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Fixed Asset or Expense?

So you bought a laptop computer. That’s great!

Quick question: Is it an asset or is it an expense?

Answer: It depends.

Don’t you hate that? 

For one organization the laptop is an asset. For another organization, it’s an expense. It all depends on the organization’s capitalization threshold.

The what?

Capitalization Threshold

Let’s define capitalization threshold: It’s the dollar amount at which a long-lived asset is treated as a fixed asset rather than as an expense. This dollar amount is defined in the organization’s capitalization policy.

Flashback to the Three Buckets

We refer you to our previous post Nonprofit Balance Sheet Framework. It helps to understand the three buckets of transactions before you can put fixed assets into perspective. Sometimes expenditures should be recorded in the Net Assets Bucket as an expense. Other times the expenditure should be recorded in the Assets Bucket as an asset. Sometimes an expenditure goes into the Liabilities Bucket if it is a payment on a loan (which may be a result of acquiring an asset, such as a vehicle or a building.) Today we are focusing on when purchases of property and equipment belong in the Assets Bucket as a fixed asset vs. when they should go into the Net Assets bucket as an expense.

What No Capitalization Policy?

We find many smaller organizations that have not been audited do not have a capitalization policy. Hence there is no guidance on how to record the purchase of property and equipment as a fixed asset or as an expense. The result is inconsistent bookkeeping and generally a big mess in the fixed asset accounts. Lacking a capitalization threshold, we usually see a tendency to code too much to fixed assets, such as $45 bookcases and $13.95 extension cords.

If your organization has an audit, you will need to adopt a capitalization policy. FASB ASC 958-360-50 requires disclosure in audited financial statements of significant accounting policies and procedures concerning property and equipment, including “the capitalization policy adopted.” Even if you don’t plan to have an audit, it’s a good idea to have this policy!

What’s a Fixed Asset?

The other word that needs defining is “fixed asset.” Fixed assets refer to tangible property and equipment with a useful life of more than a year  (except collection items and assets held for investment purposes) that meet or exceed the organization’s capitalization threshold. Assets with a useful life of more than a year are also referred to as “long-lived” assets.

Common Asset Categories

Common categories of fixed assets include:

  • Land
  • Buildings
  • Construction-in-progress
  • Leasehold Improvements
  • Vehicles
  • Furniture and equipment

What Amount Should You Use as a Capitalization Threshold?

As a nonprofit organization, you get to define (within reason) the amount long-lived property and equipment must cost before you classify it as a fixed asset. Most of the smaller nonprofits that we have worked with use a capitalization threshold of $500 or $1,000.  Larger nonprofits with multi millions in revenue may decide to use a higher threshold such as $5,000.

Assume in the scenario presented at the start of this post that the organization has a $1,000 capitalization threshold. The laptop has an expected useful life of three years. If the laptop cost $999, even though it is a long-lived asset, it falls below the capitalization threshold and therefore would be coded to expense (on the profit and loss report). If the laptop cost $1,000 or more, it would meet the capitalization threshold and therefore it would be coded to fixed assets (on the balance sheet). Just $1 makes the difference!

Where To Code That $999 Laptop

A handy expense account to have is an account called Furnishings and Equipment < $1,000 (or whatever your capitalization threshold is).  That way a $999 laptop would not get coded to Office Supplies, or worse, Miscellaneous Expense. Now you have an appropriate place to record it and the account is clearly labeled for the dollar amount of your capitalization policy.

Benefits of a Higher Capitalization Policy

We can think of several benefits of a higher capitalization policy:

  • It brings you a little closer to true cash basis accounting since more asset purchases will go to straight to expense instead of being recorded as an asset.
  • You will have fewer fixed assets which means less accounting work. Fixed assets must be depreciated each year and removed from the balance sheet when they are discarded or sold. It’s a lot less hassle to simply record the asset purchase to expense.
  • You will have a smaller list of fixed assets to physically audit (meaning keep track of) each year. You can still put controls in place to manage smaller non-capitalized assets such as laptops.

Sample Capitalization Policy

Search the Internet on “capitalization policy” and you will find examples of wording to help you craft your own policy. Here’s sample wording from a Financial Policies & Procedures template we offer:

  1. The Organization records fixed assets meeting the following criteria to the Property & Equipment account using a detailed description:
    • Useful life of more than one year
    • Cost of $500 or more;
  2. The Executive Director annually does an inventory of fixed assets, updating records for disposals or impairment;
  3. The Executive Director reviews and approves equipment leases and provides lease documentation to external accountant for proper recording.

Or make your threshold amount $1,000. You can also increase the threshold amount in the future if your organization grows.

If your organization already has a capitalization policy, what is it? Please let us know in the comments section below!

7 Comments

  1. Melissa on April 13, 2018 at 6:37 am

    How would you handle something like the development of an app? The cost of the developer, sound design, research fees, are all paid separately (mostly in increments > $1000) and the completed project will have cost much more than that threshold.

    • Carol Wilson and Carrie Schulz on May 28, 2018 at 3:11 pm

      Costs to develop software are capitalized after a certain development stage is reached, depending on whether the software is for internal use or is to be sold or leased to customers.

      Per ASC 350-40-25, costs to develop internal-use software incurred during the “preliminary project stage” are expensed. The preliminary project stage includes determining software requirements and selecting vendors. Once the project reaches the “application development” phase, these costs are capitalized. Training costs and maintenance costs during the “post implementation-operation stage” are expensed as incurred.

      Per ASC 985-20-25, research and development costs to establish the technological feasibility of computer software to be sold or leased is expensed as incurred. After technological feasibility is reached, expenses to develop the software are capitalized.

      We expect to see more conversation around this topic and potentially new accounting standards issued as software development becomes increasingly important to our economy. We hope this answers your question! You can access the FASB standards at https://asc.fasb.org//.

  2. L on May 19, 2018 at 1:10 pm

    You may not want to limit your advice to suggestions but emphasize that your users follow the latest accounting rules and tax law.

    https://asc.fasb.org/imageRoot/56/92564756.pdf

    https://www.irs.gov/pub/irs-drop/n-15-82.pdf

    • Carol Wilson and Carrie Schulz on May 28, 2018 at 3:19 pm

      Thank you for reminding us to be mindful of referencing important accounting standards.

      The first FASB link you provided is to Accounting Standards Update (ASU) 2016-14. We recently touched on aspects of ASU 2016-14 in our post “New Take on Net Assets,” published 5/21/18, and “ASU 2016-14: Cash and Nonprofit Liquidity,” published 11/6/17. We anticipate blogging more about various aspects of ASU 2016-14 since this new standard makes many changes to nonprofit financial reports.

      The IRS link you provided is relevant only to for-profit businesses or to nonprofits that generate unrelated business taxable income. In this blog we have not yet covered any topics pertaining to taxable income, though it may be an area we explore in the future.

  3. Dee on December 19, 2018 at 10:33 pm

    We started with a standard $500 capitalization rule, but reduced it to $250 the first two years so that we would have more show up on the balance sheet! We will probably raise it back up, possibly to $1000 since we have grown.

  4. Pat Kain on March 7, 2019 at 3:25 pm

    We are a non-profit who recently had a 2 trailer log truck load of firewood logs donated to us which will eventually be cut up and then donated to seniors as firewood. We also have a large shed of cords of firewood in reserve. Question:
    Should the FMV of the truck of logs be an asset or an expense as it may be more than a year before it gets into the next stage.
    Should the reserve firewood be recorded as inventory as it is donated usually within a year, possibly 2.
    Thank you.

    • Carol Wilson & Carrie Schulz on March 18, 2019 at 8:35 am

      Since you will be keeping the firewood for a period of time but plan to distribute it, recording it as an asset(raw materials or inventory) would make sense. As you distribute the logs you will then expense them.

      The reserve firewood should be the same.

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