Capitalisation of small restaurant assets

Small Restaurant Assets

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I am preparing the accounts for a restaurant (Ltd) for the first year of trade - wouuld small assets such as plates, bowls, small kitchen equipment etc amounting to around £7k be capitalised and depreciated? Many Thanks

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Mike Cooper HJS
By mike_uk_1983
30th Aug 2016 12:53

You need to think about the definition of an asset. Will these items bring economic benefit over more than one period? If so then capitalise if not then put through P&L.

I would consider how long things like plates, glasses cups etc last at a restaurant before being replaced. If they go through them quickly they should go through P&L.

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By DKB-Sheffield
30th Aug 2016 14:01

Hi,

I spent many of years in the catering trade and came across this question on a regular basis.

On the one hand, Mike is right in questioning the definition of a fixed asset. From a longevity aspect... a solitary tea spoon may last 6 days before being accidentally "binned" yet a silver salver may last 6 years (or even 60!). From an economic benefit perspective.. do the assets themselves bring an economic benefit... well I suppose that is a "yes".

However, you should also consider the matter of "what" the "asset" actually is. Whilst a £7K outlay on a single asset would certainly suggest capitalisation, that £7K is probably made up of 1,000 or more individual items. How do you therefore monitor the "asset" as a whole? Take plates for example... a plate can be broken (worthless), chipped (minimal value), de-glazed through washing (perhaps 30% new value) or as new (minimal depreciation). So... out of 200 plates purchased in year 1, 40 may have broken, 50 may be chipped, 60 may be de-glazed and 50 may be "as new". You would then really need to work out the level of disposal, write off and depreciation which would need applying.

If you then factor in replacements/ additions... you're looking at a whole new layer of work for, what in all honesty, is of little benefit.

Now...

This has been handled by the industry in different ways over the past with some large chains treating such "assets" as working replacements and hence, as stock, performing stock takes for these in the same way as they do with food, liquor and (even) paper ware, linen etc. with any diminution in value being reported against the stock value. However, many have now ceased this practice having considered the materiality of such "stocks" and the time taken to record/ report them.

So... the above said...

In my eyes cutlery, crockery, paper ware etc. would not be classed as fixed assets as it is almost impossible to guarantee life of the asset with any degree of certainty. Furthermore, the separately identifiable components of the fixed assets are generally too small to be sensibly recognised as fixed assets in an FAR. After all, would a market research company purchasing 5,000 clipboards with a useful life of 10 years capitalise them as fixed assets?

Indeed, I would suggest that, were the items to be classed as an asset, they would be current assets held as stock.

My personal recommendation therefore is to direct expense the initial purchase and all subsequent purchases through the P&L.

If you feel there is a benefit in (or a requirement to) holding the working replacements as stock, performing stock checks and depreciating the value as required... that would be my suggested route instead of capitalising!

Always bear in mind the T&F materiality aspect of holding/ expensing a level of "asset".

Hope this helps

Dave

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Replying to DKB-Sheffield:
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By Ron_de_Voo
02nd Nov 2020 20:42

Hi Dave,

Could you please clarify the below:

"My personal recommendation therefore is to direct expense the initial purchase and all subsequent purchases through the P&L."

Isn't 'Direct expense' going to be reflected in P&L as well...same as subsequent purchase..If both are going through P&L..whats the difference..

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By Vaughan Blake1
30th Aug 2016 15:34

Taking a pragmatic view, the only people who will look at the accounts are the owner, the bank and HMRC.

These assets have a limited life due to heavy usage (especially if it is a Greek restaurant!) so 100% write off in the accounts seems fair to all parties. Best use a separate heading.

The bank can see the P&L heading, HMRC won't care as 100% AIA would apply and it is ancient history for the owner.

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