In establishing a consistent asset policy, the determination of base units is of prime importance. The base unit is the smallest asset component. It is the basic unit in which the property records are maintained.
The definition and policies for establishing base units should be written by the asset manager and accountant. It should be reviewed and approved by the company’s senior management. The policies that establish the base unit will have a long-term impact on the decision of what to capitalize versus expense in the current period. This will have great impact on the company’s financial results. It also affects the ability to control assets and the expense of the asset accounting process. The base unit is the smallest item capitalized. All components of a base unit are capitalized as part of the base unit in initial purchase. Subsequent replacements of components will be expensed when purchased.
Definition Of Base Unit
Little authoritative documentation has been done on establishing a base unit. The only definition currently cited is contained in the Institute of Management Accountants (IMA): Statement on Management Accounting 4J. It states:
Base unit is the least expensive cost objective to be capitalized. If a computer system is capitalized as a single asset, then the computer system is a base unit. If a central processor (CPU), the disk drives, and each work station are recorded as separate assets, then a CPU is a base unit as are the disk drives and work stations.
The definition of cost objective is a function, organizational subdivision, contract, product or other work unit for which arrangement is made to accumulate and measure cost. (IMA Statement on Management Accounting 2)
It is easy to apply these definitions for a specific base unit. A computer or a disk drive can be described exactly. Its limits are precisely established.
It is quite another thing to write a definition of the generalities of a base unit. Abase unit can be an entire building or each of its components, an entire assembly line or its components.
The definition of a base unit must be established for each individual company. In this post, the elements that must be considered and how a general definition may be written will be discussed. Be aware that each industry and each company within it will have different requirements.
Further worth reading for Establishing Base Unit Of Asset: