In August 1987 the FASB issued SFAS 93, "Recognition of Depreciation by Not-for-Profit Organizations." Statement 93 requires not-for-profit organizations to record in general purpose external financial statements the depreciation expense related to using long-term assets. In addition to depreciation expense, this includes recognition in the balance sheet of costs by category and accumulated depreciation and disclosure in the notes to the financial statements of the methods used to calculate depreciation. Exempted from depreciation recognition are works of art or historical treasures whose lives are long, if the asset is preservable and the owner has the capability of preserving the asset.
Many not-for-profit organizations, such as hospitals and charities, already record depreciation in their financial statements. The entities most affected by SFAS 93 are colleges, universities and religious organizations. This article focuses on the issue relating to colleges and universities, but many of the points are equally relevant to other not-for-profit organizations.
Who Will Comply?
There has been much controversy over SFAS 93. Enough debate was generated to postpone its effective date from fiscal years beginning after May 15, 1988, to fiscal years beginning after January 1, 1990. How many colleges complied with the pronouncement? What are the consequences if the colleges do not comply? What will be the impact on the comparison of financial statements for like not-for-profit organizations and governmental colleges and universities?
Arguments Concerning Recording Depreciation
There are many arguments for and against recording depreciation expense by not-for-profit organizations. Malvern J. Gross, Jr., and William Warshauer, Jr., have summarized the arguments for and against depreciation in their text Financial and Accounting Guide for Nonprofit Organizations (John Wiley and Sons, New York, 1983).
Arguments against taking depreciation:
1. Nonprofit entities are not interested in matching revenues and expenses;
2. Nonprofit entities often raise specific funds to cover the cost of new purchases of capital assets, thus there is no need to cover these costs by current income having recorded depreciation;
3. Inflation causes the market value of assets to increase faster than the decline in value as a result of wear and tear and deterioration from time; and
4. Depreciation is difficult to show in the financial statements, especially when fund accounting is employed.
Arguments for taking depreciation:
1. Nonprofit entities provide services that are measured in costs and depreciation is a cost;
2. Even though major capital assets are funded through special drives, some capital assets are replaced by use of current funds. When this is done it causes income from year to year to fluctuate widely and misleads the public into thinking income is sufficient to cover expenses;
3. Nonprofit entities sell products or services that are available from commercial enterprises. This implies a matching of revenues and costs the same as commercial enterprises. If no depreciation is recorded there is a potential for misstatement of profit; and
4. Nonprofit entities are subject to federal income tax on unrelated business income. Depreciation should be recorded to reduce the tax liability.
For many years the AICPA industry guide Audit Guide for Colleges and Universities supported not recording depreciation in the operating fund; however, the Guide allows recording of depreciation in the plant fund section of the statement of changes in fund balances.
What happened to spark the FASB board members to issue SFAS 93? In the late 1970s and early 1980s the FASB began to put more emphasis on not-for-profit accounting. The FASB began to realize that the inconsistencies among different not-for-profit and for-profit enterprises needed to be eliminated as much as possible. …