ACYFARP: Depreciation

Depreciation

Is the systematic allocation of the asset's depreciable amount over its useful life.

Allocation

Refers to the manner of spreading the asset's cost over the period (useful life) of its usage.

Systematic

Refers to the methods used in allocating the asset's cost over its useful life, in other words, it has basis in doing so, although mainly used on estimate, but at least, there is relatively applied procedure.

Useful Life

The amount of time the entity expects to use the asset.

Useful Life

It could also mean the amount of hours it is expected to work or the amount of units an asset can generate or manufacture.

Residual Value

The amount expected to be recovered by an entity after the asset's useful life.

Depreciable Amount

The amount subject to depreciation

Depreciable Amount

Acquisition Cost - Residual Value

Recognition of Depreciation

Depreciation is recognized as an expense unless it is included in the cost of producing another asset.

True

(True or False) If the PPE is used mainly in selling or administrative purposes, then the depreciation associated to it forms part of the operating expenses since they are considered as period cost or cost that are expensed outright when incurred.

True

(True or False) If the PPE is used mainly in manufacturing products, then the depreciation associated to it forms part of the manufacturing overhead as indirect costs, thus, considered as inventoriable or product cost.

Commencement

The start of depreciation. It occurs when the asset is available for use.

Cessation

The end of depreciation. It occurs when the asset is:

a. Derecognized (sold or disposed)

b. Classified as held for sale

c. Fully depreciated

Available for Use

The moment the company took possession of the PPE and acquired its title, then that's the time the depreciation will start even if not yet used. The main basis is the time or aging or the asset. Again, even if the asset is being used or not, it is depreciated.

Derecognition

It pertains to a manner of eliminating an asset from the record for some reasons such as sale or retirement of the asset. Therefore, once an asset is derecognized, it is already carried out from the books of the entity, thus, depreciation will now be stopped.

Held for Sale

A noncurrent asset is reclassified as current asset because the company expects it to be sold within a short period of time.

True

(True or False) Depreciation does not cease when the asset becomes idle or is retired from active use.

Straight-Line Method Annual Depreciation

Cost - Residual Value / Estimated Useful Life (In Years)

SYD Method

Depreciable Amount x Useful Life as of the Beg. Period / SYD

SYD

n (n+1) / 2

Double Declining Balance Method

Also known as the 200% declining balance method

Annual Depreciation under Double Declining Balance Method

Carrying Value, Beg. x 2/n

Double Declining Balance Method

The residual value is not considered when computing the depreciation expense per year (except for the final year of the asset's useful life). The residual value will only be considered in computing the depreciation in the final year of the asset's useful life.

150% Declining Balance Method

Carrying Value, Beg. x 1.5/n

150% Declining Balance Method

The residual value is not considered when computing the depreciation expense per year (except for the final year of the asset's useful life). The residual value will only be considered in computing the depreciation in the final year of the asset's useful life.

Working Hours Method

Under this method, the number of hours consumed in using the asset will be the basis for its depreciation.

Working Hours Method

Actual hours worked during the year x Depreciation per hour

Depreciation per Hour (Working Hours Method)

Cost - Residual Value / Estimated Useful Life (In Service Hours)

Output Method

Under this method, the number of units produced by using the asset will be the basis for its depreciation.

Depreciation Rate per Hour (Output Method)

Cost - Residual Value / Estimated Useful Life (In Terms of Number of Output or Units Produced).

Annual Depreciation (Output Method)

Actual units produced during the year x Depreciation per Unit

Composite or Group Method

When a company has a large number of assets, calculating asset depreciation one by one becomes complex. Entities can use the composite technique or the group technique.

Composite Method

A method wherein, dissimilar in nature items are depreciated as if they were a single unit.

Group Method

A method wherein, similar in nature items are depreciated as if they were a single unit.

Composite Life

Total Depreciable Amount / Total Annual Depreciation

Composite Rate

Total Annual Depreciation / Total Cost

Composite or Group Method

Only one accumulated depreciation account is needed because depreciation is calculated on the entire group.

Composite or Group Method

When an asset in the group is derecognized, no gain or loss is recognized.

Composite or Group Method

The difference between the original cost of the asset sold and any proceeds received from the sale is debited or credited to accumulated depreciation.

Cash XX

Acc. Dep (Bal. Figure) XX

Asset XX

Acc. Dep (Bal. Figure) XX

Composite or Group Method

If an asset is retired but not sold, the asset's original cost is deducted from the accumulated depreciation.

Acc Dep XX

Asset XX

Composite or Group Method

When an asset is replaced, the original cost of the replaced asset is deduced from accumulated depreciation, and the cost of replacement is added to the group's total cost.

Acc. Dep XX

Asset XX

Asset XX

Cash XX

Inventory Method

Asset Balance, End of the Year - Asset Balance, Before Adjustment = Depreciation Expense

Retirement Method

No depreciation is recognized until the asset is retired.

Retirement Method

Original Cost of the Asset Retired - Proceeds from Disposal/Retirement = Depreciation Expense

Replacement Method

No depreciation is recognized until the asset is retired and replaced.

Replacement Method

(When the asset is retired and replaced) Replacement Cost of the Asset - Proceeds from Disposal/Retirement = Depreciation Expense

Replacement Method

(When the asset is retired but not replaced) Original Cost of the Asset Retired - Proceeds from Disposal/Retirement = Depreciation Expense

True

(True or False) IAS 16 requires management to select the method that best reflects the expected pattern of consumption of the future economic benefits embodied in the asset when making the judgement, and to apply that method consistently from period to period unless the expected pattern of consumption of those future economic benefit changes.

True

(True or False) IAS 16 prohibits the use of a revenue-based depreciation approach.

Change in Accounting Estimate

At each reporting period, the standard requires a yearly assessment or review of the depreciation method. A change in depreciation method is a _____________ __ ____________ ______________.

Carrying Amount

The amount after recording depreciation of an asset. It is the amount to be presented in the financial statements in respect of PPE items.

Carrying Amount

Cost - Accumulated Depreciation - Accumulated Impairment Losses

SYD Method

In the early years of the asset, the amount of depreciation is bigger as compared to its later years, the reason being is that the asset is expected to be fully utilized in its earlier stage and once it aged, it slowly been used leading to less amount of depreciation as it approached the end of its useful life.

Working Hours Method

An asset is depreciated based on the number of hours it is used. The depreciation rate per hour should be determined to be multiplied by the number of hours consumed in using the asset in a given year which will arrive at the depreciation expense for the year.

Output Method

An asset is depreciated based on the number of units produced. The depreciation rate per unit should be determined to be multiplied by the number of units produced in using the asset in a given year which will arrive at the depreciation expense for the year.

Leasehold Improvements

Are changes made by a tenant to a property leased under an operating lease.

Leasehold Improvements

Are depreciated over the useful life of the improvements or remaining term of the lease, whichever is shorter.

Depreciation Expense under Composite or Group Method

Cost of Asset + Acquisition Cost of Asset - Disposal of Asset (Based on Cost) = Net Assets at the End of the Year x Composite Depreciation Rate

True

(True or False) Each part of an item of PPE with a significant cost in relation to the total cost should be depreciated separately.