What is a Depreciation Report (Reserve Fund Study)?
A Depreciation Report (Reserve Fund Study) is first and foremost a financial planning process that is intended to analyze, assess and plan the funding for Contingency Reserves. The purpose of this analysis is to identify the funding needs within the Contingency Reserve Fund, in order to make recommendations to ensure that sufficient funding is available for future repairs and replacement of the common building elements or assets of a Strata Corporation.
The Institute of Real Estate Studies defines a Depreciation Report (Reserve Fund Study) as a plan for the “provision of resources for major repairs and replacements of building components and improvements, or common elements, over time to ensure adequate funding of all future capital expenditures when required.”
An effective Depreciation Report (Reserve Fund Study) should:
- Identify and analyze all common reserve components, providing:
- A full description;
- The expected life-span;
- The current observed physical condition;
- The current effective age, in terms of physical deterioration and functional obsolescence;
- Any details of repair histories and expenditures; and
- An estimate of the remaining years of useful life
- Provide a financial analysis on a component by component basis, including:
- The estimated current replacement cost;
- A projection of the future replacement cost at applicable long term inflation rates; and
- A projection of the future reserve requirements compounded and based upon long term interest rates
- Provide a recommended funding model, which if adhered to, will result in sufficient funds to cover all future reserve fund expenditures.
- In B.C. two alternative funding models must also be included.