I have a client who is a dealer in fine art and he has a collection of research books, some of which are very valuable. Between us we estimate the value of his library at around £5,000 so I feel it should be a business asset.
I know the cost price of each item but am just wondering about whether or not they depreciate? I would probably say not but just wanted to know others opinions...
Thanks all
Clare
obviously you are looking at the books in agregate rather than individual depreciation which creates an issue for if more books are added or some of the existing asset sold (which would indicate the need for individual depreciation as with the usually quoted engines on an aeroplane... But you really don't want to do that for books).
My feeling is that as specialist books they are likely to have a finite life so if the decision is taken to capitalise rather than expense I would depreciate on a straight line basis over ten or twenty years.
If these assets were expenses as purchased then whilst in agregate they may form an asset they have in reality already filtered through the P&L so despite their value (for which the client may wish to insure them as specified items) they would not end up as depreciable assets.
If the books are something to be introduced to the business on mass and have not previously been expensed then as mentioned above, agregate and treat as a single item and depreciate down to residual value matched to their useage to the business.
I know that I'm telling my grannie how to suck eggs here but don't forget that the depreciation is the indication of the usage to the business, not necessarily a refletion of wastage of the asset so, if your client is set to retire in ten years and the books relate to a business that will not exist without him in it then surely that defines a useful period of ten years over which the business will conume useage of the books and the depreciation schedule should be set to the same period (with residual set to the value that the assets could be disposed of between knowledgeable willing parties in an arms length transaction).
Thats my thoughts but sure others will have a different take on this one.
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
It's the life of the books that I am struggling with.
As an example - he buys a painting at auction that he needs to research so he then buys books about that artist, time period, art school etc and each book costs him IRO £70 - he could buy 5 or 6 relating to that one painting. He does not sell the books ever, even when he has sold the painting they were bought to research. The books are added to his in house library where they will stay gathering dust forever and a day.
That's why I have a quandary - initially they are purchased (IMO) as a cost of sale - they directly relate to the purchase and sale of one painting. However they will never be sold themselves. However if in 10 years he buys another painting by the same artist he will use those same books again. Fine art and old masters being what they are, the books are always relevant and don't have a finite life.
I'm almost of the opinion that they should not be depreciated at all as they hold value very well indeed. The client is prepared to have his whole collection valued at current market value each year (his suggestion not mine) so I could just adjust the asset value each year as I would for stock...
Really not sure on the best way to approach this one.
SHaun - in the year that I have been doing his books they have all been expensed through the P&L but one of the decisions I have to make is whether to move those expenses out of the P&L. I don't believe they should really be expense items and should be capitalised.
If you look at the books individually then it shouts expense (the same as we do with accountancy books... Although tax books and manuals on accounting standards only last for a year anyway so maybe not a good comparrison there!).
If you look at them in aggregate as a possibly appreciating asset then it's shouting capitalise.
Sounds as though you are toying with the capitalise and revalue to fair value at each reporting date which is of course a viable alternative to depreciation.
Means of course that you may end up with a chunky revaluation reserve instead of the books going through retained earnings as depreciation.
One thing to consider. Is this actually material to your clients books? (more than 5% of profit or 1% of total assets or 0.5% of turnover?) If not then as both treatments are quite justifiable then nobody is going to take issue with you taking either route.
If the amounts are material then more care needs to be taken over the option pursued as capitalising changes some key ratio's including Return on Capital Employed and Gearing.
I would not in any way link the books to the actual painting purchased as they cannot be deemed to have been wholly, neccessarily and exclusively purchased in relation to the painting (it is not a necessity to provide a copy of the book with the picture and the book can (regardless as to whether it will be) used for the sale of similar pictures by the same artist).
If other books are purchased and expensed then all books should be treated in the same manner as they all belong to the same class of asset.
If these are the only books purchased then you have a choice but whatever you decide it needs to be applied consistently for all items of this class and for future periods unless a new accounting standard dictates that you need to change or other changes to the asset mean that using the alternate approach gives a fairer view of the entities affairs.
In such instance my reading is that would be a change of accounting policy rather than estimate so changes would need to be applied retrospectively rather than prospectively.
My approach would be to expense (as you are currently doing) but you need to make your decision based on all of the facts including materialarity of the books treated as an asset in agregate.
Where Bill when we need him as sure that he would have a good take on this scenario!
talk in a bit,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
....... Where Bill when we need him as sure that he would have a good take on this scenario!
talk in a bit,
Shaun.
Been a bit busy over the last few weeks, and although I have managed to read posts, I have struggled to to find time to respond to all the ones I would have liked to (takes me ages to write up a considerd response, usually by which time, someone else has already covered it)
I have had a similar situation, a graphic designer buying books to research the project he may be working on.
In this situation I capitalised the books because the business is fledgling at the moment, and a couple of hundred pounds on books makes a difference.
Having said all that (Shaun thinking "'ere we go" ) I am reviewing my thoughts on the subject. In both these cases the book(s) are bought for a specific purpose. There usefulness has expired, and they are obsolete once the research is complete. It does not mean that they cannot be used in the future but a) that's not guaranteed, and b) the information contained in them may not be relevant any more. I would say it is no different to a business holding on to a piece of equipment once depreciation has been fully realised (as an avid collector of junk whose mantra is "it may come in useful one day"). For example a micro fische reader. Most people would say they are obsolete but once in a blue moon they are still needed.
Conclusion. In future I will expense them.
Out of interest Shaun, how have you dealt with your extensive collection of reference materials (I realise some are bought for personal study)
Thanks guys for your responses. The client is adamant that the books are an asset and is happy to pay for a valuation each year so I'm going to capitalise.
Bill I think that this situation is slightly different to your graphic designer as the books will have a use throughout the life of the business as he deals with specific groups of artists so the books remain relevant to the business (at least most of them do).
They are not really material in value (wish I made 10% of what this guy makes in a year!) so as SHaun says I don't really have anything to worry about either way.
Again, thanks for the help and making me consider things I hadn't thought about - as always!
) I am reviewing my thoughts on the subject. In both these cases the book(s) are bought for a specific purpose. There usefulness has expired, and they are obsolete once the research is complete. It does not mean that they cannot be used in the future but a) that's not guaranteed, and b) the information contained in them may not be relevant any more. I would say it is no different to a business holding on to a piece of equipment once depreciation has been fully realised (as an avid collector of junk whose mantra is "it may come in useful one day"). For example a micro fische reader. Most people would say they are obsolete but once in a blue moon they are still needed.
