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10.2 Property, plant, and equipment
Publication date: 27 May 2020
us NFP guide
Property, plant, and equipment (PP&E) refers to the long-lived tangible assets employed in day-to-day operations to deliver an NFP’s goods or services. The value of such assets is derived from using them during their useful lives in carrying out the entity’s mission, rather than from holding them for capital appreciation or resale. Similar assets that are acquired and held for investment purposes (for example, real estate held by an endowment) are accounted for using the investment guidance discussed in NP 9.
The general rules used in accounting for PP&E for NFPs are similar to business entities. Long-lived assets are capitalized, classified as held-and-used or held-for-sale, depreciated over their estimated useful lives, and tested for impairment in accordance with ASC 360, Property, plant, and equipment. PwC’s guide Property, plant, equipment and other assets (PPE) summarizes the authoritative guidance and provides additional interpretive guidance on accounting for PP&E.
ASC 958-360, Not-for-profit entities – Property, plant, and equipment, provides incremental guidance on NFP-specific aspects of the accounting for PP&E, including specialized guidance on accounting for museum collections and depreciation.
10.2.1 Initial recognition of PP&E
NFPs must capitalize PP&E (including contributed PP&E), with exceptions for certain works of art or historical treasures (i.e., collections), discussed at NP 10.3.2. PP&E is initially measured at cost if purchased, or at fair value at the date of contribution if donated.
Sometimes donors will contribute a long-lived asset for use in an NFP’s operations. Consistent with the requirements for similar items acquired in exchange transactions, ASC 958-360-30-1 requires that the amount initially recognized include all of the costs incurred by the NFP to place the contributed asset into service.
Similar to items acquired in exchange transactions, the amount initially recognized for contributed property, plant, and equipment shall include all the costs incurred by the entity to place those assets in use. Examples of such costs include the freight and installation costs of contributed equipment and cataloging costs for contributed library books.
PPE 1.2 provides guidance on the accounting for costs incurred in connection with construction projects. If an NFP is constructing an asset for its use and has borrowings outstanding during the construction period, interest costs must be capitalized as part of the cost of the constructed asset (or assets). When the construction is financed with tax-exempt municipal bonds, the interest capitalization rules differ from the rules generally used for determining capitalized interest and are described in NP 11.5.
The characteristics and expected use of individual items of PP&E should be considered in evaluating whether they will benefit the NFP for more than a single period (and thus, require capitalization). For example, if sets and costumes owned by opera, ballet, and theater companies relate to a production that is given season after season, they would be capitalized and depreciated. However, for companies that do not perform the same production on a regular schedule, the costumes and scenery provide no probable future economic benefit beyond the current production and should be expensed.
10.2.2 Subsequent measurement of PP&E
ASC 958-360-35-1 requires that all PP&E, apart from land, must be depreciated (including PP&E acquired by contribution) except for certain works of art or historical treasures (discussed at NP 10.3.2).
A not-for-profit entity (NFP) shall recognize the cost of using up the future economic benefits or service potentials of its long-lived tangible assets—depreciation.
As described and discussed more fully in PPE 3, depreciation accounting allocates an asset’s cost in a systematic and rational manner over the periods during which the NFP benefits from its use.
Grants and contracts that reimburse incurred costs may require the NFP to account for capital costs in a specific manner (for example, to use a specific method of depreciation or to include the entire fixed asset expenditure as a reportable cost in the period acquired.). Such terms are considered in calculating the amount of contract or grant revenue to which the NFP is entitled under the arrangement. However, under ASC 958-360-35-7, those terms do not impact the accounting under GAAP for the underlying assets and do not affect the recognition and measurement of depreciation expense for financial reporting purposes.
The terms of certain grants and reimbursements from other entities may specify whether depreciation or the entire cost of the asset in the year of acquisition should be included as a cost of activities associated with those grants or reimbursements for contractual purposes (sometimes referred to as allowable costs). Those terms shall not affect the recognition and measurement of depreciation for financial reporting purposes.
As discussed in PPE 4, impairment testing is required when events or changes in circumstances occur that indicate the cost of long-lived assets may not be recoverable. Long-lived assets (or asset groups) are tested for recoverability by comparing the undiscounted net cash flows to be generated from the use and eventual disposition of those assets to their net carrying value. In accordance with ASC 958-360-35-8, an NFP whose operations rely in part on contribution income may need to consider the cash flows from contributions when determining the cash flows to compare with the carrying amount of the assets.
When grouping assets for impairment testing as described in paragraphs 360-10-35-23 through 35-28, an NFP that relies in part on contributions to maintain its assets may need to consider those contributions in determining the appropriate cash flows to compare with the carrying amount of an asset. If future contributions without donor restrictions to the entity as a whole are not considered, the sum of the expected future cash flows may be negative or positive but less than the carrying amount of the asset. For example, the costs of administering a museum may exceed the admission fees charged, but the museum may fund the cash flow deficit with contributions without donor restrictions.
Subsequent to acquisition, outlays will be required to keep long-lived assets in good working order. The normal, recurring expenditures required to maintain a long-lived asset in an efficient operating condition are expensed as period costs, as are repairs required to restore an asset to its normal operating efficiency. However, expenditures that will increase the economic life or functionality of a long-lived asset should be capitalized and depreciated. See PPE 1.2.1.4.
10.2.3 Disposal of PP&E
When an NFP disposes of a long-lived asset through sale, the asset is derecognized, the sales proceeds are recognized, and a gain or loss from the sale is recognized. Disposition of a long-lived asset other than by sale—e.g., abandonment or scrap—involves derecognizing the asset and recognizing a corresponding amount of loss on disposal based on the asset’s carrying value. However, if an NFP disposes of a long-lived asset by contributing it to another entity, GAAP requires the NFP to recognize contribution expense based on the fair value of the asset, which could give rise to a gain or loss (from the adjustment of the carrying amount of the asset to fair value). Example NP 7-4 in NP 7.4.3 illustrates the accounting for a disposal of equipment via contribution.
10.2.4 Leases of PP&E
An NFP may have access to use property or equipment that it does not own. If the property or equipment is used under the terms of a lease agreement that at its inception requires lease payments at fair value, NFPs would apply the same accounting and reporting rules as business entities.
For NFPs that are conduit bond obligors with publicly-traded debt, ASU 2016-02, Leases (Topic 842) is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2018. For all other NFPs, the ASU will be effective for fiscal years beginning after December 15, 2020 and for interim periods within fiscal years beginning after December 15, 2021, with early application permitted. See PwC’s Leases guide for information regarding ASC 842. Prior to adoption of ASC 842, if the right to use PP&E is obtained through a lease agreement that requires lease payments at fair value, the NFP would apply the guidance in ASC 840, Leases.
Both ASC 842 and ASC 840 apply to leases that are exchange transactions – that is, when an entity obtains the right to use the asset in exchange for payment of consideration. NFPs may also enter into leases that involve below-market rates, or arrangements similar to leases that provide free use of space or other PP&E. Arrangements that give an NFP the use of space or other PP&E for free fall outside the scope of ASC 842 or ASC 840 and are accounted for under the contribution accounting guidance discussed in NP 7.6. A lease of space or other PP&E at below-market rates is accounted for as part-exchange, part-contribution. In those situations, the accounting for the exchange portion will be dictated by ASC 842 or ASC 840 (as appropriate), and the contribution portion will be accounted for using contribution accounting guidance. For additional information, see chapter 5 of AAG-NFP.
10.2.5 Gifts of PP&E
An NFP that receives gifts of long-lived assets (or of cash that is restricted to the acquisition of long-lived assets) must appropriately classify the increase in net assets associated with the gift based on the absence or presence of donor-imposed restrictions. If restrictions exist, the NFP must also determine the timing of reclassifications from net assets with donor restrictions to net assets without donor restrictions based upon the expiration of time and purpose restrictions.
If a donor gives a long-lived asset without specifying how or how long it must be used, the gift will increase net assets without donor restrictions. Example NP 7-4 in NP 7.4.3 illustrates the accounting by a donee for a contribution of medical equipment that does not involve a time restriction.
If a donor gives cash that is restricted for acquisition of PP&E and does not stipulate how or how long the acquired asset must be used, the donor restriction expires when the purpose restriction is satisfied (that is, when the assets are acquired and placed in service, as discussed in NP 6.7.2). At that time, the NFP would reclassify the gift amount from net assets with donor restrictions to net assets without donor restrictions.
If a donor gives a long-lived asset (or cash to acquire a long-lived asset) with a stipulation on the length of time the asset must be used (or used in a certain way), an explicit donor-imposed time restriction exists. As per ASC 958-360-45-1, a time restriction expires over the time period specified by the donor (not all at once upon its expiration).
If the property, plant, and equipment item being depreciated was contributed to the not-for-profit entity with an explicit donor-imposed restriction on the length of time of the item's use, net assets with donor restrictions shall be reclassified as net assets without donor restrictions in a statement of activities as those restrictions expire.
The amount of net assets to be reclassified each period is based on the length of the donor-imposed restriction. If the time restriction and the economic useful life of the asset coincide, the amount of net assets reclassified from those with donor restrictions to those without donor restrictions will offset the amount of depreciation expense recognized and there will be no impact on net assets without donor restrictions. If, however, as illustrated in Example NP 10-1, the depreciable life of the asset and the donor-imposed time restrictions differ, depreciation and the lapsing of the restrictions will not directly coincide.
EXAMPLE NP 10-1
Accounting for gift of PP&E subject to explicit time restriction
Accounting for gift of PP&E subject to explicit time restriction
On January 1, 20X1, a donor contributed a computer to Local Charity with a stipulation that it be used in the entity’s operations for at least two years. The fair value of the computer on the date of donation was $900, and its estimated useful life was three years.
How would this gift impact net assets without donor restrictions in Local Charity’s statement of activities for the year ended December 31, 20X1?
Analysis
Because an explicit time restriction was imposed by the donor, the gift will initially increase net assets with donor restrictions by $900. One-half of the two-year time restriction will expire in 20X1. Therefore, at December 31, 20X1, Local Charity would reclassify $450 from net assets with donor restrictions to net assets without donor restrictions to reflect the partial release of the donor restriction. Because the estimated economic life of the computer is three years, depreciation expense for 20X1 is $300 ($900/3 years).
The “net assets without donor restrictions” column in Local Charity’s statement of activities for the year ended December 31, 20X1 would reflect an increase in net assets of $450 (for the partial release of the donor-restriction), and a decrease of $300 related to the depreciation expense.
10.2.6 Presentation and disclosure of PP&E
As described in NP 3.4.2, some NFPs choose to classify revenues, expenses, gains, and losses as operating or nonoperating in the statement of activities (or for an NFP HCO, in the statement of operations). When an “operating” performance measure or subtotal is presented, ASC 958-220-45-11 requires that it include any gain or loss on disposal of long-lived assets (or a group of long-lived assets). Similarly, if an impairment of PPE is recognized, impairment losses must be included within that subtotal.
NFPs must provide the general disclosures for PP&E required by ASC 360, discussed in FSP 8.6. In addition, ASC 958-360-50 requires a number of incremental disclosures for NFPs, including:
- The capitalization policy for PP&E and for collections
- The basis for valuation (e.g., cost for purchased PP&E or fair value for PP&E received via contribution)
- An explicit disaggregation of PP&E between nondepreciable assets (e.g., land, collections), PP&E not held for use in operations, and improvements to leased facilities and equipment
- Restrictions on liquidity or use of the PP&E, such as PP&E pledged as collateral, donor or legal limitations on the use of proceeds from disposal, or PP&E for which title may revert to another party
- The terms of exchange transactions, such as federal contracts, when the resource provider retains legal title to the PP&E but it is probable that the NFP will be permitted to keep the assets
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