Depreciation is an accounting estimate of the general wear and tear on your organization’s fixed assets and is recorded in the CDP survey annually as depreciation expense in the Non-Personnel Expenses section and in the Balance Sheet section as accumulated depreciation. It reflects the fact that physical assets like buildings or equipment lose value over time and eventually need to be replaced.
In the Expenses section of the CDP survey, there is a line for the amount of depreciation expense for the fiscal year you are working on. The amount could be on your Income Statement or Statement of Activities if you are audited or reviewed, your Statement of Functional Expense (Part IX, Line 22) on your Form 990, or on your Profit and Loss Statement from your accounting software.
In the Assets section of the CDP Balance Sheet, you are asked for your Fixed Assets Net of accumulated depreciation. This is your total fixed assets amount minus the accumulated depreciation for those fixed assets. This is often how fixed assets appear in the Statement of Financial Position in your audit or review, and in the Balance Sheet of your 990. If you enter an amount on that line in the CDP survey, you must enter the Gross Fixed Assets amount and the accumulated depreciation of those assets (accumulated depreciation is entered as a negative number). On an audit or review, accumulated depreciation may be listed in the Statement of Financial Position, or in the notes section under a heading sometimes called Property and Equipment.
Ignoring depreciation is a risky strategy. Just because no one sends your organization a bill for depreciation doesn’t mean it doesn’t matter. If your organization has no cash-on-hand when the roof begins to leak, the HVAC breaks down, or production equipment becomes obsolete, you put your programs and organization at risk.
A smarter strategy is to set aside savings each year into a reserve dedicated to the future care of fixed assets. Ideally, the value of this reserve will approximate the amount of accumulated depreciation on the balance sheet. Some organizations use the depreciation expense from their Statement of Activities as a proxy for the amount they should save each year. An even better method for estimating savings needs is an engineer's assessment of the size and timing of future repairs and replacements.
Many organizations find it difficult to cover annual depreciation expense with operating revenue alone. They may periodically need to raise additional capital through special fundraising efforts, or a campaign. However, it’s risky to delay fundraising for depreciation until a specific need arises. Organizations should always have some savings on hand for the unexpected emergency.
Management Tip: Consider hiring a qualified engineer who can provide an estimate of your organization’s future fixed asset needs. Then, align your savings goals to these needs, and budget to meet them. If you can’t afford an engineer’s assessment, use depreciation expense as your savings guide. Savings for future fixed asset replacements should be set aside in a dedicated cash reserve.
