Stone Mountain Corporation
Re$erve Studies


Straight-Line Depreciation Analysis

Following is an example of a Straight-Line Depreciation Analysis report. The purpose of a Straight-Line Depreciation Analysis report is threefold:

  • Determine what is the annual depreciation cost for all reserve components such as roofs, streets, pools, tennis courts, etc. For example, if a roof has a 30 year life and it costs $300,000, then the annual depreciation liability for that roof would be $10,000 per year.

  • Determine the Reserve Fund Status, commonly known as the "Percent-Funded Estimate. This is a ratio of how much cash your association has in reserves compared to how much depreciation of all reserve components has occurred to-date. For example, if the total of your association's depreciation of its reserve component assets is $100,000 and the association only has $50,000 in reserves, then it is considered to be "50% funded." The Percent-Funded Estimate is a measure of the strength of your reserves relative to the depreciation of your capital assets.

  • If your association isn't 100% funded, determine the "Unfunded Depreciation Liability" In the foregoing example, the association has $50,000 in reserves, but there is $100,000 depreciation-to-date, so their unfunded depreciation liability would be $50,000 because they would need that amount in order to be %100 funded.
  • In the following Straight-Line Depreciation Analysis sample report, you can see that the sample association has the following measures of reserve fund status:

  • The FY 2005 Funding Requirement ( annual depreciation) is: $41,275
  • The Percent-Funded Estimate is: 18.3% (poor financial condition)
  • The Cumulative Depreciation to-date is: $286,560
  • The Fiscal Year End Reserve Balance is: $52,540
  • The Unfunded Depreciation Liability is: $234,020
  • To summarize what was said above so you can view the numbers in the above report:

  • The FY 2005 Funding Requirement (annual depreciation) is: $41,275
  • The Percent-Funded Estimate is: 18.3% (poor financial condition)
  • The Cumulative Depreciation to-date is: $286,560
  • The Fiscal Year End Reserve Balance is: $52,540
  • The Unfunded Depreciation Liability is: $234,020
  • NOTE: Board members commonly make the mistake of choosing the Straight-Line Depreciation Analysis method of funding and assuming they only need to fund their reserve budget enough to offset their "FY2005 Funding Requirement" ($41,275 in this case) for depreciation expected to occur in FY 2005. This is fine if the association is 100% funded for depreciation-to-date.

    However if the association is running a reserve deficit, as in this example where they only have 18.3% of the cash in reserves necessary to offset depreciation-to-date, they also need to get serious about reducing their unfunded depreciation liability. In other words, they'll need to supplement their reserve funding plan to offset the $41,275 of annual reserve depreciation with extra funds to reduce their unfunded depreciation liability.

    The Optimized Cash Flow Analysis method determines a reserve funding plan that will help reduce the reserve deficit, but doesn't guarantee the association's reserves will be 100% funded during all years. For more information, refer to the Cash Flow Analysis page.

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