What it means
The term is most common in hotels, restaurants, offices, hospitals and retail, where opening or refurbishing a site means buying a long list of physical items. Anything permanently built into the property, such as the roof, the walls or the plumbing, is part of the building.
Anything that stays with the business when it moves, such as a reception desk or a coffee machine, is FF&E. Accountants classify FF&E as property, plant and equipment (long-lived physical assets used to run the business).
Because these items wear out or go out of fashion, their cost is spread over their useful lives through depreciation (the gradual write-off of an asset's cost) rather than charged to profit all at once. Useful lives usually range from a few years for computers to ten years or more for heavy kitchen equipment.
Hotel and restaurant owners often set up an FF&E reserve, which is a cash fund built up from a percentage of revenue so that money is available when rooms or dining areas need refreshing. Lenders and franchisors frequently require it, and a common range is a few per cent of revenue.
It protects the property's quality and the lender's security without a sudden cash crunch. FF&E also appears in deal-making and insolvency.
A buyer of a hotel will negotiate whether the price includes the FF&E or whether it is a separate line, and a liquidator will value FF&E on a forced-sale basis, which is often far below the original cost. Insurers likewise need an accurate FF&E schedule to set cover.
The boundary between FF&E and building improvements can be blurry, for example with built-in cabinetry or a fitted bar. The classification can change both the depreciation period and the tax treatment, so finance teams usually agree the policy with their auditors and tax advisers before a project starts.
In practice
Real-world examples.
Example
A restaurant group opens a new site and spends $350,000 on tables, chairs, a commercial kitchen and a point-of-sale system. The finance team records all of it as FF&E and depreciates each category over its own useful life rather than expensing the whole amount in the opening month.
Example
A private equity buyer is bidding for a 120-room hotel. The seller's price is $18,000,000 including FF&E, but the buyer's inspection shows the room furnishings are due for replacement, so it negotiates the price down to reflect an upcoming $2,400,000 refurbishment.
Example
A software company moves into new offices and leases the space with the landlord handling the building works. The company's own desks, monitors and meeting-room screens are its FF&E, and it adds them to the asset register so that they can be depreciated and insured.
Formula
Calculation
Two simple calculations are used with FF&E:
FF&E reserve = Annual revenue x Reserve percentage
Annual depreciation (straight-line) = Cost of FF&E / Useful life in years
A boutique hotel earns $12,000,000 of revenue in a year and its management agreement requires a 4% reserve. The reserve contribution is $12,000,000 x 0.04 = $480,000. Separately, the hotel buys $84,000 of new room furniture with an expected life of 7 years, so annual depreciation is $84,000 / 7 = $12,000 a year, charged to profit each year for seven years until the carrying value reaches zero.Case study
Seen in the real world.
Harbourview Suites is an illustrative, fictional 80-room hotel whose owners had always treated refurbishment as something to pay for when it became unavoidable. After three years of thin cash flow the rooms looked tired, review scores fell, and the lender raised concerns about the condition of the collateral.
The owners agreed to start an FF&E reserve funded by 4% of monthly revenue, held in a separate account. In the first year it built up a balance big enough to replace the carpets and bedding in a third of the rooms without borrowing.
In this illustrative story the fresh rooms lifted the average room rate within a year, and the lender relaxed its covenants (the conditions attached to the loan). The lesson is that planning for replacement as a steady cost is cheaper and calmer than facing it as an emergency.
Watch out
Common mistakes.
- Charging the full cost of FF&E to the profit and loss account in the year it is bought, instead of capitalising it and depreciating it.
- Assuming FF&E is the same as the building, and forgetting that movable items may be owned by the tenant rather than the landlord.
- Ignoring replacement cycles, so that a business shows healthy profit while its furnishings and equipment quietly wear out.
Questions
People also ask.
Is FF&E the same as fixed assets?
No, FF&E is one category within fixed assets; land, buildings and vehicles are also fixed assets but are not FF&E.
How much should an FF&E reserve be?
It depends on the property type and the age of its contents, but contracts commonly set it at a few per cent of revenue, rising as the property ages.
What happens to FF&E when a business closes?
It is sold, usually at auction or through a liquidator, and the proceeds are typically much lower than the cost less depreciation would suggest.
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