International Capital Budgeting Institute
Generally Accepted Reserve Study Principles ©
Revised July 2020
General Principles – Section 1
1. Organizations that maintain physical facilities will, over time, need to perform major repairs or replacements to those physical facilities. It is possible to identify, quantify, and evaluate the condition of those facilities that require long term major repair or replacement.
2. Organizations should establish maintenance plans that provide for both the current and long term maintenance of physical facilities. Formal maintenance plans generally result in an overall reduction of life cycle costs when compared to a lack of planned maintenance.
3. Reserve studies are long term capital major repair and replacement budgets that are the financial reflection of the long term maintenance plan and are based on assumptions regarding operating maintenance activities and future events. The assumptions are in turn based on a combination of available information and judgment, in which both history and plans play a part.
4. It is considered fiscally prudent to provide for regular periodic interim funding to a separate, dedicated reserve fund to accumulate the monies necessary for the estimated future expenditures. However, because each organization is unique, only the governing body of such organization can determine how and when they should fund estimated future major repair and replacement expenditures, subject, however, to provisions contained in governing documents or any federal, state, or other regulatory requirements.
5. The development of reserve study policies helps to provide consistent guidelines for the development of and documentation of their reasoning for significant factors considered in the reserve study plan.
6. Reserve studies should be updated on a regular, periodic basis, generally based on the passage of time but also affected by unplanned events. The nature of the facilities has significant bearing on the timing of the update cycle.
7. As facilities age the normal review/update cycle is generally reduced to a shorter cycle, typically three years. Newer properties can generally have a longer review/update cycle.
Component/Activity Principles – Section 2
1. Physical facilities may consist of both real property and personal property.
Real property items for which the organization has maintenance responsibility may consist of:
A. Real property specified in the governing documents, whether owned by the organization or owned in common by the members of the organization
B. Real property not specifically identified in the governing documents, whether owned by the organization or owned in common by the members of the organization
C. Real property owned by third parties that is maintained by the organization
Personal property for which the organization has maintenance responsibility may consist of:
A. Personal property owned by the organization
B. Personal property owned in common by the members of the organization
C. Personal property owned by third parties that is maintained by the organization
2. Physical Components have the following general characteristics:
A. Physical property that is the maintenance financial responsibility of the organization
B. Material in cost, either individually or as a group
C. Maintenance related activity
D. Non-annual expenditure
E. Any additional item required by local codes or statutes
3. Intangible costs such as engineering studies or feasibility studies that are related to the overall maintenance activities of the association may be included in the reserve study.
4. Additional component/activity considerations:
A. Components may be excluded from the reserve study if they are not intended to be replaced.
B. Building structures and certain other very long lived components are normally considered to be remodeled rather than replaced. In such cases, the structure itself is generally referred to as a “lifetime” component and are generally not included in the reserve study funding plan. These lifetime components establish the outer component replacement life parameter for building subcomponents or other components that have a shorter life span.
C. Structures and other long lived components should be included in the reserve study if they are being scheduled for substantial repair or replacement.
D. Those components not considered lifetime components comprise the items that are generally considered for inclusion in the reserve study (major repair and replacement budget).
E. Components need not have a predictable life. It is acceptable to provide an “allowance” funding plan for partial or full major repair or replacement expenditures based upon ranges of life or failure estimates, even where future costs cannot be accurately estimated.
F. Major repair or replacement expenditures may be excluded from the reserve study if the expenditure history of or the maintenance plan for the subject components indicate that the cyclical timing of expenditures approximates equal annual expenditures and are easily included in the annual operating budget.
G. Immaterial components that otherwise meet the criteria for inclusion in the reserve study may be excluded. Immaterial components that are part of a larger component, or that are purchased as a group of multiple items should generally be included if, in the aggregate, the expenditure is material. Immaterial components may be included should the organization consider it appropriate, or the organization may include a single “allowance” representing an aggregation of immaterial components.
Calculation Principles – Section 3
1. Replacement cost – Replacement cost shall include the entire acquisition and installation cost of the repair or replacement component.
2. Inflation - Projected future component expenditures should include a factor for inflation / deflation.
3. One time expenditures – One time expenditures should be included in the reserve study if applicable.
4. Percent funded – Percent funded calculations are not required. If percent funded calculations are made, they shall be made on the inflation adjusted method rather than the current cost, future cost, or average cost method.
5. Funding Calculation Method – Funding for future expenditures shall be calculated using the cash flow method, not the component method. The component method should only be used for regulatory disclosure purposes if required by statute, not for budgetary funding plan purposes.
Service Level Principles – Section 4
Levels of service – Reserve Professionals may provide the following levels of services:
1. Independent Reserve Study
2. Reserve Management Plan
3. Reserve Study Consulting Services
Reporting Principles – Section 5
1. Long term capital or major repair and replacement budgets (reserve studies) can be estimated that reflect the maintenance plan of the organization. By their very nature, such future expenditures tend to be large, non-annual items that are not easily includible in the annual budget process of any organization. There are two general types of long term capital budgets:
A. Capital Expenditure Budget - Such budgets generally consist of a projection of estimated future expenditures without identifying how funding for these expenditures will be achieved.
B. Reserve Study – The reserve study differs from the capital expenditure budget in that it also provides for a long term funding plan to finance (reserve for) those estimated future expenditures.
2. The types of reports that may be issued are:
A. Full reserve study based upon an on-site analysis
B. Update reserve study based upon an on-site analysis
C. Update of reserve study without an on-site analysis
3. Reserve professionals shall issue a “preparer’s report” that describes the reserve study engagement, summarizes procedures and conclusions, and refers to professional standards applicable to the engagement. The preparer’s report shall be issued by the reserve study company as opposed to the individual preparer but may identify the individual preparer.
Software Principles – Section 6
Software that correctly summarizes the projection to future periods of reserve expenditures and funding is crucial to the accuracy of the reserve study report. Software must have the capability of making the following calculations and reports as described below.
1. General funding plan calculations using the using the cash flow method and the component method.
2. Component calculations including (a) Inflation / deflation calculations of future expenditures, (b) One time (non-repeating) expenditures that include inflation / deflation calculations, (c) Percent funded calculations under the three methods in current use, and (d) Category or other method of summarizing component data into groups for summary reporting.
3. Funding plan calculations including (a) Interest earnings for future periods, (b) Income tax calculations, (c) Regular periodic reserve assessments, (d) Modifications to periodic reserve assessments, (e) Special Assessments, and (f) Loans and Loan Repayments.
4. Basic financial exhibits, at a summary level, generally of one or two pages, of (a) Statement of Current Position, (b) Cash Flow Funding plan or percent funded exhibit in summary format, (c) Expenditures for 30-year period in summary format, and (d) Component list in summary format.
5. Additional exhibits consisting of; (a) Preparer’s Report, (b) Disclosures, (c) Regulatory Information (FASB [Financial Accounting Standards Board] Disclosures and any formats required by state or other regulatory agencies), (d) RSI - Required Supplementary Information - Component list at detail level, and (e) Supplemental reports.
6. Timeshare association component calculation by unit.