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Asset vs. Expense

March 22, 2013

Tax Question:

When is a company expenditure considered an asset?

Facts:

There are three criteria for recognizing an expenditure as an asset for accounting purposes. The expenditure must meet all three criteria to be considered an asset. The tax treatment is similar but not identical to accounting treatment. Generally, for tax, all items are expensed unless they are capital in nature as defined by tax criteria. This FAQ covers accounting, not tax treatment. Tax and Accounting treatments can be different.

Discussion:

There are times in which we may want to delay an expense and recognize it as an asset for accounting purposes in order to match the expense with the revenues when they occur. An example would be an intangible asset such as goodwill or a deferred development cost. In order to recognize the amount as an asset, it must meet the following three criteria:

  1. The company must control access to the asset. A good test of this is whether the company is able to sell the asset. You may be able to sell a car or a piece of equipment. In contrast, you may have exclusive rights or a membership that is non-transferable and thus unsaleable. If it is unsaleable because it is non-transferrable, it cannot be claimed as an asset.
  2. The transaction must have already occurred. You cannot claim an item as an asset if you made an agreement to purchase the item in the future, even if you have paid a deposit. To claim the asset, the purchase must have already taken place.
  3. There must be a future economic benefit associated with the expenditure. For example, equipment purchases may help the company manufacture more items which will increase cash flows. A vehicle will allow you to visit clients or potential clients which will also increase cash flows. If there is no future economic benefit, then it is not considered an asset.
 

Once you have determined that the expenditure is an asset, the asset is then depreciated over its useful life.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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