Asset Replacement Plan

Posted on Wednesday, August 22, 2018

An asset replacement plan allows an organization to better manage its resources and plan for future asset replacements.  Capital assets are normally a significant expense for nonprofit organizations, especially smaller organizations that rely heavily on contributions.  To plan for your organizations future asset purchases, consider implementing an asset replacement plan. 

The plan should address the following key components. 

Identify Current Assets

Your organization should have a depreciation schedule that lists all of your current fixed assets, the initial cost of the asset and the life of the asset.  Start with this list to take a current inventory of your assets.  Making sure all assets owned by the organization are included on the list and any assets that the organization has sold or disposed of are removed from the list.

Determine Replacement Dates

Each item on your organization’s asset listing should have a specific target date for replacement.  Every asset included on your organization’s depreciation schedule has an estimated useful life.  This is the number of years that the asset is depreciated.  After this time has passed, the net book value of the asset should be zero.  Since the life is only an estimate, the actual number of years that the organization uses the asset may be longer or shorter.  Use the depreciation schedule to set a target date for replacing each asset.  

Determine Available Resources for Replacement

In order to replace current assets or add new ones, the organization must have resources to purchase them.  Your organization must determine how it is going to fund future purchases. 

Funded Reserves

Most nonprofits include a line item in their annual budget for depreciation.  Although this isn’t an actual cash expense, if there is a net increase in net assets (net income), it assumes that enough operating cash is being collected to cover the annual depreciation expense.  This amount would then be put into a reserve to purchase future fixed assets.  Or the organization may determine a portion of unrestricted grants and contributions are set aside each year for capital purchases.

Capital Grants

Some foundations award grants for capital asset purchases.  These are often less common than programming or operating grants; however, they do exist.  Your organization may be able to apply for a grant to purchase a specific item.  This type of funding may require additional planning due to more variables – the grant being awarded, the period of the grant and the replacement date of the asset.

Capital Campaign

If your organization is going to replace a large number of assets at once or purchase a building, you may consider holding a capital campaign.  Often times payments received from a capital campaign are received over time, so your organization will need to collect a portion of the gifts before starting the project.

Debt

Another option for your organization to raise the necessary funds is to take on debt for the purchase.  Your organization will still need to raise the necessary resources to pay for the purchases; however, debt-financed projects allow your organization time to collect the necessary funding.  

In order for the asset replacement plan to be successful, it should cover all necessary assets; everything from buildings and technology to furniture and improvements.  It should also include an annual process for identifying capital purchases and reviewing the plan. 

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.