What is Capitalization Policy?
A capitalization policy is a written internal rule that defines when a business records an expenditure as a long-lived asset (capitalises it) instead of charging it to the income statement as an expense in the period incurred.
How It Works
- Set a minimum monetary threshold below which all expenditures are expensed.
- Add a minimum useful life requirement, typically more than one year.
- Specify which cost components are capitalised — purchase price, installation, delivery, testing.
- Address bulk purchases and component accounting where required by IFRS.
- Document approval levels and how the policy is reviewed annually.
Saudi Context
Saudi entities applying IFRS for SMEs or full IFRS must align the policy with IAS 16. ZATCA accepts company-level thresholds for income tax and zakat purposes as long as they are applied consistently and disclosed in the financial statements.
Example
A trading company sets the threshold at SAR 5,000 and a useful life of two years. A SAR 4,200 office printer is expensed in the period of purchase. A SAR 12,000 server with a five-year life is capitalised and depreciated over its useful life.