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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
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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
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The balance in Accumulated
Depreciation is not a cash fund.
4. Depreciation
Factors in Computing Depreciation
4. Depreciation
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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Key point
Disposal
Definition
recognition
Acquisition cost
Production cost
Depreciation
methods
Capital/Subsequent
expenditures
Tangible assets