Do we Replace a Reserve Asset when Remaining Life shows Zero
This was an interesting question posed by one of our clients. It goes to the heart of a Reserve Study, which shows the anticipated scope and schedule of Reserve projects. So, when the Remaining Useful Life hits zero, should you replace it?
Let me explain that different types of components reach the end of their Useful Life differently. As you can imagine, a water heater that serves an entire building should be replaced when its expected Remaining Useful Life hits zero, rather than pressing your luck and tempting fate. All too often when you try to stretch the life of a component like this it tends to fail at the most inappropriate time... like on a Friday night of a holiday weekend. And there are components where the expenditure is a preventive maintenance project. Doing the preventive maintenance project on time actually saves the association money, by preventing premature failure (replacement) of the underlying component.
In this case, the question had to do with an aesthetic component... chairs in the recreation room. The chairs had a Useful Life of 10 years, and that 10 years was used up. The Remaining Useful Life was at zero. So... do they have to replace the chairs? The client was suggesting that they were "just fine", and could serve the association well for another 5-7 years. And if they didn't spend the money this year, would they have to wait another 10 yrs before they had another chance to replace them?
Let's look at the underlying principles. A Reserve Study is a budget plan. It is not a mandatory rulebook (do this, or else!). A Reserve Study helps a Board plan ahead financially for the timely repair and replacement of the major components the association is responsible to maintain. In this light, if an expenditure doesn't make sense this year, by all means delay it. The Reserve Study should be updated every year based on the ever-changing physical and financial status of the association.
In the case of rec rm chairs, it would be wise to replace the chairs the same year the carpet and window treatments are replaced and the walls are painted, for a cohesive remodel of the room. Stalling a few years until those projects could be coordinated would be wise. Every year the Board has the opportunity to make wise plans about the care of their association. You shouldn't wait for chairs to physically fail. You should replace them when they are no longer aesthetically or stylistically helping your property values.
Whether you account for your Reserves on a line-by-line basis or on a cash-flow (pooled) basis, Reserve funds are not a "spend it or lose it" situation. If the Reserve Study says to expect a chair replacement project this year and you don't replace the chairs, the money will still be there to replace them next year. No worries. It's your association, your Reserve Fund, and your budget plan (Reserve Study). You can, and should, adjust the numbers every year. The Reserve Study supports the Board of Directors, helping them plan for the timely care for the major assets of the association. A Reserve Study is not an obstacle to overcome!