Motives For Asset Revaluation: An Empirical Analysis In Nonprofit Organizations

• In Event: Financial Structure and Transparency

Abstract

This paper investigates the motives of discretionary fixed-asset revaluation in Belgian nonprofit organizations (NPOs). Revaluation alters financial statements. It increases solvency (increase of equity) and the value of fixed assets and it decreases profitability (higher depreciation expense). Consequently, it may influence an organization’s perceived financial health and the financing decisions taken by stakeholders. For-profit research revealed that revaluation is used to improve borrowing capacity and to signal favorable future cash flows to shareholders (Baek and Lee 2016). In NPOs where governments and donors play a major financing role, revaluation may be driven by other motives. As many countries allow discretionary revaluation this study is of interest to an international audience.

Resource-dependence theory (Pfeffer and Salancik 1978) posits that meeting the requirements of grantors, donors and creditors is essential to secure NPOs’ resource provision and survival. NPOs make accounting choices, such as earnings management and expense misreporting, that seek to affect resource providers’ decisions (Vermeer et al. 2014). We assume that NPOs also use revaluation for this purpose and that in a nonprofit context retained surpluses and revenue structure impact the revaluation decision. NPOs tend to manage reported surpluses to zero because both too much and too little earnings are penalized by funders (Verbruggen and Christiaens 2012). As revaluation decreases reported surpluses it may be an interesting strategy when retained surpluses are high. Regarding revenue structure, NPOs are often classified into ‘donative’ NPOs (mainly relying on grantors and donors) and ‘commercial’ NPOs (mainly relying on client fees). Grantors and donors use NPOs’ financial statements to guide financing decisions (Verbruggen et al. 2011) and their donative funding is more difficult to grow than commercial revenues (Cortis 2017). Consequently, particularly donative NPOs may try to stay attractive to funders by using revaluation to reduce surpluses. Finally, in line with for-profit we hypothesize a positive relation between leverage and revaluation.

Logistic regression, explaining the presence/absence of revaluation for 11 299 NPO-year observations over the period 2007-2015, confirmed that leverage encourages revaluation. Contrary to expectations, revaluation is less likely in case of high retained surpluses and donative NPOs. This suggests that donative NPOs do not use revaluation to reduce reported surpluses, but focus on its signal of higher future benefit, which may crowd out grants and donations. Creditors should be alert for window dressing by NPOs. Grantors and donors should realize that NPOs are reluctant to revalue fixed assets in accordance with probable future benefits.

Authors

• Anne-Mie Reheul, KU Leuven

• Tom Van Caneghem, KU Leuven