The Case for Capitalizing Portable Electronic Devices (PEDs)

Nonprofit organizations are now accustomed to living with changing conditions. Change can come in many different forms, from dramatic and fast (remote working, inflation) to subtle and out of sight (technology, rules, and regulations). A noteworthy example involves portable electronic devices (PEDs), which have seen subtle steady changes leading to lower cost with expanded performance and capacity. These changes have led to new risks that deserve special attention.

The National Institute of Standards and Technology (NIST), a federal agency within the U.S. Department of Commerce, defines PEDs as:

“Electronic devices having the capability to store, record, and/or transmit text, images/video, or audio data. Examples of such devices include, but are not limited to: pagers, laptops, cellular telephones, radios, compact disc and cassette players/recorders, portable digital assistant, audio devices, watches with input capability, and reminder recorders.”

PEDs are part of a broad asset category covering most of the electronic equipment used by nonprofits today. The performance and capacity of PEDs have steadily increased while cost per unit has continued to gradually decline. These are positive attributes but are having an unintended impact on capitalization policies.

AccountingTools describes capitalization policies as follows:

“A capitalization policy is used by a company to set a threshold, above which qualifying expenditures are recorded as fixed assets, and below which they are charged to expense as incurred … The threshold level set by a capitalization policy can vary considerably. A smaller business with few expenditures may be willing to accept a low capitalization threshold of just $1,000, whereas a larger business that may be overwhelmed by the recordation requirements of fixed assets may prefer a very high limit, such as $50,000. Nonprofits may prefer a low capitalization limit, so that they can keep close track of their assets.”

A capitalization policy by itself is not a problem. What has become a challenge is how threshold levels for capitalizing fixed (long-lived) assets have been set and applied. Capitalization thresholds are typically set to favor capitalizing larger fixed assets while using a materiality threshold to limit the capitalization of low-cost fixed assets.

Materiality here is based on the individual cost of each fixed asset. This exposes organizations to risks that were easier to keep track of when PEDs were more expensive and thus were capitalized and included in fixed asset schedules. Today most PEDs are expensed and not included in fixed asset schedules, causing them to be forgotten and not tracked.

There are two resulting risk exposures. First, PEDs are small, portable, and highly desirable for personal use, making them susceptible to loss and theft.

Second, PEDs have information stored in the device and act as access portals to the organization’s information systems. Often the information within and the access associated with these devices is worth many times the cost of the individual device.

To rectify this unintended risk exposure, organizations should multi-tier their materiality capitalization thresholds to allow for lower thresholds for capitalizing PEDs, where the risk exposure is a more important determinant than the cost of the asset.

Planning Tip – Most nonprofit organizations and auditors treat materiality as a mathematical calculation. If an organization’s budget increases, it is often assumed materiality thresholds will increase incrementally. The practice of automatically increasing materiality thresholds should be avoided. When an organization grows, it is better to keep materiality thresholds at current levels until an in-depth analysis of the risk vs. benefits from increasing materiality thresholds is completed.

Adopting separate capitalization thresholds for PEDs can help organizations return to a time when computers, smartphones, tablets, and storage devices were capitalized, catalogued, and tracked on a regular basis. Your organization’s assets as well as its reputation are at risk if you choose to ignore this continuing subtle change.