What gets capitalized
Capitalize all costs necessary to get an asset ready for its intended use: purchase price, freight, installation, testing, and (for self-constructed assets) capitalized interest during construction. Repairs that merely maintain normal operating condition are expensed; those that extend useful life, increase capacity, or improve efficiency are capitalized.
Depreciation methods
| Method | Formula |
|---|---|
| Straight-line | (Cost − Salvage) ÷ Useful life |
| Double-declining balance | (2 ÷ Useful life) × Beginning book value (ignore salvage until the end) |
| Units of production | (Cost − Salvage) ÷ Total estimated units × Units produced this period |
EXAM TIP: Under declining-balance methods, never depreciate below salvage value — stop once book value reaches salvage.
Impairment (held-for-use assets)
US GAAP uses a two-step model for long-lived assets held for use:
- Recoverability test: Compare carrying value to undiscounted future net cash flows. If carrying value exceeds undiscounted cash flows, the asset is impaired.
- Measurement: If impaired, write down to fair value; the impairment loss = carrying value − fair value.
IMPORTANT: This is a key US GAAP vs. IFRS difference — IFRS uses a single-step recoverable-amount test and permits impairment reversals for most assets; US GAAP's held-for-use impairment losses are never reversed.
Assets held for sale
Once an asset meets the held-for-sale criteria (management committed to a plan, actively marketed, sale probable within a year, etc.), it's measured at the lower of carrying value or fair value less costs to sell, and depreciation stops.