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Do you determine correctly the lifetime of a technical improvement of a leased building?

Helena Šulcová
22/04/2019
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Do you have your office, warehouse or production area located in a leased building? Have you made any construction that are in your accounting books kept as a technical improvement of the leased building?

If your answers were “YES” to both questions, for how many years you stated the useful life of the technical improvement for depreciation purposes?

On the basis of my experience, I often find that for my clients a building means simply building and thus it is depreciated for 30 years. But does it make sense to you also with a rented building when you have a rent agreement for example just for five years?

If you have technical improvements to a rented building, I recommend you to consider the useful life of these assets in two ways:

  1. What is the useful life of this property?
    It depends on the type of the property: electrical wiring, building floor marking, shelves firmly attached to the building, etc.

  2. For how long have you signed the rent contract?

The useful life (and thus the depreciation period) of the technical improvement should be stated at the shorter of:

  • the useful life of the property and
  • the period for which the rent agreement is concluded.

It should definitely not happen to you that after the termination of the rent agreement you will still have an asset in the property register with a net book value for which you do not have longer the right to use.

What else do I recommend to consider?
In the rent agreement, you may also have the obligation to restore the premises to the original state at your costs. In this case, you should also account for a reserve for a restoration the premises in a value at which you estimate the cost of the restoration.

Should you have any further questions on the topic of depreciation of the technical improvement, my colleagues and I are very pleased to help you with all of your queries.

Author

Helena Sulcova
Helena Šulcová
Audit Manager
Crowe