New IRD Depreciation Rules.

May 2020

To help business cash flow, Inland Revenue has increased the threshold above which new assets must be capitalised from $500 to $5,000. This does not mean that not-for-profits should write off all assets under $5,000!

Inland Revenue issues depreciation rules and rates for Income Tax purposes only. They have no bearing on not-for-profit accounts. The accounting standards mandatory for registered Charities make no mention of Inland Revenue rules.

Non-Charities, which are Incorporated Societies, are also required by law to include their assets and liabilities in their financial statements, and they cannot simply be written off.

Standard accounting practice is to write off assets only where this has an immaterial effect on the financial statements. ‘Immaterial’ is in relation to the organisation; for an organisation with expenditure of, say, $30,000, writing off an asset purchase over $500 would be considered material to the accounts.

As a result, CCA will not apply a $5,000 threshold for capitalising purchased assets when preparing accounts, nor can we accept such a threshold for review or audit purposes for most organisations, as this would result in a significant distortion of an organisation’s financial position.

The rule on which assets to capitalise and which to ‘expense’ is largely a governance decision. Some organisations may want to record even small assets in their asset register, so as not to lose track of them, while others want the least hassle with depreciation. But whatever threshold an organisation sets, it needs to be reasonable considering the overall size of the organisation.

Also, any policy of expensing assets rather than capitalising them needs to be stated in Accounting Policies, as accounting standards do not automatically allow for such thresholds