Help

System

Please can someone help me, <BR>My company are leasing a building, for which we pay rent on a quarterly basis (revenue exp), however to get this building to a workable state we have had to put in new electrics, my manager wants me to code the cost of this work to capital exp and depreciate.....Is this right?? shouldnt it be revenue expenditure??<BR><BR>Help me please???

System

Kill me if i am wrong but...

i would treat it as revenue expenditure and then have a revaluation of the property and increase its value whilst continuing your normal method of depreciation on the building. Unfortunately though you don't own the building you only rent it so as such can't put it's value into your accounts.<BR><BR>To conduct depreciation on something it really ought to be an asset of your company (expensive production based machines, buildings, vehicles etc.) yet the electrics inside a building that isn't yours can't really be considered to be an asset unless you are planning on taking them out when you leave! Therefore I would say that considering electrical wiring in a building you don't own to be an asset and depreciating it would be putting an untrue slant on the value of your business. I would go with revenue expenditure not capital in that case.<BR><BR>but hey i am just doing the same as i did in my exams and guessing so i would consult that text book of yours if i were you...<BR><BR>Matt

System

Kill me if i am wrong but...

Thanks, thats what i was thinking!! (i too was taking a wild guess!!)

System

just to add confusion...

Hi<BR><BR>Just to throw a stick into the works, Id say I agree with your manager, you cant look at how something is physically when deciding if it a fixed assest or not.<BR><BR>The company I work for is in a similar situation, we rent the building. However when some work was done on the electrics (mainly for the staff kitchen) it was treated as a fixed asset. Yes we dont own the buiding but it is possible to own systems/fixtures and fittings within it regardless of how they are physically attached to the building. For all I/you know, if the company vacate the building, the land lord may purchase the electrics back, its not about the building or the land thebuilding is on.<BR><BR>Also consider that the eletrics are used to run your company and will provide use formore than one accounting period (12 months), their not just an over head like the electricity itself. In a way the eletrcs are no different to a factory plant which could be 'part-and-parcel' of the building, cars, even furniture.<BR><BR>Neil

System

The landlord would have to be...

...completely loony if he agreed to 'buy back' the electrics within his own building. He would know as well as you that it would cost you money to have them removed and once you did they would be of no value to you. You would have to be really rather spiteful to incur a cost to your business, without gain, just because the landlord wouldn't buy them back.<BR><BR>Of course a prior agreement may be in place regarding this but as it is not mentioned i presume it that there is not.<BR><BR>I concede the point regarding the fact that they will be useful for more than one accounting period but i do not believe that after expenditure they have any residual value because all that has been done is to bring the building up to the necessary specification. Therefore to depreciate its value when i dont believe it has one would be incorrect.<BR><BR>I disagree with the factory plant, building, cars and furniture analogies in that it they can be sold at any time and therefore do still have a residual value hence the need for depreciation. Try selling the electrics you ripped out cause the landlord wouldn't buy them off you.<BR><BR>but hey i could still be wrong i am just justifying my reasoning. Can somebody out there settle our discussion please?

System

The landlord would have to be...

Hi<BR><BR>I see what your saying, and when i say buy them back i dont mean ripping them out literally, I mean some sort of settlement for upgrading the buildings fittings. But like i also said, its nothing to with how something exists physically, (i.e. attached to building or not) its about what or how something is used in relation to the operation of a business. A renovation of this type is considered Improvement to Leasehold, the leasehold being an asset of the business regardless of if it can be sold or not.<BR><BR>Costs in bringing something up to specification does can have value, unless its general maintenance on an existing item. For instance if you buy an unusable building a renovate it (as in this case), the costs incurred in its rebuild are treated the same as the costs of purchase - the value of the asset, just the same as if you build it from scratch (the value wouldn't just be based on the purchase price of the land). Whereas general maintenance costs to keep the building at its original condition (i.e. a lick of paint!) would be revenue. True you can sell building resonably straight forward whereas you cant an installed eletrical network but its none the less an investiment in the long term operations of the business. But, if someone where to buy the business they could well buy the fittings (including an electrical system) if it was still to run from the same location. Also residual value of an item is a question of accounting for a businesses finances, not wether or not you can sell the item.<BR><BR>In general a fixed asset is a long term item held for business use and its value includes all acquisition costs items, such as its freight and istallation. Converting it to cash is irelevant since it could be depreciated to £00. The issue of accounting for assets is done according to the assets cost in relation to its use by the business, if it can sold or not is an issue of liquidity, which should effect the assest's main treatment in the accounts.<BR><BR>In this case I think there seems to be confusion because the building is owned by own person and the electrics another. If the building were your own you would treat the installation of new electrics as part of the building's value but just because you would only own part of the building doesnt mean its any less a fixed asset.<BR><BR>Neil

System

ok...

I understand all the points you make. I think the key to this is whether or not the elctrical re-wire is considered to be an upgrade or considered to be maintenance.<BR><BR>According to FRS 15: An upgrade would be capital expenditure but as maintenance it would be classed as revenue expenditure.<BR><BR>Rightly or wrongly i believe that bringing a building up to specification would be considered maintenance in so far as you wouldnt expect someone purchasing the building to believe the electrical systems were of an upgraded status. They would be considered to be either up to standard or not up to standard and requiring maintenance.

System

ok...

Hi<BR><BR>A rewire would be an upgrade, and not maitenance, as its taking it from one form to an improved form (in this case a completely new electrical system), its a renovation. Maintenance wouldnt involve a change of substance to the electrics but rather just doing standard work to keep it in a working condition. Considering a complete rewire as maintenance would be like buying a new car and saying its the same car as you bought a year before but it has been serviced.<BR><BR>Neil

System

Dear god..

..It just struck me that i have finished studying for the AAT qualification and here i am discussing the intricacies of Capital Expenditure. I never thought it would come to this...I dont remember turning into a gimp! <BR><BR>Ahhh...but i have the answer to this problem:<BR><BR>Stella, Stella Artois - Numb the pain Matt, Numb the pain!<BR><BR>Can i post you a can, gimpy? Sorry can i post you a can, Neil? hahaha :-)<BR><BR><BR>(no offence intended, of course!)<BR><BR>

System

Dear god..

Can I throw in my two pence here???<BR><BR>Wiring is something that has to be replaced every 10 years or so to be safe so I think that this would be treated as revenue and not capital expenditure.<BR><BR>No previous knowledge greater than you two, just a gut feeling!<BR><BR>Gimp 3 (Annette)

System

Dear god..

Thank you all so much, really got stuck into this query didnt you!!!! All points taken into account i am now going to print all this off and read it, then drink stella and as you say drink to numb the pain. It would be so much easier to have become a gardener....hmmm which border plant to use here....oh the decisions...!!<BR><BR>Once again thanks to you both<BR><BR>Jodie

System

Dear god..

evenin!<BR><BR>Yes it does, but so does factory machinery when its worn out and thats a capital expense, and in this istance it was a renavation (spelling?) that the business could use, like upgrading a factory production line. Isnt a new elctrical system like building an extension? If a factory line were replaced in its entirity, the old one would be written off (taking into account any current value) and a new one purchsed, same with an electrical network. Generla repair and up keep however = maintenace = revenue expence. <BR><BR>Jodie, did your compnay 1.) purchase an entirley new electrical network/have an old one updated or 2.) did it just a few tweeks done to sort it out? One of these is capital the other is revenue.

System

Dear god..

lol<BR><BR>says he who can quote financial reporting standards...<BR><BR>Ah well, Stella Artois hasnt got the name 'loopy juice' for nothing <BR><BR> ;o)

System

Dear god..

I have got some more information. The electrician has ripped out the old cables, replaced and fitted new lights and a new mains board, therefore a complete overhaul. Total cost, spread over weekly invoices will total £5k. I think i capitalise the whole cost and depreciate, however i cannot reason this as it isnt our building therefore isnt really increasing the value of our company. <BR><BR>Jodie

System

Dear god..

afternoon<BR><BR>To re phrase form above, it is possible to own fistures and fittings in a building and not the building, its all about the value an not the physicality of something. For instance you can rent a house (and so not own it) but own the funiture within. Although the electrics are vitually permanently attached you can still own them without the building.<BR><BR>pass a glass ;o)