1. ISSUES ,GUIDELINES AND
STANDARDS OF DEPRECIATION
OF FIXED ASSETS
(issued at 1 January 2012)
The International Accounting Standards
Board is the independent, accounting
standard-setting body of the IFRS
Foundation. The IASB was founded on
April 1, 2001 as the successor to the
3. Objectives of I.A.S (16)
• The objective of this Standard is to
prescribe the accounting treatment for
property, plant and equipment.
• Users of the financial statements can
discern information about an entity’s
investment in its property, plant and
equipment and the changes in such
An asset is an economic resource.
Anything tangible or intangible that is
capable of being owned or controlled to
produce value and that is held to have
positive economic value is considered an
5. Types of Assets
Following are two types of assets.
• Current Assets
Current assets are cash and other assets expected to be
converted to cash or consumed in a year.
• Fixed Assets
Fixed Assets include property, plant, and equipment etc.
These are purchased for continued and long-term use in
earning profit in a business
6. Types of Fixed Assets
Fixed assets are of two types:
• Tangible Assets
Tangible assets are those that have a physical
substance, such as, building, real estate,
vehicles, equipment, and precious metals.
• Intangible Assets
Intangible assets lack of physical substance
and usually are very hard to evaluate. They
include patents, copyrights, franchises,
goodwill, trademarks, trade names, etc
7. The Principal Issues in Accounting
for Fixed Assets
• Recognition of the Assets
• Measurement of Recognition
• Impairment Losses
The cost of an item of property, plant and
equipment shall be recognized as an asset if;
• It is probable that future economic benefits
associated with the item will flow to the entity.
• The cost of the item can be measured
10. ALI RAZA
Measurement of Recognition
• An item of property, plant and equipment
that qualifies for recognition as an asset
shall be measured at its cost.
• The cost of an item of property, plant and
equipment is the cash price equivalent at
the recognition date.
• If payment is deferred beyond normal
credit terms, the difference between the
cash price equivalent and the total
payment is recognized as interest over the
period of credit unless such interest is
capitalized in accordance with IAS 23.
14. Cost Includes…
Non-refundable purchase taxes
Any costs directly attributable to bringing the asset in
The initial estimate of the costs of dismantling and
removing the item and restoring the site on which it is
15. Measurement After Recognition
An entity shall choose either the cost model
or the revaluationModels as its
accounting policy and shall apply that policy
to an entire class of property, plant and
After recognition as an asset, an item of property, plant
and equipment shall be carried at its cost less any
accumulated depreciation and any accumulated
A fixed Asset, whose fair value can be measured reliably
shall be carried at a revalued amount, being its fair value
at the date of the revaluation
19. Impairment Loss
An impaired asset is a condition in which an
asset's market value falls below its carrying
amount and is not expected to recover. ...
To determine whether an item of property, plant and
equipment is impaired, an entity applies IAS 36
Impairment of Assets.
The carrying amount of an item of property, plant and
equipment shall be derecognized:
(a) on disposal;
(b) When no future economic benefits are expected
from its use or disposal
Depreciation is the gradual permanent decrease in
the value of an asset from any cause.
24. Types of Depreciation
25. Methods of Depreciation
Straight Line Method
Diminishing Balance Method
Units of Production Method
Sum of year digits Method
Units of time depreciation
Group depreciation Method
Composite Depreciation Method
26. ZAIN UD-DIN
27. Straight Line Method
An equal portion of the initial cost of the
asset is allocated to each period of use.
Cost of Asset – Estimated Residual Value
Estimated Useful Economic Life
28. Example :
Annual charge for depreciation
Scrap Value =$0
Expected Life=3 Years
Opening Balance of
29. Declining / Diminishing
• Declining balance is an accelerated depreciation
method. Higher depreciation is charged in early years
and smaller amounts in later years.
• Revenues may be higher in early years, declining in later
years as efficiency falls. So, according to matching
principle depreciation should decline with benefits.
Annual Depreciation = Net Book Value * Depreciation Rate
= (Cost – Accumulated Depreciation) * Depreciation Rate
Annual Depreciation :
Scrap Value =$3000
Expected Life =5 years
Net book Value
31. Units of Production & Service
• This method depreciate assets in proportion to
their actual use rather than as a function with the
passage of time.
• This method require an initial estimate of the
total number of units of output or service hours
expected over the life of the machine.
• Rate /Service hour=Cost /Exp service hour
• Rate/Unit =Cost/Exp Unit of output
32. Units of Production Method
• Rate Per unit for Depreciation
Scrap Value =$3000
Units of output
Net Book Value
33. Changes in Depreciation Method
• In Case of newly Acquired Assets Only
• Change Method Applicable to All Assets