Please is a building not allowed to be depreciated as client believes the residual value will not be less than its carrying value? Therefore has not depreciated the building for years.
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Has the building depreciated ?Companies are supposed to bring in an independent valuer on a regular basis. No need to depreciate unless significant drop in property values. Make sure notes to accounts state policy used.
Although you've not stated, I'm assuming we're dealing with a building occupied by your client and not an investment property.
Firstly, you need to separate the land and the buildings element, even if they were purchased at the same time (para17.8). It's generally accepted that land is not a depreciable asset.
If using a cost basis, buildings should be depreciated based on the expected useful life and the residual value. The latter is defined in FRS102 as the estimated proceeds on sale from as asset already of the age and in the condition expected at the end of its useful life. (FRS102 Glossary, paraphrased slightly).
Alternatively, FRS102 (but not FRS105) permits a revaluation method for buildings. The requirements are set out in the standard.
In the OP, you've said residual value is *not* less than carrying value and in this post you've said it is less than carrying value.
If residual value is less than cost, you should depreciate.
If client believes residual value is *not* less than cost, ask for evidence. Remember the estimated residual value is as at today - it cannot take into account future movement in property values. You refer to 'carrying value' - what do you mean here? Depreciated cost or has the client already been revaluing the property?
FRS102 para 16.4 says that for mixed self-occupied/tenanted property, you account for the parts as PP&E/investment property respectively - or account for the whole lot as PP&E.
And the land? Is that already accounted for separately? If not, who owns it and what is client's tenure. It will surely be either long lease - which does have a value. Or shorter term which could mean that at end of term, client must return a clean level site - and that means residual value is nil or even negative.
To avoid what's happened, property's useful life should have been reviewed at least once in a reporting period. To rectify this, property's remaining useful life can be reviewed now.
I am assuming that the building is being used by the client and it's not an investment property.
Rental side of the property would be considered to be an investment property (it can't be PPE) hence measured at fair value and gais/losses posted to P&L and retained earnings.
Part that is rented out to a related party would be considered to be PPE and a suitable model for subsequent measurement should be used.
If the useful life (for PPE side of things) is reviewed once a year then there won't be an issue of carrying value being less than the residual value, so question whether it is complaint or not will be removed.
Lower of carrying value and residual value will arise when an asset is held for sale so it's a separate issue.
Now deferred tax. This will need to be taken into account too for both, investment property (because of gain/loss) and PPE (because of tax base difference). Also, expenses related to the use of property by a related party cannot be claimed ad there is no rental income.
Here's a link to an ACCA article which explains FRS 102 Investment property and PPE.
https://www.accaglobal.com/pk/en/member/discover/cpd-articles/corporate-...
Things will be different if using FRS105 instead.