Setting and Revising a Capitalization Policy for your Non-Profit

Key considerations when establishing a capitalization policy

Establishing and adhering to a capitalization policy is a common accounting practice followed by many not-for-profits. Such policies are useful in determining which expenditures should be capitalized on the statement of financial position or expensed through the statement of operations. While there’s no ironclad top-down rule regarding which dollar amount to use as the dividing line between capitalizing and expensing, thresholds used by non-profits commonly hover between $500 and $5,000, with the dollar amount increasing commensurate with the size of the organization. Whether you are looking to dust off and update your old capitalization policy or establish one for your organization for the first time, here are some considerations that might prove helpful.

Fixed assets – A refresher

Whether you call them fixed assets, or property and equipment, these represent assets held in use for operations over multiple years. Capitalization creates an asset on the statement of financial position, as opposed to having the expenditure flow through expenses on the statement of activities. The fixed assets are then depreciated over their useful lives. Fixed assets consist of assets such as buildings, equipment, and vehicles, but can also consist of building improvements, significant repair costs, and leasehold improvements. The decision to capitalize or expense is a common accounting fork in the road, which is why a firm capitalization policy can clear ambiguity within the organization.

Setting a threshold

Determining an appropriate capitalization threshold can be tricky, as there are multiple variables to consider when setting a dollar amount. A common variable is efficiency. A low capitalization threshold (e.g. $0) would burden the organization with the task of maintaining a record for nearly every single capital asset. This means that, for each small-dollar piece of equipment (e.g. a $100 used iPad), the organization would need to:

1. Determine the useful life of the asset
2. Enter the amount into their fixed asset ledger
3. Compute depreciation for the asset
4. Make recurring journal entries to record the depreciation
5. Reconcile the fixed asset record to the general ledger
6. Remove the asset from the ledger once disposed of

These actions, while standard for fixed assets, would be onerous for items of such small values. Conversely, setting too large of a threshold would be equally as problematic, as it may result in important capital assets going unrecorded on the statement of financial position. Therefore, when setting a threshold, there is a balancing act between efficiency of operations and financial statement accuracy.

Consider multiple capitalization thresholds

Not all fixed assets are the same. Many non-profits have multiple types of fixed assets, such as vehicles, equipment, buildings, building improvements, and furniture. While many non-profit organizations use a single threshold for a one-size-fits all policy, it may be appropriate to use multiple thresholds that consider the different depreciable lives and potential repair/maintenance costs of each capital asset class. For example, an organization may use a $1,000 capitalization threshold for equipment and a $4,000 threshold for vehicles.

Low dollar items

There could be a situation where an organization buys multiple units of the same item for a dollar amount that in aggregate exceeds their own capitalization threshold (even if the individual unit price is insignificant). Should such a purchase be capitalized? If the purchase is significant, then the organization should capitalize the expenditure even if the individual unit cost is lower than the capitalization threshold.

Periodic revisitations

It is common for organizations to stick to the same across-the-board dollar thresholds for several years. However, given the inflationary environment and the diversity of fixed assets, it is recommended that capitalization thresholds go through periodic reviews (e.g. every 5 years) to ensure the policy remains judicious and up-to-date.

Conclusion

Capitalization policies are a useful and important characteristic of many accounting systems and ensuring the proper setup and maintenance of one can save time and resources for your organization. If you have any further questions, consider reaching out to your Keiter Opportunity Advisor | Call: 804.747.0000 |Email