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
Hooked on Depreciation?
December 2024
‘Depreciation’ is the allocation of the cost of purchasing and installing a fixed asset over the time you expect to use it. For example, if you buy a $3,000 computer system, which you expect to use for five years, you should use a 20% per year depreciation rate. Contrary to public perception, depreciation has nothing to do with loss of market value.
Occasionally, the resale value of an asset needs to be taken into consideration. If you buy a vehicle, for example, intend to use it for five years and then sell it on, you will calculate depreciation only on the difference between the purchase price and the expected sale price. Many buildings would not depreciate at all for this reason – in fact, the expected sale price will in many cases be higher than the cost of obtaining the building in the first place.
Whether an asset needs to be ‘capitalised’, and depreciated over time, depends on its relative significance to your accounts. For the purpose of an income tax return, IRD allows assets under $1,000, purchased individually, to be put as an operational expense. This is not an accounting rule and does not apply to accounts produced for any other purpose than Income Tax.
In accounting, the ‘materiality’ principle applies: An asset, or several assets if taken together, would have to be capitalised if otherwise they have a significant effect on overall expenses, overall surplus/deficit, or the net assets on your Balance Sheet. Organisations can set an accounting policy specifying a threshold, as long as it doesn’t violate this principle.
To keep depreciation as realistic as possible, make a realistic estimate of how long you are likely to use this type of asset – you may know this from your own history – and come up with a reasonable depreciation rate from there. IRD depreciation rates tend to be on the high side for an asset’s average use in small not-for-profits, and you also want to avoid the ‘Diminishing Value’ depreciation method.