirm the current tax treatment with your tax adviser rather than assuming it mirrors your accounting policy.
Common questions about capitalisation threshold
Is there a legally required threshold in Kenya?
Not a single universal one for commercial entities. Public sector bodies and donor-funded organisations often have one imposed, and regulated sectors may too. Confirm your own position with your accountant.
Can we have different thresholds for different asset classes?
You can, and some organisations do for classes such as IT. It adds complexity and it must be documented, so only do it where there is a real reason.
What about assets received as donations?
They are recognised at fair value at the date of receipt rather than at nil, and assessed against the threshold on that value. Record how the valuation was arrived at.
Should the threshold include VAT?
Use the amount you actually capitalise in the accounts, which depends on whether the tax is recoverable for you. Whichever basis you use, use it consistently in both the register and the ledger.
How often should we review the threshold?
Every few years, or when the organisation’s size changes materially. Reviewing it annually creates churn for little benefit.
What happens to items below the threshold?
They are expensed. If they are also above your tracking threshold, they still get tagged, a custodian and a place in the verification round, flagged as tracked but not capitalised.
Whatever capitalisation threshold you set, decide separately how low-value but attractive items will be controlled. Laptops and phones below the line still need a custodian, even if they never appear in the accounts.
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