Hi Sammy,

Jo's answered all of this perfectly but as she doesn't feel comfortable commiting to advising in this instance I'll just step in to confirm that there is nothing wrong with her answer.

for all assets, not just computers :

• You look at the asset and determine whether it is likely to be sold at the end of its life or just scrapped (or left in a cupboard).
• You determine how long that useful economic life of the asset will be before it needs to be replaced.
• You decide whether the asset will lose a lot up front and less later or whether there will be an even dispibution of consumption.

Remember when depreciating something that (unless revalued) there is not intended to be any link to the market value of the asset over its life. Depreciation is simply the systematic consumption by the business of the asset over it's useful economic life and is based purely on its value to the business (relative to it's purchase prce) not its value in the market.

I would argue that a computer is as useful to the business on it's last day of service as its first so would personally adopt straight line depreciation although I have no arguement with those who go down the reducing balance path.

Generally computers are written down to zero residual value over three years. The computer may still be in working order after that time, it may even still be in use by the business but the expectation at the outset would be that it would be replaced after three years because the speed that technology moves at renders it pretty much obsolete after that time.

Remember when looking at depreciation that whilst it has an effect on paper profitability for the business it has no effect at all on tax. (depreciation being an accounting, not tax concept).

Hope that helps,

Shaun.

In a past life, as an auditor, I used to come across this quite a lot.

In theory, it is never wrong to capitalise things that will deliver benefit to a business over more than one financial year. However, if you used that definition for capitalisation, you'd be buried in work recording everything in a fixed asset register and calculating depreciation on it. The financial statements would be more "accurate", sure, but not materially so. The accounting policy set by a business for fixed asset capitalisation seeks to establish a threshold value above which there would be a risk of material misstatement of the financial statements if assets above that value were not capitalised. Georgie has experience of a set of accounts where the capitalisation threshold is set at £500. The Department of Agriculture and Rural Development (a Northern Ireland Government Department) has an accounting policies note stating: "Expenditure on property, plant and equipment of over £5,000 is capitalised." Clearly, what is material to a small business will be different to what is material to a Government Department.

Occasionally, I used to come across junior auditors raising error schedule entries where a businesses capitalised something costing less than the capitalisation threshold. My response was always to remove the item from the error schedule. If anything, the accuracy of the accounts is improved by such an action. The problem is more that the extra workload created outweighs the benefit of the extra accuracy (which by definition is not material to the results of the business). If it happened on an industrial scale a management letter point may have been raised asking management to consider the costs/benefit considerations of capitalising below the threshold.

So, if the capitalisation threshold for a business is £500 and I capitalise a phone costing £250, it is not "wrong", just unnecessary for efficient and materially correct bookkeeping.

Edit: Shaun's post appeared while I was drafting the above. I agree with everything Shaun has said.