Depreciation Policy: How Do You "Actually" Decide?

Formal procedure e.g. at a directors' meeting?

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Hi, my client has a brand new limited company, purchased a few desktop computers. He has no idea about depreciation. We normally apply 20-25% straight line, don't we? And the depreciation policy should be disclosed in the annual accounts...

So how do companies usually set the policy? Do they have to have a formal meeting and document it?

In my client's case, he's the only director. Can he just say "OK I'll take your advice, let's make it 20% SL"?

Thank you for your help in advance.

Replies (15)

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paddle steamer
By DJKL
23rd Jun 2023 19:38

I tend to go higher with computers and printers, say 35-40% RB, whilst you can of course use them for more than 4 or 5 years in reality we replace most of ours after nearer 3/3.5 years.

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Replying to DJKL:
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By Hugo Fair
23rd Jun 2023 21:15

I'd go with 40% for 'desktop computers' (their shelf-life for most purposes isn't much over 3 years even if still physically 'working', and their value negligible).

But to answer OP, accounting policies are ultimately the responsibility of the body reporting (i.e. the client) ... however, they will usually need at least an explanation if not gentle prodding to get there.

The procedure for setting the policy will be the same as for all other strategic decisions of the company (which may or may not involve a formal meeting and then documenting it - but since in this case "he's the only director" the formality would seem superfluous).

Like all other aspects of the accounts, in the hopefully unlikely event that you and client don't agree then you have to make a judgement as to whether you can remain in place (but obviously only where the 'gap' in approach seems to you to be a matter of integrity rather than mere opinion).

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Replying to Hugo Fair:
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By Victor01
23rd Jun 2023 22:14

Thank you for your help. In that case maybe I'll ask him to confirm by email and use the confirmation as a depreciation policy. Thank you very much, for your advice.

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Replying to Victor01:
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By WhichTyler
24th Jun 2023 11:40

Could you do it as part of signing off the annual accounts (which include the accounting policies as well as 'areas of judgement'

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By Calculatorboy
24th Jun 2023 16:07

I'd just record it all in the final meeting (or telephone call ) notes when final accounts queries are cleared ,
I also do a letter of representation to be confirmed/signed by director every year covering material items etc ( even if not audited accounts)

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By Gone Sailing
25th Jun 2023 15:34

With AIA as it is, I expense computers and similar equipment up to £1k, and save everyone a lot of time.

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Replying to Gone Sailing:
Danny Kent
By Viciuno
26th Jun 2023 09:46

Don't you then risk the chance that SD is missed on these assets (albeit getting to the point where it is no longer a consideration) ?

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Danny Kent
By Viciuno
26th Jun 2023 09:49

Tend to find clients have no idea (or care) what depn is, how it works, or why we waste our time calculating it. Tends to just confuse things.

Obviously it's explained to them, but suspect it goes over most peoples heads. We tend not to discuss the rates with clients tbh.

The exception to this is larger pieces of P&M that will likely have a residual value.

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Replying to Viciuno:
paddle steamer
By DJKL
26th Jun 2023 14:01

Or when they want to pay dividends and you tell them they can't because the depreciation applied means little in the way of distributable reserves.

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By Victor01
26th Jun 2023 15:40

Thank you all for your advice but my question is how you set the depreciation policy in the first place. NOT about the rates % or about the disclosure.

Obviously you need to post the depreciation to the ledger during the year and to post it, your client should be made aware of %. At the start of the year, not at the signing off of the accounts stage. I'll take Hugo Fair's advice. Thanks all.

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John Toon
By John Toon
26th Jun 2023 17:54

The reality in this situation is the accountant applies the policy they think most reasonable. This may or may not be discussed with the client. Client signs the accounts which implicitly marks their agreement with everything disclosed whether they are aware, or not, of the contents and implications.

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Replying to johnt27:
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By listerramjet
29th Jun 2023 12:14

Of course you are right. And as I remember that sign off would include a representation letter covering this. But nothing wrong in shifting the direction of travel from board outwards. Particularly if the exit plan is grow and sell. Get the discipline in place early.

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By Themba
29th Jun 2023 10:57

Hi, I am of the view there are two issues to be dealt with in your inquiry. First, as the management what process do we follow to design/craft our policies and how do we keep them or file them including template to use to formulate them? On the other hand, after having an approach for crafting policy, the next step is the actually crafting or formulating of policies including the depreciation policy? Bearing in mind, there are many other policies. Which inform or guide the decision making process in the business.

Having said the above, once you an approach for formulating and approval of policy. Then you can start the process of formulating and getting all of them approved. Only a senior person or director must approve policies then be filed for all to access. Accounting standards will be the source of reference on guiding and informing which method is best to adopt and approve.

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By listerramjet
29th Jun 2023 11:52

I would suggest that in the circumstances of a small company like this then perhaps get him to minute the formal acceptance of the accounting policies that will be applied in preparing the accounts. I would add on a technical note that the accounting policy for depreciation should be method (say straight line) over the expected life of each asset group, as determined from time to time by review of the expected useful life. Then each year or so a sign off to confirm this review.

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Pile of Stones
By Beach Accountancy
29th Jun 2023 17:49

You mean we don't just click the boilerplate text in the Accounts Production software?

Yes this is tongue in cheek

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