Assets
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.
Capitalise it or Expense it?
In accounting, if you purchase a significant item that you intend to use over a number of years, the price of that item is being spread out over those years, rather than put the whole lot as an expense in the year it was purchased. This is called ‘capitalisation’, and the apportionment of the expense over the years ‘depreciation’.
It requires a bit of extra accounting work, and organisations tend to want to avoid it if they can. In most cases we get quoted the IRD threshold for when an item must be capitalised, which at present stands at $1,000.
IRD rules exist for Income Tax reasons, but they are not accounting rules and are not consistent with the accounting standards that Charities or Societies have to use. In accounting, it has to be decided whether the purchase is ‘material’ (or significant) to the accounts overall, i.e. would it distort either the financial performance or the financial position if something was not capitalised and just put as an expense.
This depends on an organisation’s turnover and total assets, and also the total asset purchases for the year. Let’s say your organisation’s policy is to use a $1,000 threshold for capitalisation and is big enough that this would not normally be distorting. A purchase of a $999 item can then be just put as an expense, but if you had 10 such purchases over the year, it may still become significant, and these items may still need to be capitalised, even though each individual item is under a threshold.
Accounting is all about creating accurate and meaningful financial reports about an organisation’s financial activity and position, and this is one of those areas where the rules require a judgment call.
Work in Progress Assets
Sometimes an asset is not so much bought as built, and sometimes it is being improved on before being used. In accounting terms, an asset only becomes an asset once it is in a useable state, and all costs to bring it into that state are part of the capital expense of that asset.
For a building, all materials, labour, consenting fees, fees for consultants or planners, wages for the project manager (even if internal) and all some such are part of the building’s capital cost. If the ground has to be prepared first, or an old building be demolished on that site, that’s all part of it too. But only once the organisation actually moves in and uses it does it become an asset. Until then it is listed on the balance sheet as ‘work in progress’.
Some organisations buy a vehicle, or a trailer, which requires significant kitting out or customisations to be used for its intended purpose. Often branding is applied as well. The same principle applies here: absolutely all costs to bring it to its useful state, including the original registration, will be capitalised, and only once completed and being used does it become an asset and, in this case, will start to be depreciated.