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Getting to grips with component accounting

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Management accountant and Great British Bake Off star Makbul Patel gives his hot take on component accounting.

25th Jun 2021
Principle Accountant Bolton at Home
Columnist
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There’s nothing like a bit of pottering about on the allotment. I’m not exactly green-fingered but to be out in the sunshine and away from the glare of the screen is magical.

My beehives are buzzing! I could watch them going in and out all day - industry on a totally perplexing scale. I recently had my first experience of catching a swarm. I was very fortunate and my inexperience didn’t muck anything up. The swarm was on a low hanging branch - all it needed was a quick jerk into a hive box.

Watching a whole mass plummet to the floor is dazzling. The theory is if you’ve caught the Queen in the box, the rest of the bees will follow. There are fascinating videos available online depicting the march of a swarm into a hive to be with the Queen. It reminds you of that film Metropolis - an organised swarm of workers.

So anyway, there I was, at the allotment lost in my thoughts watching the bees, at peace. Suzie, my neighbouring plot holder, waved to me. I waved back and she came over. We watched the bees and talked about the benefits of organic food, as you do. She then asked me if I was willing to sell her a hive.

She had watched me over the years and now wanted a new challenge. How much would I sell her one of my hives for? Before this encounter, I had never really given much thought into the costs of a full hive.

To buy a small colony from a breeder would cost about £250. Then there is all the transportation and equipment. To rear a colony from infancy takes lots of care and time. Evaluating things from a financial perspective would require the inclusion of many subjective costs.

I ended up putting my neighbour off the idea of buying a hive from me - it would be too expensive, and in all honesty I am too attached to them. Beekeeping is like that. It’s very emotional.

This exchange got me thinking about a little known area of management accounting called component accounting (CA). Before you get ideas, it’s not about costing microchips and transistor valves.

CA is the process by which you assign capital costs to a company asset that improves it and raises its value. This value of the asset is then used to work out depreciation and net book value.

I work as a Principal Accountant for a Social Housing company, with more than 18,000 housing stock - flats, apartments, traditional houses, community centres, we have the whole shooting match.

I am deeply involved with CA at year end. Once the accounts have closed and rolled over into the new year, I have to assign capital costs of the period just closed to our housing stock.

It’s not as easy as it sounds. There is a giddy mix of external contractors working on the asset, surveyors assessing the work, testing and surveying and a host of other costs. On top of that, our in-house labour and materials are added to the work type at year end.

The work-type, or work-areas in our case, are trades such as Kitchens and Bathrooms, Structural Work, External Refurbishment, Gas and Electric, and so on. It is my job to assign the costs to the property worked on. That task can vary depending on how much thought and work you have done in the months leading up to year end. With, in our case, 18,000 properties receiving capital work jobs for a CA accountant, it can be quite demanding. I will admit that.

Leaving aside the complexities of CA purely from a work point of view, it is mired with grey areas.

Take, for example, 23 Acacia Avenue. A new central heating system was fitted - total costs of £2,500, which included a new boiler and seven radiators. Easy peasy. No sweat. If only everything in life were that simple.

However, the smugness hardly had a chance to settle when a curveball came hurtling towards me. A gentleman in Flat 13b on the same street had his bathroom adapted for disability at an eye-watering cost of £15,000. That’s straight-forward, I hear you say - 15 grand is assigned to that property.

But it was £15k spent on a property making it suitable for a disabled person; did that increase the value of the property? What if the next tenant that comes in has the same age profile but does not need, nor wish to have, a house adapted for a disabled person? It all must be ripped out and reinstated as a standard bathroom. There’s a view that the adaptation cannot be capitalised on the property as it is too niche. Some say it should as the asset has had a tangible improvement.

It is of course an extreme example, but on a routine level there are other issues. Can planning consultations and surveys for properties be realised as component capital costs for the property? From a layman’s point of view it is not a tangible cost, such as a fitted kitchen.

In my opinion, if it’s significant enough it will be assigned as a component cost to the asset value. Again, what is significant varies from person to person and company to company. That is the beauty of management accountancy - the room for individualism and interpretation. It’s one of the reasons I absolutely love doing Component Accounting. The sheer quantity of data to sift through, making judgement calls and sometimes even striking up a debate with your colleagues. Everyone will have an opinion.

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By DJKL
25th Jun 2021 22:34

Surely if these are existing properties whether these costs are even Capex in the first place needs addressed, you surely first need to determine what is revenue.

How we used to control ours, on a far smaller scale, was have a small works LLP that captured all costs via project accounting (Access Accounting) on a property by property basis and then it invoiced our investment companies for either capex or repairs depending upon what we had done, though in our case re flats etc most tended to be repairs as we captured the capex on the original build of the blocks, however commercial property modifications tended to need a bit more thought- luckily there might only be 5-6 upgrades/structural change projects a year, the other 80-90 projects tended to be revenue.

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