Depreciation and Accretion Notes

Overview of Depreciation

  • Depreciation refers to the reduction in value of tangible assets over time.

  • Important to differentiate between depreciation, amortization (for intangible assets), and depletion (for mining assets).

Methods of Depreciation

  • There are six methods of depreciation with different impacts on financial statements.

Non-Accelerated Methods

  1. Straight Line Method

  • Depreciation is the same amount each period.

  • Simple to calculate, often used for financial reporting.

  1. Units of Production Method

  • Depreciation varies based on the usage of the asset.

  • Ideal for assets where wear and tear depend significantly on usage.

  1. Specific Identification Method

  • Tracks each individual item purchased or manufactured.

  • Allows precise tracking and assignment of costs.

Accelerated Methods

  1. Double Declining Balance Method

  • Calculates depreciation by doubling the straight-line percentage rate.

  • Provides a higher depreciation expense in earlier periods.

  1. Triple Declining Balance Method

  • Similar to double declining but triples the straight-line percentage.

  • Results in even steeper depreciation in the early years.

  1. Sum of the Years' Digits Method

  • Depreciation expense is calculated based on the sum of the years.

  • The numerator counts down from the total number of years (e.g. for 5 years: 5+4+3+2+1).

Key Terms Related to Depreciation

  • Depreciation: For tangible assets.

  • Amortization: For intangible assets.

  • Depletion: For natural resources (e.g., mining). UNITS OF PRODUCTION

Accretion

  • Refers to the increase in liability due to the present value of future expenditures required at the end of an asset's life (e.g., land restoration).

  • Each year, recalculate the liability based on changing future costs, creating what are termed accretion expenses.

  • Distinction from depreciation as it deals with liabilities rather than assets.

Summary of Accretion Calculation

  • Book a liability equal to the present value of future expenditures.

  • Changes in this liability over time can result in accretion expenses.

  • Important for financial reporting to reflect accurately the costs associated with asset management.

  • Further review on impairment will follow in the next recording.