Fixed assets of a non-profit entity – an accounting perspective
“PPE” stands for property, plant, and equipment (not, in this case, for the acronym of the pandemic for Personal Protective Equipment). As we reflected on challenges that have arisen in preparing or reviewing annual financial statements of non-profit entities in recent months, we realised that the accounting treatment of PPE was raising a few questions. As a response, this newsletter is the first in a short series that we hope will address some of the most headache-inducing issues on the subject, as pleasantly as possible.
The importance of being able to identify items of PPE is that they have a different accounting treatment to everyday expenses; instead of expensing their full cost at the time of purchase, their cost is capitalised (treated as an asset) and then written off, through a depreciation charge, over the period in which they are being used by the organisation.
To be classified as PPE, in terms of accounting standards, items will be:
- held for use in the production or supply of goods or services, for rental to others or for administrative purposes and able to provide future economic benefits to the organisation. Some might argue that non-profits should not capitalise such items as they do not generate income for those organisations, however, we believe that PPE can generate social benefits.
- expected to be used over more than one financial year; and
- of a cost that can be measured reliably and that exceeds a stated threshold amount (of which more later). “Cost” is not as easy to determine as it seems; this is because it is the cash price equivalent at the recognition date PLUS location and to the condition
Once cost has been determined, we are often asked what cost threshold should be used in determining whether or not items are recognised as PPE. Many people refer to the SARS cost threshold, although this is not always relevant to non-profit organisations unless they are tax-paying entities. To answer this, it is the accounting policies of the organisation that set the cost threshold and so it is the responsibility of the governing body to decide on a suitable threshold, bearing in mind the following key factors:
- Importance of safeguarding the assets and resources of the organisation.
- Need to reflect a realistic cost of usage of items of PPE in the organisation’s work/activities over the useful life of those items (by way of a depreciation charge).
- Practical implications of setting the threshold too low and so creating a great deal of administrative and record-keeping effort in documenting, verifying the existence of and reporting on PPE.
Taking account of the above, most of the organisations we work with have set a limit of between R2,000 and R7,000 per item (or group of items), at which point some readers will ask whether this would be acceptable to SARS. The answer to this is that SARS does not really have a say in the matter unless the organisation has taxable trading income against which it is claiming a wear and tear allowance for items of PPE used in the production of that taxable income; it would be then that the provisions of sub-section 11(e) of the Income tax Act No 58 of 1962 have effect. These provisions mean that the cost of “small” items may be written off in full in the year of assessment in which they are acquired and brought into use, where a “small” item is one which:
- normally functions in its own right;
- does not form part of a set; and
- is acquired at a cost of less than R7,000 per item; any item costing R7,000 or more cannot be written off in full during the year of assessment in which it was acquired and brought into use.
Finally, we know that some organisations write off PPE items in full in the year of acquisition so that they can report the expenditure in full to the relevant funder(s). However, we believe that the way in which the acquisition was financed is not a defining criterion in setting the accounting policy for PPE and that this treatment may affect the fair and consistent presentation of the annual financial statements.