Anonymous
Share this content
0
4494

FRS 102 sch 1a - depreciation on buildings

Depreciation on buildings - not land

Didn't find your answer?

Search AccountingWEB

I remain to be confused by this is and any google search seems to confuse further and is inconclusive 

for a small limited company with a building it uses for its trade (Not as an investment) I understand it should be depreciated and 2% seems a generally accepted amount 

however our software says depreciation is calculated and writes off the difference between cost and it’s expected residual value (or something similar)

so if a building cost 100k and the directors consider the residual value to be 100k surely at, no matter what % - that equates to zero 

Replies (20)

Please login or register to join the discussion.

avatar
By atleastisoundknowledgable...
22nd Mar 2018 18:22

You need to tell your software that you want a residual value of £nil in 50 years time. It will then write it off at 2%SL

Thanks (0)
avatar
By ajj.jones
22nd Mar 2018 18:36

But what if the residual value is considered £100k - there appears to be no need to depreciate at all?

Thanks (0)
Replying to ajj.jones:
avatar
By atleastisoundknowledgable...
22nd Mar 2018 20:40

Correct.

Thanks (0)
avatar
By ajj.jones
23rd Mar 2018 10:36

Any other opinion would be appreciated

Thanks (0)
avatar
By paulwakefield1
23rd Mar 2018 13:57

Based on the information in the question, I would agree that no depreciation is required. I would however be wanting to see some solid justification of the residual value that complies with your reporting standrd (FRS 102 I assume).

Thanks (0)
Replying to paulwakefield1:
avatar
By ajj.jones
23rd Mar 2018 14:03

Thanks
FRS 102 sch 1a

The directors feel the value is higher now than the cost ......

Thanks (0)
Replying to paulwakefield1:
avatar
By ajj.jones
23rd Mar 2018 14:03

Thanks
FRS 102 sch 1a

The directors feel the value is higher now than the cost ......

Thanks (0)
Replying to ajj.jones:
Hallerud at Easter
By DJKL
23rd Mar 2018 14:25

Presumably they are valuing the land in current use and with regard to current planning status rather than the say "well with residential planning it will be worth £XXX" approach when it does not currently have residential planning? They also need to consider bare site valuation taking into account the demolition cost of existing structure.

Thanks (0)
Replying to DJKL:
avatar
By ajj.jones
23rd Mar 2018 14:34

This is a building from which they trade
There is no development land

Thanks (0)
Replying to ajj.jones:
Hallerud at Easter
By DJKL
23rd Mar 2018 14:52

But I thought the point was they were arguing the building had no value as the residual value of the land was greater than the existing cost of the land and building, or am I misinterpreting?

Thanks (0)
avatar
By paulwakefield1
23rd Mar 2018 15:19

The question the directors should be asking is if, say, they are assuming a 50 year life: "What will the residual value be of a building that is 50 years older than it is now using current prices"? It is not "What is the building worth now"?

I assume this is a freehold or very long leasehold building?

Thanks (0)
Replying to paulwakefield1:
avatar
By ajj.jones
23rd Mar 2018 16:26

Thanks
I have a feeling they will suggest that the value in 50 years time would be more than current value
I maintain that a 2% ( or any rate at all in fact) depn rate gives us a £0 depn charge if the value is considered at least cost after the useful life

Thanks (0)
avatar
By Wanderer
23rd Mar 2018 16:14

Isn't this the whole nonsense of our accounting standards attempting to separate land from buildings then depreciate the building element?

Example, my parents bought their first house in 1966 for £450. Drove past it recently and no apparent signs of it being at the end of its economic life.

But let's say it is (52 years after purchase) at the end of its life. You could probably sell the second hand materials (roof tiles, bricks, copper pipes etc.) for more than the £450 the whole thing originally cost let alone the buildings element of that £450.

Thanks (1)
Replying to Wanderer:
avatar
By ajj.jones
23rd Mar 2018 16:23

I couldn’t agree more
A total nonsense that no body really understands

Thanks (0)
Replying to Wanderer:
avatar
By paulwakefield1
23rd Mar 2018 17:48

But at least FRS102 is more cognizant of that by looking at the current residual value rather than the historical one which means that frequently depreciation for buildings will be zero or will become zero during the life of the asset depending on inflation and deterioration.

Thanks (0)
avatar
By john hextall
28th Mar 2018 11:08

My understanding of this (which may well be wrong of course) is that buildings are normally depreciated over 25 years on the basis that, if you use a commercial building for this period, it will probably need substantial rebuilding work at the end. So the value is spread over 25 years worth of accounts to more accurately reflect the actual costs of doing business. You have a certain amount of choice as to whether it is 25 years or 50 or whatever depending on the actual business.

Thanks (0)
avatar
By ASF
28th Mar 2018 12:16

Without having checked FRS102, I suspect it might need to be based on a "valuation" of the building rather than merely what the directors "feel". I would expect this would normally be based on some externally verifiable valuation, such as from a commercial property agent, RICS member, or similar. After all, we all "feel" our properties are worth more now that they used to be!! Also, whilst an underlying presumption that the land on which the property sits may appreciate in value (but even that may not be so certain in recent times!), I think it might be that there could be an underlying presumption of the opposite as far as the building goes. Should there be an evidenced increase in value, some consideration of what can and cannot be done with any revaluation reserve created from recognising any increased value in the books, will also need to be made.

Thanks (0)
avatar
By rememberscarborough
28th Mar 2018 13:31

Common sense tells you that any building has a finite life and should therefore be depreciated (2% being a reasonable assumption for a long life asset).

The assumption that the property increases in value is separate to this and will need to be covered by a re-valuation say every 3-5 years. Any change in valuation is then booked to the revaluation reserve and depreciation recalculated over the remaining life of the asset.

The nett effect is probably pretty close to your nil depreciation of the original value but the accounts do show what the true value of the asset is likely to be rather than just netting it off.

BTW my last employer added an extension and reduced the value of the asset because all the value was in the land and increasing the size of the building just meant it would cost more to knock it down...

Thanks (0)
Replying to rememberscarborough:
avatar
By Wanderer
28th Mar 2018 13:37

Quote:

Common sense tells you that any building has a finite life

Agreed.
Quote:

and should therefore be depreciated (2% being a reasonable assumption for a long life asset).

But does this necessarily follow? See my 23rd Mar 2018 16:14 post above.
Thanks (0)
Replying to rememberscarborough:
avatar
By paulwakefield1
28th Mar 2018 15:45

The residual value and therefore the depreciation charge is a separate matter from revaluations and changes in the current value.

The residual value definition has changed under FRS102. It is now: "Residual value is defined as the estimated amount that an entity would currently obtain from disposal of an asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life."

Thus the residual value used in the depreciation calculation can fluctuate over the life of an asset. If residual values increase, depreciation may cease.

Thanks (0)
Share this content