March 2017

Assets in Cash Accounting

With the advent of the new charity rules, many organisations have ‘reverted’ from accrual to cash accounting to make their life a bit easier. This does not just affect charities: other not-for-profits, such as sports clubs, have also started adopting cash accounting as the new ‘acceptable’ way to do it for small groups.

No Depreciation

When converting accrual-based financial statements to (mostly) cash, depreciation on fixed assets is removed. This means that suddenly your assets appear in your financial statements at their original cost price, and this has led to some confused queries from our clients.

It’s true, your fixed assets are not worth now what they were when you purchased them. But chances are that your depreciated assets had too low a value in your financial statements, especially if you used IRD rates – which was not helpful either.

The original cost price of an asset is not meant to be used to calculate your organisation’s net worth. This figure, also called equity, is not calculated at all in cash accounting.  It is only meant to show a reader of your financial statements what you have.

Or Is There?

Nevertheless, some clients have asked whether it is okay to continue showing a depreciated value for their assets in cash accounts. The answer is: maybe.

There must not be depreciation in your Statement of Receipts and Payments/Cash Flows as it is a non-cash expense. However, the Tier 4 standard (that non-charities can adopt or partly adopt if they wish) allows to show fixed assets at ‘valuation’. It can be argued that applying depreciation against fixed assets is a valid method of valuing such assets, provided the depreciation is based on a realistic assumption about the lifetime of each asset, and the method you used is explained.

What’s also important is that your asset register as a whole is reasonably accurate, meaning you should de-clutter it every year and remove any items that are no longer in use.

Significant Assets Only

The Tier 4 standard asks organisations to include all assets that are ‘significant’. Elsewhere it is explained that ‘significant’ is used synonymously with what an accountant understands to be ‘material’. Most auditors would consider an asset material if its value is more than 1% of the total value of all assets (not just the fixed ones) of the organisation. So if you have $100,000 in the bank and no other assets, anything below $1,000 would not be considered material or ‘significant’.

However, if you had two assets both worth about $900, or a whole raft of smaller items probably exceeding $1,000 in total, this would make it significant again.

December 2016

Taking Stock of your ‘Fixed’ Assets

‘Fixed’ assets can be a very significant part of your Balance Sheet and for many organisations are the core of what they do. Yet we see rather a lot of libraries without books, toy libraries without toys or sports clubs without equipment or uniforms on their statements.

This is probably because these are the kind of ‘fixed’ assets that are quite mobile. There are also generally rather a lot of them, which means they are rather hard to keep track of individually. So even though they are not ‘consumables’ and provide economic or service value for a few years they are more often than not treated like any other expense by the organisation.

There are some fairly simple approximations that can be used to calculate a reasonable value for such items, even if they are not being kept track of individually, but an organisation still needs to know how many of such items there are. It is not a bad idea to count them at the end of the financial year, just like you would in a stocktake.

Another problem that we often strike is that organisations have no record of what the ‘fixed asset’ figure in their financial statements actually stands for. These are assets purchased some time ago, which keep being depreciated in bulk even though no-one knows what they actually are.

In that case the best approach is to create a new list of all the assets you own. If necessary, their value can be estimated by finding similar items for sale on TradeMe.

Best practice to prevent this from happening is to record newly purchased items in your asset register in a more identifiable way. For example just putting ‘computer’, ‘laptop’ or ‘new desk’ will not allow you in a few years’ time, when you replace or dispose of this item, to identify exactly which one it was.

The other main benefit of a well-maintained asset register is knowing what you have, as this makes it less likely for items to disappear without this being noticed.