Reserve Study vs Accounting Methodology


The reserve study field is unique in that it’ a combination of several industries. Developing a tailored reserve study for a common interest community requires the knowledge and expertise in the fields of construction, budgeting, valuation marketability and numerous fields unique to the industry. However, a common overlap occurs with reserve study concepts and accounting practices which are often times at odds.

Often reserve study concepts and methodologies get confused with accounting concepts and methodologies. This can usually be attributed to some of the terminology being the same such as the word "depreciation" which in accounting typically means depreciation of the asset as a whole as opposed to reserve studies where we are discussing depreciation only of common area components that meet the four part test outlined in CAI's National Reserve Study Standards.

  • Is it the responsibility of the Association (stated in governing documents)?
  • Does the component have a known useful life expectancy?
  • Does the component have a predictable remaining useful life?
  • Is the cost of repair and/or replacement above a minimum threshold (indicated by Client)?

Accounting methodologies and reserve study concepts typically have two different goals in mind.

Accounting is most often utilized for tax purposes or lending purposes. The goal of an accountant is usually to show the organization has made the least amount in profit and has the highest depreciation of the assets possible.

Reserve studies​ are typically used for long-term budget projections of a community or organization and are developed to show the true costs of the components over the time period in the study. It would not be in the Clients best interest to take depreciation numbers for accounting purposes and apply them to reserve study components as the methodologies are not the same and the end result will be an unreliable study.

These differences can become problematic for Boards specifically when some members are used to accounting practices and are not familiar with construction techniques, building costs and the overall concepts in the reserve study industry. Often the funding plan developed by the Reserve Analyst is at odds with projections developed for accounting purposes. This can usually be attributed to accounting practices being utilized to reduce tax consequences and show that the community or organization is making less money than they actually are and have higher depreciation of the components than what is considered in a reserve study.

The reserve study is created to show the true cost of component replacement and/or repair over an extended period of time. It would not be in the best interest of the community or in developing a funding plan​ to show a figure which should be less than accurate. I always remind boards that the costs in the reserve study are real and a vendor will ask for an actual check when the work has been completed. Utilizing any type of depreciated figures that may be best for tax purposes would result in a funding plan which is not accurate or reliable for the long-term projections needed in a reserve study.

A good accountant is an invaluable asset to a community or organization but it’s important that we do not overlap these two industries as often times the end goals are opposite from one another.