Depreciation, Impairments, and Depletion

Vocabulary and core concepts regarding the accounting for depreciation, depletion, and impairment of long-lived assets.

Depreciation

The accounting process of allocating the historical cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

Impairment

A situation when events or changes in circumstances indicate that the company may not be able to recover the carrying amount of a long-lived asset.

Depletion

The allocation of the cost of natural resources, such as gravel, oil, and coal, over periods when those assets are generating cash flows and income.

Three factors of depreciation and depletion

(1) Determining the depreciation or depletion base, (2) estimating service (useful) lives, and (3) applying a method of cost allocation.

Common depreciation allocation methods

Activity (based on the use of the asset), straight-line, or decreasing-charge approaches.

Depletion measurement function

Generally a function of the number of units of natural resource withdrawn during the period.

Impairment loss condition

Recorded if the sum of the expected future net cash flows from the long-lived asset is less than the carrying amount of the asset.

Impairment loss calculation

The amount by which the carrying amount of the asset exceeds the fair value of the asset.

Service (useful) life

An estimate used for the purpose of cost allocation and determining the amount of depreciation expense recorded each period, which often differs from the asset's physical life.

Physical factors for asset retirement

Factors such as casualty or the expiration of physical life that lead a company to retire an asset.

Economic factors for asset retirement

Factors related to obsolescence that impact company decisions about when to dispose of an asset.

Book value after full depreciation

The status of an asset's value, typically recorded as $0$, once its cost has been fully allocated to expense over its estimated service life.

Systematic and rational

The professional requirement for the depreciation method employed by a company.