Depreciation accounting

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Depreciation accounting

  1. 1. Depreciation Accounting Definition Depreciation is a measure of the wearing out, consumption or otherloss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes.
  2. 2. Depreciable AssetsDepreciable assets are assets which(i) Are expected to be used during more than one accounting period;(ii) Have a limited useful life;(iii) Are held by an enterprise for use in the production or supply of goods and services (i.e. not for the purpose of sale in ordinary course of business)
  3. 3. Applicability of the Accounting Standard 6This accounting standard is applicable to all depreciableassets except, the following:(i) Forests, plantations and similar regenerative naturalresources;(ii) Wasting assets including expenditure on theexploration for and extraction of minerals, oils, natural gasand similar non-regenerative resources;(iii) Expenditure on research and development;(iv)Goodwill;(v) Live stock- Cattle, Animal Husbandry
  4. 4. Calculation of depreciationThe amount of depreciation is calculated as under:(i) Historical cost or other amount substituted for thehistorical cost of the depreciable asset when the assethas been revalued;(ii) Expected useful life of the depreciable asset; and(iii) Estimated residual value of the depreciable asset.
  5. 5. Methods of depreciationThere are two methods of depreciation. These are:i)Straight Line Method (SLM)ii)Written down value Method (WDV)Selection of appropriate methodIt depends upon following methods:-•Type of assets•Nature of assets•Circumstances of prevailing businessNote- A combination of more than one standards may be usedAccounting treatment- selected depreciation methods shouldbe applied consistently applied from period to period
  6. 6. Change in depreciation methods:•Compliance of statute•Compliance of accounting standards•For more appropriate presentation of the financial statementsProcedure to be followed in change of methods:-•Depreciation should be recomputed applying new method from date ofacquisition/installation till date of change of method.•Difference between total depreciation under two methods andaccumulated depreciation under the old method till date of change maybe surplus or deficiency.•Resultant surplus credited to profit and loss a/c under head“depreciation written back”.• Resultant deficiency charged to profit and loss a/c.Change in depreciation method should be treated as change inaccounting policy (as per AS 5) and its effect should be quantified anddisclosed.
  7. 7. Change in estimated useful life When there is change in estimated useful life ofassets, outstanding depreciable amount on the date of change in estimated useful life of asset shouldallocated over the revised remaining useful life of assets.
  8. 8. Depreciation under GAAPThree Steps of the Depreciation Process:Find depreciable base of the assetOriginal Cost XXXXLess: Salvage Value XXXXDepreciable Base XXXXEstimate asset’s useful life
  9. 9. Depreciation under GAAP cont’dThree Important Notes About Depreciation: PP&E held for sale is not depreciatedPP&E is not written up by an enterprise to reflect appraisal, market, or current values which are above cost to the enterpriseEstimates of useful life and residual value, and the method of depreciation, are reviewed only when events or changes indicate that the current estimates or depreciation method no longer are appropriate
  10. 10. Depreciation under IFRS• Current Authoritative Source–IAS 16Same as GAAP except for two main differences:• Estimates of useful life and residual value, and the method of depreciation, are reviewed at least at each annual reporting date• For a company currently using GAAP a change to IFRS could result in a greater frequency of revisions in depreciation rates, which in turn could mean less predictable depreciation expense
  11. 11. Depreciation under IFRS cont’dIFRS allows a company to choose between two different models in order to value PP&E (property, plant & equipment) after it has been recognized on the books-Cost model–this model is like GAAP where PP&E is carried at its cost less any accumulated depreciationRevaluation model–this model allows a company to revalue PP&E on its books to fair value if fair value can be reliably measured
  12. 12. Example Facts: At the beginning of the year a company has a building with a carrying value of $100,000 and a remaining useful life of 10 years that was recently valued at $300,000 Under GAAP: depreciation expense for the year would be $10,000 (assuming straight-line) Under IFRS: depreciation expense for the year could be either $30,000 or $10,000
  13. 13. Depreciation under IFRS cont’dThree Important Notes About Depreciation:If an item of PP&E is revalued, the entire class of PP&E to which the asset belongs has to be revaluedExamples of separate classes: land, machinery, motor vehicles, office equipmentItems in a class of PP&E are revalued simultaneously to avoid selective revaluation of assets
  14. 14. Depreciation under IFRS cont’d If an asset is revalued up, the increase is credited directly to equity under the heading of revaluation surplus An increase is recognized in P&L to the extent that it reverses a revaluation decrease of the same asset previously recognized in P&L When PP&E is revalued, any accumulated depreciation can be treated in one of two ways
  15. 15. Difference between AS-6, GAAP, IAS-16AS-6 GAAP IAS-16AS-6 allows the depreciation on US GAAP prohibits revaluation. IAS-16 allows fair valuerevalued value of the assets accounting (upwards) for fixed assets as an alternatives treatment.A change in depreciation AS-6 Same as AS-6,US GAAP is also Under IAS-16 it is treated as ais treated as a change in an treated as a change in an change in estimates, whichaccounting policy accounting policy affects the results of current and future periods.
  16. 16. Findings Facts: A company using IFRS (revaluation model) has a piece of equipment with a cost of $10,000 and acc. depr. of $2,000. The equipment is revalued to a FMV of $20,000Balance Sheet Presentation: After Before Equipment $10,000 $25,000 Less: acc depr 2,000 5,000 Carrying value $8,000 $20,000
  17. 17. ObjectivesIn general• The introduction accounting standards there was uniformity in the accounts of various companies within India.• Converged Accounting Standards along with IFRS was introduced so that accounts of India can be compared with companies of the worldRelated to Depreciation• It will charged according to the shelve life of fixed asset .
  18. 18. Recommendations• There are two types of depreciation which are:-• Straight Line Depreciation Method• Written Down Value MethodIt would be better if only one kind of depreciation method is followed all over the world• There should be such accounting so that tax accounting and financial statement accounting could be done together• Slabs of tax accounting should be same with the financial statements.

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