Component accounting

Unusually, the chairman of Brighton Lions Housing Society and I (I am treasurer/company secretary) had a pre-audit meeting with our accountants today.  I say "unusually" because the pre-audit questions are usually dealt with quickly and simply by a telephone call.  However, this year things are different and there is a new requirement in our accounting system which was best discussed face to face: component accounting.  To be fair, we had been warned last year that this would be introduced and that starting from the accounts for the year ended 31 December 2012, we would have to comply.  Basically, it involves the way we treat the depreciation of our building stock.

(I have no intention of trying to explain what depreciation is or how it is applied in accounting.  A fairly simple explanation may be found here.)

The standard practice in past years has been to depreciate our buildings over their expected useful life, which is 100 years.  But some clever so-and-so has realised that the various parts of a building don't last as long as the bricks and mortar.  Rooves, for example, need replacing after perhaps 60 or 70 years; kitchen fittings every 20 years; and so on.  So, there has been produced a list of what are considered to be separate component parts of a building.  These include the main fabric, the roof structure, windows and external door, gas boilers, kitchen fittings, bathrooms, electrics and lifts. 

In the past it has been our practice, when replacing a kitchen or bathroom or when we replaced all the windows in a block of flats, to write off the cost in that year's accounts as major repairs.  But that is no longer good enough.  In future, these costs must be capitalised and the value depreciated over the appropriate number of years.  But even that is not all.

In order to achieve a fresh starting point, a clean slate (if you will pardon the dreadful pun), we have to allocate a percentage of the original cost of each building to the various components and then calculate the depreciation afresh.  What is more, where any component has been replaced, the book balance of the old component must be written off and the new component listed in the fixed asset register and the appropriate depreciation to date calculated, with a journal entry being raised for "prior year adjustments".  In theory, it should be necessary to go right back to when the first block of flats was built - which was 1962 - and list major changes since then.  In practice, our accountants will produce a schedule of major repairs over the last five or six years and we will see which need to be capitalised.

All in all it's quite a headache.  And we have just four blocks of flats comprising 109 units and six bungalows.  I hate to think of the work involved for some of the major players.

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Having been burbling on about Brighton Lions Housing Society, let me show you one of our blocks of flats.  This is Lions Dene where there are 33 flats (I think) plus a doctor's surgery and a meeting room for Brighton Lions Club.  The flats are let as social housing to persons of retirement age.