How can dilapidations assessments affect your balance sheet under FRS 102?

Under the Financial Reporting Standard (FRS) 102, commercial leases are treated as fixed assets. This means that, as a tenant, you need to accurately record the costs and liabilities associated with your lease on your balance sheets and make financial provisions for any known dilapidations liabilities that will accrue by the end of your lease term.

The most accurate way to record these costs is through regular dilapidations surveys throughout your tenancy, reporting on the current state of the building and the work that will need to be carried out before the end of your lease.

Here, we’ll go into more detail on the ways in which dilapidations surveys and reports can affect your balance sheets, and what you can do to make your reports as accurate as possible when it comes to your commercial lease.

What is a dilapidations survey?

A dilapidations survey is a detailed report of the current condition of a building, including its physical structure and general wear and tear. They are used to assess any work that will need to be done to a building before the end of the tenancy to return the property to at least the same condition it was in at the beginning of the agreement.

The 4 pillars of dilapidations liability

 Under commercial tenancies, the client is liable for:

• Reinstatement: Returning the property to its original state by removing tenant-made alterations, such as partition walls.
• Decoration: Fully redecorating the property in the final 3-12 months of the lease.
• Repair: Maintaining the building in good condition throughout the lease and repairing defects (such as roof repairs or worn carpets) as they arise.
• Compliance: Meeting statutory requirements, such as ensuring gas and electrical systems have valid certificates.

A dilapidations survey will assess all of these areas in detail and provide a report to help you make the required capitalised provisions.

“Can I estimate dilapidations-related costs?”

Technically, yes, there’s nothing stopping you from estimating your capital provisions based on the size or type of property. This is an option many tenants take, especially if they have a large property portfolio to base their estimates on.

However, this approach often leads to significant inaccuracies, as it doesn’t take into account the specific condition of the property. It can lead to underestimating lease end costs and therefore falsely inflating profitability, or vice versa, unnecessarily reducing the apparent value of the business.

Using a dilapidations survey, on the other hand, provides the most accurate indication of future costs and, therefore, profitability.

What do good dilapidations assessments look like?

Regular assessments

Your dilapidations assessment can only be based on current, observable facts rather than predictions of future failures. For example, while it may be likely that you’ll need to replace double-glazed windows during the course of your tenancy, your assessment can’t report this until the windows are at the point where they’re ready to be replaced. If you only have a dilapidations assessment carried out before this point, you’ll underestimate your lease-end costs and overestimate profitability.

That’s why it’s necessary to have an updated survey every 3-5 years to get an up-to-date picture of the state of your property and what capitalised provisions you need to make under the Financial Reporting Standard (FRS) 102.

Segmented reporting

While managing all 4 pillars of dilapidations liability is your responsibility as a tenant, not all of them necessarily need to be accounted for in your balance sheet under the Financial Reporting Standard (FRS) 102.

Typically, you will only need to make capitalised provisions for reinstatement and decoration works that will be left until the end of the lease. In contrast, costs associated with compliance and repairs can often be managed and paid for throughout the lease, using annual maintenance budgets.

Some dilapidations reports make no distinction between the costs associated with lease-end work and regular maintenance. This can mean that the capitalised provisions you make are higher than necessary, leading to underestimated profitability.

However, surveyors like Bradley-Mason LLP provide detailed, segmented reports for dilapidations assessments with a detailed coding system. These reports clearly distinguish between the works that can be covered under the tenant’s annual maintenance budget and those that need to be accounted for under FRS 102, allowing accountants to make more accurate projections.

Beyond balance sheets: maintaining accurate records

Having regular commercial building surveys isn’t just important for making accurate capitalised provisions under the Financial Reporting Standard (FRS) 102. It can also protect you as a tenant in the event of a dispute or negotiation at the end of your lease.

As well as dilapidations surveys throughout your lease, you should consider:

• Schedules of condition (SoC): Carried out before your tenancy agreement is signed, a detailed SoC documents the state of the property at the beginning of the lease, and therefore the condition the property must be in at lease end.
• Lease-end record (LER): Conducted on the final day of the tenancy, a LER provides a factual record of the condition of the property at handover.

Regular and detailed dilapidations assessments allow you as a tenant to make accurate capitalised provisions in relation to your commercial lease. When carried out in addition to other commercial building surveys, such as schedules of condition and lease-end records, they can also protect tenants from unexpected charges at the end of a tenancy.

If you’d like to find out more about our dilapidations surveys or other services, get in touch with the team, who will be happy to help.