CHAPTERFIVE 5

Fixed Assets and Depreciation

5.1 General Principles— 5.4 Collections 53
Working Definitions 49 5.5 Fair Value Measurement 54
(a) Capitalization of 5.6 Contributions Restricted for
Fixed Assets— Purchase of Fixed Assets
Establish a Threshold 50
(b) Capitalization of Impairment or Disposal of 55
Fixed Assets— 5.7 Long-Lived Assets
Establish a Reasonable (a) Consideration of 56
Useful Life 50 Impairment
(b) Consideration of 56
Property and Equipment—
5.2 Disposal—Assets
Classes and Kinds of
Assets 51 Held for Sale
(c) Consideration of 58
(a) Disclosures in the Financial
Statements 52
Retirement Obligations 58
Fixed Assets Where Title 5.8 Conclusion and
5.3
May Revert to Grantors 53 Recommendations 59
Not-for-profit organizations use various kinds of property and equipment in the
exercise of their mission. Property and equipment include all long-lived, tangible
assets held by not-for-profit organizations except collection items and assets held
for investment purposes. Because of their unique nature, collection items are
reported differently from other tangible assets. Fixed assets purchased with federal
funds are treated differently from fixed assets purchased directly by the
organization or received as contributions.

5.1 GENERAL PRINCIPLES—WORKING DEFINITIONS

Property and equipment are recorded by the not-for-profit organization in much
the same way as a business enterprise is required to record similar assets. An asset
is typically recorded at its historical cost or fair-market value if donated. Then,
over the course of the asset’s estimated life, depreciation expense is charged as
operating expense and tracked as accumulated depreciation. An organization will
present the difference between the original value and the accumulated depreciation
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as net-fixed assets on the balance sheet. Notes to the financial statement further
describe the classes and kinds of fixed assets, the estimated lives in use by the
organization, the method of depreciation, and the accumulated depreciation in total
or by asset class as of the balance sheet date.
Accounting theory with respect to fixed assets continues to evolve. Intuitively,
it seems absurd for an organization to present the cost of an old building on land
that has in fact appreciated to many times its value over the course of time.
However, the intended purpose of this same building and its use and enjoyment by
the organization are independent from the market value until the time comes when
the organization changes its purpose and places the asset for sale. Thus, the balance
sheet is not intended to be a statement of any organization’s true value; rather, it is
a combination of a point in time and a period in time. Regular readers of financial
reports have come to accept the inherent limitation of accounting for property and
equipment, and they will look to the notes on the financial statements for a deeper
understanding of the nature and kind of fixed assets. This chapter explores some
of the accounting treatments and disclosures that are typical for a not-for-profit
organization.

(a) Capitalization of Fixed Assets—Establish a Threshold

The organization will first establish a policy for recording fixed assets. Generally,
this policy will provide for the asset to be capitalized if its cost (or fair value at the
date of a donation) exceeds a minimum threshold and its useful life is expected to
exceed one year. Some organizations have a very low threshold, perhaps as low as
$1,000. Even large not-forprofit organizations may have a comparatively low
threshold for capitalization, typically $5,000, as this amount is generally consistent
with tax or other regulatory guidelines. A comprehensive fixed-asset policy may
require all assets to be tagged and tracked for insurance and other reporting
purposes in addition to being capitalized on the balance sheet.

(b) Capitalization of Fixed Assets—Establish a Reasonable Useful Life

Next the organization will estimate the useful life of the capitalized fixed assets,
by class and kind, to provide a ratable system for depreciation over this period.
There is considerable flexibility as to the estimated useful life for each class of
assets, as there is a considerable difference in the way any individual organization
would plan to use the property and
5.2 PROPERTY AND EQUIPMENT—CLASSES AND KINDS OF ASSETS

equipment. As an example, furniture and fixtures may have an estimated useful life
for 3–15 years. For leasehold improvements, the useful life is estimated over the
life of the lease plus options as appropriate.
Usually, the organization will capitalize fixed assets on the balance sheet in the
period in which they were received or put in use, and the organization will record

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depreciation expense in the statement of activities for each period that the asset is
used until the estimated life is expired or the asset is sold or lost.

5.2 PROPERTY AND EQUIPMENT—CLASSES AND KINDS OF

ASSETS
Property and equipment commonly held by not-for-profit organizations include the
following:
1. Land. When land is acquired as part of a parcel that includes a building, the
organization should determine the value of the land by objective measure
and separate that amount from the value of the building. Land is not subject
to depreciation.
2. Land improvements, buildings, building improvements, equipment,
furniture and office equipment, library books, motor vehicles, and similar
depreciable assets. Fixed assets of a similar type and kind should be subject
to a consistent depreciation policy. For example, an organization can not
arbitrarily change the policy for depreciation of office furniture to a
different life each year office furniture is purchased. If there is a reason that
a certain grouping of office furniture has a shorter or longer life than general
office furniture purchases, the reasons for the difference should be clearly
documented.
3. Leased property and equipment. These must be capitalized in conformity
with accounting rules that consider the life of the lease, the cost of the lease,
and the disposition at the end of the lease.1
4. Improvements to leased property. As noted in item 3, such improvements
should normally be depreciated (or amortized) over the life of the lease or
the useful life of the improvement whichever is less.
5. Construction in process costs. Such costs are accumulated on the balance
sheet and not depreciated until the project is placed in service. The trigger
for placed in service is typically a certificate of occupancy. Accounting
rules provide for an organization to capitalize labor, interest costs, and other
real costs of the project.2
6. Contributions of property and equipment. These should be recognized at
fair value at the date of contribution. If the donor stipulates how or how long
the contributed property must be used by the organization, the contribution
is reported as restricted support, otherwise the value of the contributed
assets are considered unrestricted.

1
FASB Statement of Financial Accounting Standards No. 13, Accounting for Leases.
2
FASB Statement of Financial Accounting Standards No. 34, Capitalization of Interest Costs; and FASB
Statement of Financial Accounting Standards No. 63, Capitalization of Interest Cost in Situations Involving
Certain Tax-Exempt Borrowings and Certain Gifts and Grants.

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 7. Unconditional promises to give the use of long-lived assets. Such
promises—for example, a building or other facilities for a specified number
of periods in which the donor retains legal title to the longlived asset—may
be received in connection with leases or may be similar to leases but have
no lease payments. The accounting treatment would provide for the asset to
be capitalized at the fair value of property less the stated amount of lease
payments, if any.
8. Computer equipment and costs to increase the functionality of computer
equipment or software. These assets are subject to special accounting rules,
but generally they should be capitalized and depreciated.3
Depreciation is generally expensed straight-line over the estimated useful of
the asset. The starting point may be the month the asset is placed in service, or the
organization may choose to use a half-year convention for assets placed in service
anytime during the first nine months of the fiscal year. The depreciation policy
should be defined by a written policy and applied consistently for all depreciable
assets.

(a) Disclosures in the Financial Statements

Fixed assets are reported in the financial statements by asset class including land
and land improvements, building and building improvements, furniture, machinery
and equipment, and construction-in-process. Additional classes may be presented
if they are material to the organization. The range of useful lives for each asset
class must be disclosed, and accumulated depreciation as of the date of the
financial report, in total or by asset class. Other related disclosures include:
• Current year depreciation expense
• Capitalized interest
• Fully depreciated assets in use by the organization
• Commitments related to construction-in-process
• Donated assets, including related depreciation
• Nondepreciating assets, typically land or collections
5.4 COLLECTIONS

5.3 FIXED ASSETS WHERE TITLE MAY REVERT TO GRANTORS

Some organizations purchase or receive fixed assets under research or similar
grants or contract awards in which legal title to the assets remains with the grantor
agency. At the completion of the award period, the right to these fixed assets
reverts to the grantor agency. Typically the award period closely approximates the

3
AICPA Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use.

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useful life of these assets, and the grantor agency seldom asks for their return. The
right to reclaim these assets, or to receive the proceeds from the sale of these assets
is in the award mainly to protect the grantor agency in the event the grant is
prematurely terminated, or the award may simply provide for purchased assets to
be used by similarly funded programs.
These kinds of fixed assets are expensed as program expense and are reported
on the statement of activities during the period in which they are purchased. This
is consistent with the theory of fixed asset accounting and reporting in that the
organization does not own the asset. If material, the organization should disclose
in notes to the financial statements the value of these assets purchased during the
period and the total value retained in custody of the organization. Federal program
guidelines may require that not-for-profit organizations receive pre-approval for
the purchase of fixed assets and that they identify (tag and track) and inventory
fixed assets where title reverts to the grantor agency. Other awards have similar
provisions.

5.4 COLLECTIONS
Collections are works of art, historical treasures, or similar assets that are (1) held
for public exhibition, education, or research in furtherance of public service rather
than financial gain; (2) protected, kept unencumbered, cared for, preserved; and
(3) subject to an organizational policy that requires the proceeds of items that are
sold to be used to acquire other items for collections.4
An organization must adopt a policy for the treatment of collections. The
policy is defined by FASB SFAS 116 and may be one of three choices:
1. Capitalize the collection, including all items acquired in prior periods that
have not been previously capitalized and all items acquired in future
periods.
2. Capitalize only those items acquired after initial adoption of SFAS 116.
3. Capitalize no collections.
An organization may not capitalize part of a collection. The capitalization
policy should be clearly defined and is not subject to change.
For those organizations that capitalize collections, items acquired in an
exchange transaction should be recognized as assets in the period in which they are
acquired and should be measured at cost. Contributed collection items should be
recognized as assets and as contributions in the appropriate net asset class,
unrestricted, temporarily restricted or permanently restricted, and should be
measured at fair value. Fair value can be measured by quoted market price,
appraised value, or other techniques.

4
FASB Statement of Financial Accounting Standards No. 116, Accounting for Contributions Received and
Contributions Made.

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 If an organization does not capitalize collections, no assets should be
recognized from the acquisition of collection items. The costs of collection items
purchased, proceeds from sale of collection items, and proceeds from insurance
recoveries of lost or destroyed collection items should be reported in the statement
of activities separately from revenues, expenses, gains, or losses. Additionally, the
policy for collections should be clearly described in the notes to the financial
statements, particularly with respect to its significance and accounting and
stewardship policies. The statement of cash flows should report purchases, sales,
and insurance recoveries for unrecognized noncapitalized collection items as
investing activities.
For organizations that have a policy to capitalize collections prospectively, as
noted above, the line item description on the balance sheet should indicate:
“Collections acquired since January 1, 20X1 (Note X).”

5.5 FAIR VALUE MEASUREMENT

An organization will consider the fair value of long-lived assets when
circumstances require that an asset be valued for reporting a contribution of a long-
lived asset or in the case of impairment. In any case, quoted market values in active
markets are the best evidence of fair value and should be used, when available. If
quoted market prices are not available, prices for similar assets (groups) or
valuation techniques such as the expected present value or traditional present value
may be used.
Contributed long-lived assets must be carefully evaluated for the rights and
obligations that may attach to the gift. Organizations are strongly encouraged to
have a comprehensive gift policy that defines the nature and kind of long-lived
assets that will be accepted, and the process, including board committee approval,
that will be required before the gift and related asset will be received.
Sometimes organizations receive noncash gifts or “gifts-in-kind” as agency
transactions. In an agency transaction, the organization does not have the right to
the use or enjoyment of the asset, and accordingly the
5.6 CONTRIBUTIONS RESTRICTED FOR PURCHASE OF FIXED ASSETS

asset should not be recorded with fixed assets as described in this chapter. Noncash
fixed assets intended for use by the organization should be recognized as
contributions when received (or unconditionally promised) from the donor. Gifts
in kind that can be used or sold should be measured at fair value. When determining
fair value, the organization should consider the quality and quantity of the gifts
including the applicable discount for purchase of similar quantity. If the gifts have
no value, as might be the case for a gift of furniture or equipment that cannot be
used internally or sold externally, the gift should not be recognized. The value
recognized for contributed property and equipment should include all costs
incurred by the organization to place the assets in use. Examples of such costs

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include the freight and installation of cost of contributed equipment and cataloging
costs for contributed library books.
Contributed long-lived assets may trigger a significant tax benefit to the donor
depending upon the valuation of the asset. For this reason, the organization should
be circumspect when recording fixed assets that are valued by the donor.

5.6 CONTRIBUTIONS RESTRICTED FOR PURCHASE OF

FIXED ASSETS
Many nonprofit organizations solicit funds for the express purpose of building or
improving physical property. Contributions so received are typically recorded as
temporarily restricted support (if the building or physical property is incomplete)
until such time the building is placed in service when these temporarily restricted
contributions are released from restriction. However, the organization may define
its accounting policy to afford better matching of contributions and related
depreciation expense.
Gifts of long-lived assets received without stipulations about how long the
donated asset must be used are reported as restricted support if it is the
organization’s accounting policy to imply a time restriction that expires over the
useful life of the donated assets. When the organization adopts such a policy,
contributions restricted for the purchase of fixed assets are released from restriction
over the estimated useful life of the asset. In this way the organization will achieve
a “matching” of depreciation expense against unrestricted revenue. Organizations
that adopt a policy of implying time restrictions shall imply a time restriction on
longlived assets acquired with gifts of cash or other assets restricted for those
acquisitions. In the absence of that policy and other donor-imposed restrictions on
the use of the asset, gifts of long-lived assets shall be reported as unrestricted
support. The organization is required to disclose its accounting policy on this
matter.
Contributions collected that are restricted for the purchase of fixed assets are
reflected as a use of operating cash flows and a source of investing cash flows.

5.7 IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

When should a not-for-profit organization recognize an impairment of one or more
of its long-lived assets for accounting and reporting purposes? It is clearly not
practical to routinely reappraise fixed assets, nor is there any requirement to do so.
However, when there is a change in an asset’s use or a known decline in its market
value, then the organization must measure the potential impairment of its carrying
value. The question is whether the asset is still worth the amount at which it is
carried on the books.

(a) Consideration of Impairment

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In August 2001, FASB SFAS 121, Accounting for the Impairment of LongLived
Assets and for Long-Lived Assets to Be Disposed Of, was superseded by SFAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets.
FASB SFAS 144 applies to recognized long-lived assets of an entity to be held
and used or to be disposed of, including the following:
• Capital leases of lessees
• Long-lived assets of lessors subject to operating leases
• Long-term prepaid assets
• A segment of a business
SFAS 144 lists several situations that may trigger the need to an impairment
valuation. Specifically, per paragraph 8:
A long-lived asset (asset group) shall be tested for recoverability whenever events or
changes in circumstances indicate that its carrying amount may not be recoverable. The
following are examples of such events or changes in circumstances:
a. A significant decrease in the market price of a long-lived asset (asset group)
b. A significant adverse change in the extent or manner in which a longlived asset
(asset group) is being used or in its physical condition
c. A significant adverse change in legal factors or in the business climate that could
affect the value of a long-lived asset (asset group), including an adverse action or
assessment by a regulator
d. An accumulation of costs significantly in excess of the amount originally expected
for the acquisition or construction of a long-lived asset (asset group)
e. A current-period operating or cash flow loss combined with a history of operating
or cash flow losses or a projection or forecast that demonstrates
5.7 IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

continuing losses associated with the use of a long-lived asset (asset group)
f. A current expectation that, more likely than not, a long-lived asset (asset group) will
be sold or otherwise disposed of significantly before the end of its previously
estimated useful life.5

Impairment in SFAS 144 is defined as the condition that exists when the
carrying amount of an asset (or group of assets) to be held and used exceeds its fair
value. Organizations would test a long-lived asset for impairment using the sum of
the undiscounted future cash flows that would be expected to result from the use
and eventual disposition of the asset, excluding interest charges. The principles of
the test are described as follows:
Suppose an organization that is located in a geographic area in which property values
have declined significantly. If the organization had purchased land and building for $1
million four years ago, and it now has a book value of $900,000, the organization should
evaluate the asset to see if it has been impaired, perhaps by obtaining a current appraisal.
As an appraisal may not be feasible or cost effective, accountants may make a
comparison of estimated future cash flows derived from use of the asset with the current

5
FASB Statement of Financial Accounting Standards No. 44, Accounting for the Impairment or Disposal of
Long-Lived Assets.

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 net book value of the asset. If future net cash flows equal or exceed the book value, then
the asset is not considered impaired.6

SFAS 144 defines cash flows in paragraph 16 as:

Estimates of future cash flows used to test the recoverability of a long-lived asset (asset
group) shall include only the future cash flows (cash inflows less associated cash
outflows) that are directly associated with and that are expected to arise as a direct result
of the use and eventual disposition of the asset (asset group). Those estimates shall
exclude interest charges that will be recognized as an expense when incurred.7

Assessing net cash flows is complex. For example, the cash flows from a
dormitory that generates its own revenue stream is relatively straight forward,
versus assessing the net cash flows for a library or research building that are
supported by general tuition or other revenues. Because it is not always possible to
identify specific cash flows with specific assets, and in recognition of this fact, the
accounting standard permits the test to be made at an entity-wide level, by
comparing the values of all the organization’s assets with the total of its estimated
future cash flows. For example, a college might deliberately set its dormitory fees
below cost, in which case it probably would set its tuition, endowment income, and
other revenue sources at levels to make up the shortfall in housing revenues and
cover other operating costs. Under these circumstances, the test is met on an
enterprise-wide basis.
Paragraph 17 of SFAS 144 states:
Estimates of future cash flows used to test the recoverability of a long-lived asset (asset
group) shall incorporate the entity’s own assumptions about its use of the asset (asset
group) and shall consider all available evidence. The assumptions used in developing
those estimates shall be reasonable in relation to the assumptions used in developing
other information used by the entity for comparable periods, such as internal budgets
and projections, accruals related to incentive compensation plans, or information
communicated to others.8

SFAS 144 would not require that an impairment loss be recognized unless the
carrying amount of the asset is not recoverable. The carrying amount is not
recoverable if it exceeds the sum of the (1) undiscounted cash flows expected to
result from its use, such as fees or contributions; and (2) the eventual disposition
of the asset (or asset group).
An impairment loss is measured as the amount by which the carrying amount
of the long-lived asset (or asset group) exceeds its fair value.

(b) Consideration of Disposal—Assets Held for Sale

A long-lived asset is classified as held and used until it (1) ceases to be used, (2) is
exchanged for a smililar productive assets, or (3) it is held for sale. Under SFAS
144, a long-lived asset to be disposed of by sale should be held at the lower of its

6
Idem.
7
Idem., para. 16.
8
Idem., para. 17.

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carrying amount or fair value less cost to sell. The entity that holds the asset should
stop depreciating the asset while it is held for sale. An asset is considered held for
sale when the following conditions exist:
• The asset must be available for immediate sale in its current condi-tion,
subject only to terms that are usual and customary for sales of such assets.
• The sale of the asset must be probable, and its transfer expected toqualify
for recognition as a completed sale, within one year, with certain
exceptions.

(c) Consideration of Retirement Obligations

SFAS 143, Accounting for Asset Retirement Obligations, describes the accounting
and reporting for legal obligations associated with the retirement of tangible long-
lived assets and the associated assets’ retirement costs. This statement applies to
all entities, including not-for-profit organizations. According to SFAS 143,
organizations should recognize the fair value of a liability for an asset retirement
obligation in the period in which it is incurred—if a reasonable estimate of fair
value can be made. If a reasonable estimate of fair value cannot be made in the
period the asset retirement obligation is incurred, the liability should be recognized
when
5.8 CONCLUSION AND RECOMMENDATIONS

a reasonable estimate of fair value can be made. When initially recognizing a

liability for an asset retirement obligation, an organization should capitalize its
asset retirement cost by increasing the carrying amount of the related long-lived
asset by the same amount as the liability. An organization should subsequently
allocate the asset retirement cost to expense using a systematic and rational method
over its useful life.
Examples of situations where an asset retirement obligation and asset
retirement costs might need to be recorded by a not-for-profit organization would
include, among others:
• The removal of an underground fuel storage tank
• The dismantling of a cogeneration plant
• A requirement to undo modifications made to leased property
• A gift of a building with stipulation from the donor that after 10years the
building is to be destroyed and the land converted into a garden
The associated asset retirement costs should be capitalized as part of the
carrying amount of the long-lived asset.

5.8 CONCLUSION AND RECOMMENDATIONS

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The organization should adopt methods of accounting and reporting appropriate to
its activities and to the needs of the users of its statements. Organizations that are
reporting financial information in accordance with generally accepted accounting
principles should record, and not expense, fixed assets. Furthermore, the
organization should develop written fixed asset policies. The policies should
clarify the threshold for capitalization, classes of assets, and a range of estimated
useful lives for the classes of assets. As appropriate, the organization should define
a policy for recognizing contributions restricted for the purchase of fixed assets,
acceptance criteria for in-kind contributions and contributions of long-lived assets,
and procedures to estimate and document fair value in the event of impairment,
disposal or in consideration of retirement obligations. Additionally the
organization may clarify its practice to tag, count, and insure fixed assets under the
umbrella of comprehensive fixed-asset policy guidelines.

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