Home› For accounting professionals› General accounting discussion
Current updates regarding coronavirus (Covid-19) and the precautions AAT are taking will be continually updated on the below page.

Please check this link for the latest updates:
We hope you are all safe and well and if you need us we will be here. 💚


Assets

kazflankazflan Feels At HomeRegistered Posts: 36
in General accounting discussion
If an asset that is to be depreciated over 5 years and part way through changes to 10 years is it correct to re-calculate the depreciation charge and adjust the accumulated depreciation to reflect the new amount. This would then release the over depreciated amount back to accounts.
Or do you re-calculate the new monthly charge and leave existing depreciated value as is?
The asset is for dilapidations to the building depreciated over the original period of 5 years. The value has not changed only the lease period.
After checking for clarification I have been given two answers??

Comments

  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,042
    kazflan wrote: »
    If an asset that is to be depreciated over 5 years and part way through changes to 10 years is it correct to re-calculate the depreciation charge and adjust the accumulated depreciation to reflect the new amount. This would then release the over depreciated amount back to accounts.
    Or do you re-calculate the new monthly charge and leave existing depreciated value as is?
    The asset is for dilapidations to the building depreciated over the original period of 5 years. The value has not changed only the lease period.
    After checking for clarification I have been given two answers??

    Personally, I would just use the new rate rather than going back and changing things or reversing prior year depreciation charges. There shouldn't be any tax consequences, i.e. under/over-payment of tax, so in my opinion there's nothing to worry about.

    If the business has its accounts audited and the mistreatment is material then the auditors may decide that a prior year adjustment is required (but I'd leave that judgement call to them).
  • blobbyhblobbyh Font Of All Knowledge Registered Posts: 2,415
    kazflan wrote: »
    The asset is for dilapidations to the building depreciated over the original period of 5 years. The value has not changed only the lease period.

    Sorry, am I misunderstanding you here? Are you saying the 'asset' is the projected COST of dilapidations on the building you're currently leasing where the lease period (but not the dilaps cost) has extended? How are the dilaps cost an asset to be depreciated against?

    I'm assuming this is related to your other thread on the same topic? If so, I don't believe you were given two different answers where the dilaps were being correctly treated as an accrued liability, not an asset. Both answers agreed to release an over-accrued cost if there was one. I expanded mine for you to revisit the dilaps cost to see if the amount already accrued was sufficient enough to carry forward over the next five years without further additions.
  • kazflankazflan Feels At Home Registered Posts: 36
    The cost is projected ,determined when the lease was taken out. I have been asked do we need to re value the amount already depreciated as it is too high. I would have to release the over depreciated amount and reduce the monthly amounts going forward. I was under the impression that you would leave the amount already depreciated as it is, and split the remaining balance over the new period remaining.
  • blobbyhblobbyh Font Of All Knowledge Registered Posts: 2,415
    Reading this in context with your other thread, are you sure you're not getting mixed up here with accruals and depreciation? What is it exactly that you're depreciating against?
  • kazflankazflan Feels At Home Registered Posts: 36
    Sorry I think I was confusing myself. We were given the projected cost for dilapidations when the lease was agreed. We have spread thast cost over the lease period and accrue each mont.Our accountants have it as an asset. My predecessor did not enter it into our accounts as an asset as we did not purchase anything to depreciate against. The accountants state that the cost is incurred as soon as we took on the lease and is therefore an asset as it goes hand in hand with the lease. therefore we should be depreciating over the lease period.
    As an accrual we could re-value the amount accrued to date and reduce, the question was can this be done if it has to be classed as a depreciating asset?
  • blobbyhblobbyh Font Of All Knowledge Registered Posts: 2,415
    kazflan wrote: »
    The accountants state that the cost is incurred as soon as we took on the lease and is therefore an asset as it goes hand in hand with the lease. therefore we should be depreciating over the lease period.
    As an accrual we could re-value the amount accrued to date and reduce, the question was can this be done if it has to be classed as a depreciating asset?

    I see where you're coming from now but the incurrment of costs at the start of a lease is arguable IMO as they're only ever realised at the end and have no definitive value at the beginning. Is this an IFRS or IAS and would anyone else reading this thread classify the dilaps as an asset? I know we certainly wouldn't here and would - and do - accrue for them the same as your predecessor did.
Sign In or Register to comment.