IAS 16: the systematic allocation of the depreciable amount
of an asset over its useful life Process of allocating the cost of a long term asset in a rational and systematic manner over its useful life. (matching principle) Applies to all classes of tangible assets: Land improvements Buildings Equipment. .. NOT LAND! 4. Depreciation The revenue-producing ability of an asset declines during its useful life because of wear and tear. A decline in revenue- producing ability may also occur because of obsolescence. 4. Depreciation 2 Depreciation is The process of allocating to expense the cost of a tangible asset over its useful life in a rational and systematic manner. A process of cost allocation, not a process of asset valuation. 4. Depreciation Land Does not depreciate since its usefulness and revenue producing ability generally remain intact, or increase. 4. Depreciation 3 The balance in Accumulated Depreciation is not a cash fund. 4. Depreciation Factors in Computing Depreciation 4. Depreciation 4 4. Depreciation Acquisition cost 50- Estimated residual value 10 Depreciable amount 40 Useful life 4 years Depreciation affects the balance sheet through accumulated depreciation, which is reported as a reduction from plant assets. Book Value = Cost Accumulated Depreciation Depreciation affects the income statement through depreciation expense. Income statement impact of the different depreciation methods (p.254) (6=2) Affects of Depreciation 4. Depreciation 5 4. Depreciation Choice of a depreciation method IAS 16: the depreciation method used shall reflect the pattern in which the assets future economic benefits are expected to be consumed by the entity. Methods: Time based Activity level based Most commonly used: Straight-line Declining-balance Units-of-activity 4. Depreciation 6 4. Depreciation Depreciable amount (cost)* ________________________________________________________________________________________________________ The asset's useful life measured in years *(cost of the asset less its residual/salvage value) Straight-line Method 4. Depreciation 7 Straight-Line Depreciation Formula 4. Depreciation Straight-line Method Is the most widely used method of depreciation. Depreciation is the same for each year of the asset's useful life. 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 Year 4. Depreciation 8 Declining-Balance Method Is an accelerated method. Accelerated methods of depreciation result in more depreciation in the early years of an asset's life and less depreciation in the later years. 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 Year 4. Depreciation Units-of-Activity Method The life of an asset is expressed in terms of the total units of production or the use expected from the asset. 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 Year 4. Depreciation 9 An equipment bought in December 2006 with 6.000 lei, is depreciated in 6 years. For 2007 the depreciation under straight method is 1.000 4. Depreciation Partial Year Depreciation If an asset is purchased during the year rather than on January 1, the annual depreciation is prorated for the proportion of a year it is used. 4. Depreciation Ex. A building is bought in 10 september 2007, for 65.000 lei. Company options are: residual value 5.000 usefull life 50 years straight method depreciation Establish the depreciation value for 2007, 2008 and the last year. 10 Like a company manager what depreciation method you will use and why? RO : straight line fiscal recognized Questions/Discussion 4. Depreciation must be disclosed in the notes to financial statements. The choice of depreciation method The useful life Revising Periodic Depreciation When a change in an estimate is required, the change is made in current and future years but not to prior periods. Significant changes in estimates must be disclosed in the financial statements. Extending an asset's estimated life reduces depreciation expense and increases net income for the period. 4. Depreciation 11 Impairment A permanent decline in the market value of an asset. Is written down to the new market value during the year in which the decline occurs. 4. Depreciation Sale of Tangible Assets In the sale of an asset, the book value of the asset is compared with the proceeds from the sale. If the proceeds exceed the book value a gain on disposal occurs. Conversely, if proceeds from the sale are less than the book value a loss on disposal occurs. 3. Tangible assets 12 Is recorded by decreasing Accumulated Depreciation for the full amount of depreciation taken over the life of the asset. The asset account is reduced for the original cost of the asset. The loss is equal to the asset's book value at the time of retirement. Retirement of Tangible Assets 3. Tangible assets Analyzing tangible assets Returns on Asset Ratio Indicates the amount of net income generated by each dollar invested in assets Net Income Average Assets Asset Turnover Ratio Indicates how efficiently a company eses its assets? how many dollars of sales are generated by each dollar invested in assets? Net Sales Average Total Assets 3. Tangible assets 13 Two ways a company can increase its return on assets: Increase profit per sale--measured by profit margin ratio. Increase its volume of sales--measured by the asset turnover ratio= Net Sales Average Total Assets 3. Tangible assets acc Group 21. Tangible assets 211 Land and land improvements 2111 Land 2112 Land improvements 212 Buildings 213 Plant and machinery, motor vehicles, animals and plantations 2131 Plant and machinery 2132 Measurement, control and adjustment devices 2133 Motor vehicles 2134 Animals and plantations 214 Furniture, office equipment, protection equipment of human and material values and other tangible assets Group 23. Non-current assets in progress and advance payments for non-current assets 231 Tangible assets in progress 232 Advance payments for tangible non-current assets 5. Recording the transactions 14 General functioning rules for asset accounts present only debit closing balance and represent the existences of assets at a certain time; debit - the initial existences of asset, undertaken from the initial balance sheets asset; debit - the asset increases determined by the economic operations, inscribed in the supporting documents; credit - the asset decreases determined by the economic operations, inscribed in the supporting documents; D Tangible Asset C Group 28. Amortisation of non-current assets
281 Depreciation of tangible assets
2811 Depreciation of land improvements 2812 Depreciation of buildings 2813 Depreciation of plant and machinery, motor vehicles, animals and plantations 2814 Depreciation of other tangible assets Group 29. Adjustment for impairment or loss in value of NCA
291 Impairment of tangible assets
2911 Impairment of land and land improvements 2912 Impairment of buildings 2913 Impairment of plant and machinery, motor vehicles, animals and plantations 2914 Impairment of other tangible assets 293 Impairment of non-current assets in progress 2931 Impairment of tangible assets in progress 2933 Impairment of intangible assets in progress 5. Recording the transactions 15 General functioning rules for depreciation/impairement of asset present only credit closing balance and represent the existences at a certain time; credit - the initial existences undertaken from the initial balance sheets asset; credit - the increases determined by the economic operations, inscribed in the supporting documents; debit - the decreases determined by the economic operations, inscribed in the supporting documents; D Depreciation/impairement C Practical example 1.Entity purchases 2 computers from a supplier with an invoice value of 2.000 lei and VAT 19% per unit. 2.The invoice is acquitted as follows: 400 lei from the bank account, 2.600 lei from a long term bank loan, the difference will be paid in one month. 3.The computers useful life is 5 years and the depreciation method is straight-line. 4.After 4 years one computer is sold with 1.000 lei and VAT 19%. 5. Recording the transactions 16 GENERAL JOURNAL O p Explanation Corresponding Accounts SUMS D C 1 1 The computers purchases % = 404 Suppliers of non. 2132 Measurement, control and ... 4426 Input VAT 4000 720 4720 2 2 The invoice to a supplier is acquitted 404 Suppliers of non. = % Cash at bank in lei 5121 Long term bank loans 1621 3000 400 2600 3 3 Computers depreciation 1yr,2,3,4 6811 = 2813 Expences with depr Depreciation of .. 800 800 4 4 Selling one computer after 4 yrs 461 = % Sundry debtors 7583Proceeds from... 4427 Output WATT 1190 1000 190 5 Evidence discharging % = 2132 Measurement, .. 2813 Depreciation of.. 6583 Net value of assets disposed 1600 400 2000 5. Recording the transactions GENERAL JOURNAL O p Explanation Corresponding Accounts SUMS D C 5 6 Receivables collected through bank transfer 5121 = 461 Cash at bank in lei Sundry debtors 1190 1190 6 7 Ordinary repairs 611 = 5311 Expenses with current repairs Cash 200 200 7 8 Computer depreciation yr 5 6811 = 2813 Expences with depr Depreciation of .. 400 400 7 9 Evidence discharging 2813Depreciation of..= 2132 Measurement, 2000 2000 5. The counter value is collected through bank transfer 6. Some ordinary repairs are invoiced by the supplier 200 lei, paid in cash. 7. After 5 years the other computer is disposed 5. Recording the transactions 17 Key point Disposal Definition recognition Acquisition cost Production cost Depreciation methods Capital/Subsequent expenditures Tangible assets