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GAAP For Non-Profits › Specific Financial Statement Items

Capital Assets

Capital Assets Defined

A capital asset is either tangible or intangible. A tangible or "fixed" asset is a physical thing. An intangible asset can be described as a right to control or use some benefit, for example a right to use software or a copyright.
To be a capital asset, there must be some type of service or benefit that will be derived over time.
To be an asset of the organization, it need not be owned but only controlled.
A collection of works of art, historical treasurers or other similar assets would follow the accounting rules for collections.

Cut-off Limits For Capital Assets

An organization may wish to establish a cut-off limit for the capitalization of assets. For example, it may choose to expense all capital assets with a cost or contributed fair value of less than $200. This type of policy would be acceptable as long as the financial statements were not materially misstated as a result: the amount expensed on an annual basis should not materially differ from the amount that would have been reflected in amortization charges (had the purchases been capitalized in the first place), and the cumulative balance of unrecorded capital assets should not be material to the statements. Exactly what dollar amount of misstatement would be material is something the accountant would want to discuss with an auditor expressing an opinion on the financial statements.

Special Rules For Organizations With Gross Revenues Less Than $500,000

An organization with gross revenues less than $500,000 need not capitalize its capital assets in the financial statements but may instead provide certain information about the assets in the notes to the statements. This information could include a description of the assets, their age, uses, useful lives and locations. The notes would also have to explain that capital assets are expensed, and the total amount expensed would have to be presented either in the statements or in the notes. (4431.38)

On the surface the ability to forego capitalizing assets may seem like a time savings for the accountant. But considering the information that must be presented if assets are not capitalized, there may not be a time savings. Also if the organization has revenues of more than $500,000 at some future date, it must go back and determine the amounts that were not capitalized in the past, and work through the accounting to the present day, representing the current and prior year figures as if capital assets had been recorded on the balance sheet from the beginning.

What Value To Record Assets At

Contributed assets should be recorded at the fair (market) value at the date of contribution.
Assets otherwise acquired should be recorded at cost or the fair value of the assets given up.
Where a vendor has given a reduced price to the organization, the amount of the discount would be added to the cost of the assets and a contribution would be recorded for the amount of the discount.
Where the fair value of a contributed asset is not known, the asset would be recorded at a nominal value, for example $1. (4431.07; 4432.10)
The cost of the asset would include all costs of getting the asset ready for use, including shipping, storage and so on. If, for example, an organization wanted to purchase some land and had to remove an unwanted building from the land, the cost of the building and its removal would be added to the cost of the land.
Where an asset is constructed, all direct and indirect, or overhead costs, would be capitalized. The fair value of any contributed materials or services would also be capitalized. Any interest costs capitalized should be disclosed. (3850.03)
The cost of any betterment to the asset would be added to the cost of the asset. A betterment increases either the service potential of the asset or its useful life. The cost of a repair that simply maintains service potential and does not extend the expected useful life of the asset would not be added to the cost of the asset. In some cases an allocation may have to be made between a repair and a betterment.


Some capital assets, like land or works of art, should not be amortized as there is no using up of their benefit. However most capital assets eventually do lose their benefit, and amortization is an effective way of matching the recorded value of the asset with the service provided by the asset.

The amortization of an asset begins when it is ready for use.

The method and period of amortization should attempt to match the period of service expected to be derived from the asset: there is no attempt to reflect any decline in the resale value of the asset. For this reason, a declining balance method of amortization is likely not suitable. A straight line method is normally the most appropriate method of amortization. As the amortization period reflects service, one could not justify, in the example of a building, a method of amortization that matches the mortgage principal payments.
Technically, amortization should bring the asset cost down to its residual or salvage value. In most cases, this amount is assumed to be insignificant; the residual value is usually assumed to be negligible or nil.

Factors to consider in establishing the period of amortization would include expected changes in technology, expected repair and maintenance costs, and the expected future use of the asset. The method of amortization and the expected useful life of an asset should be reviewed to adjust for changes in original assumptions. Any resulting change in the method or rate of amortization would be applied prospectively: previously reported numbers would not be revised, as a change in the method of amortization would be considered a "change in estimate," and not a change in accounting policy or the correction of an error. The residual value would not be increased as a result of the revised estimate of amortization. (4431.16,.23)

Recording Liabilities For Site Restoration and Asset Removal

If there is a legal obligation to retire an asset, an estimate of the costs to retire the asset must be recorded as a liability. (3110.09) Such requirements are extremely rare in the not-for-profit sector. Nuclear power stations, and oil facilities are examples. The present value of the liability would be recorded, and the asset value would be increased by the amount of the liability. (3110.16) The annual income effect would be equivalent to the amortization of the additional asset "value" and the change in the present value of the obligation. (3110.19). There are a number of disclosures required. (3110.19.23)

When an asset no longer has service potential, it is written down to net realizable value (salvage value or fair value) and the amortization of the asset stops. If there are still deferred contributions associated with the asset, these would be recognized in income in the period of the write-down. The write-down would not be reversed. (4431.26; 4432.07)

Accounting For Disposals

On the disposal of an asset, the difference between the net book value and proceeds are shown as either a gain or loss in the statement of operations and any associated remaining deferred contributions are recognized in income.

Where there is a disposal of an asset or a write-down of its value, the organization would want to determine whether any contribution restrictions would affect the recognition of any unamortized deferred contributions.

Required Disclosures

For every significant class of asset, disclosure should be made of the cost, accumulated amortization, amortization method and the rate.

The total amortization expense and total write-down expense for the period should be disclosed. (4431.29-.35)

There should be disclosure of the contributed intangible assets received in the period, and recognized in the financial statements, including any intangible assets recognized at a nominal value. (4432.10-.11)