DEPRECIATION [CHAPTER 27]

DIFFERENCE
- Lies on type of assets involved
DEPRECIATION DEPLETION AMORTIZATION
✓ PPE ✓ Wasting assets ✓ Intangible assets

CONCEPT OF DEPRECIATION
❖ The systematic allocation of the depreciable amount of an asset over its useful
life.
❖ Not matter of valuation
❖ Cost allocation in recognition of exhaustion of the useful life
❖ An expense [may be part of costs of goods manufactured or an operating expense]
KINDS OF DEPRECIATION

• Wear and tear - due to frequent use

PHYSICAL DEPRECIATION
- Related to wear and tear and
deterioration
• Passage of time - due to nonuse
• Action of elements - sunshine, wind, rain or
dust
• Casualty or aaccident - fire, flood, etc.
• Disease or decay - applicable to animals or
wooden building

• Inadequacy - no longer useful to the entity

FUNCTIONAL / ECONOMIC
DEPRECIATION
- Arises from indequacy,
supersession, and obsolescence
because of increase of production ['DI NA
SAPAT :'(]
• Supersession - new asset became available
[PINAGPALIT]
• Obsolescence - catchall, no future demand,
encompasses inadequacy and supersession
[WALA NANG KWENTA]

FACTORS OF DEPRECIATION / DEFINITION OF TERMS

▪ Carrying Amount - amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairment losses.
 DEPRECIATION [CHAPTER 27]
▪ Depreciable amount - cost of an asset, or other amount substituted for cost, less
its residual value.
▪ Residual value - estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal, if the asset
were already of the age and in the condition expected at the end of its useful life.
▪ Useful life
o period over which an asset is expected to be available for use by an entity;
o number of production or similar units expected to be obtained from the asset
by an entity.

SERVICE LIFE PHYSICAL LIFE

- Useful life - How long the asset shall last

DEPRECIATION METHOD

VARIABLE DECREASING
CHANGE / USE CHNAGE OR
EQUAL / UNIFORM OTHERS
FACTOR / ACCELERATED /
ACTIVITY METHOD DIMINISHING

SYD - Sum of
Inventory /
Straight Line the Years'
Working hours Appraisal
Digits
/ Service hours

Composite Declining Retirement

method Balance method

Output or
production Double Replacement
Group Method
Declining Method

A. STRAIGHT LINE - spreads the cost of the fixed asset evenly over its useful life.
 DEPRECIATION [CHAPTER 27]
B. DECLINIING BALANCE - it results in higher depreciation expense in the earlier
years of ownership.
a. Don’t deduct salvage value when figuring the depreciable base for the
declining balance method
C. SUM OF THE YEARS’ DIGITS - Compute depreciation expense by adding all
years of the fixed asset’s expected useful life and factoring in which year you are
currently in, as compared to the total number of years.
D. GROUP DEPRECIATION METHOD - used for depreciating multiple-asset
accounts using straight-line-depreciation method. Assets must be similar in
nature and have approximately the same useful lives.
E. COMPOSITE DEPRECIATION METHOD - applied to a collection of assets that
are not similar, and have different service lives. For example, computers and
printers are not similar, but both are part of the office equipment.

KEY OBSERVATIONS
▪ SL provides uniform depreciation, SYD and Double-declining provides accelerated
and declining depreciation while production provides variable amount of
depreciation.

▪ SL, SYD and Production method uses depreciable amount from beginning to end.
Double declining ignores the residual value in the initial year and depreciates the
book value after that, but still adheres to the depreciation of the depreciable
amount only that’s why the depreciation in year 4 is only the difference between
the book value and residual value. Year four is also the final year of depreciation
because at this point the asset is fully depreciated.
 DEPRECIATION [CHAPTER 27]
▪ Depreciation for SYD and Double-Declining for a portion of a year is computed by
multiplying the amount of depreciation by the number of month’s outstanding
divided by 12. For example depreciation in the second year of the useful life for 9
months shall be 360,000 (480,000 x 9/12) for SYD and 396,000 (528,000 x 9/12)
for Double-Declining.

EXTRA INFORMATION (DEPRECIABLE AMOUNT AND DEPRECIABLE PERIOD)

▪ The depreciable amount of an asset shall be allocated on a systematic basis over
its useful life.
▪ The residual value and the useful life of an asset shall be reviewed at least at each
financial year- end and, if expectations differ from previous estimates, the
change(s) shall be accounted for as a change in an accounting estimate
▪ Depreciation is recognized even if the fair value of the asset exceeds its carrying
amount; as long as the asset’s residual value does not exceed its carrying amount.
Repair and maintenance of an asset do not negate the need to depreciate it.
▪ The residual value of an asset may increase to an amount equal to or greater than
the asset’s carrying amount. If it does, the asset’s depreciation charge is zero
unless and until its residual value subsequently decreases to an amount below the
asset’s carrying amount.
▪ Depreciation of an asset begins when it is available for use. Depreciation of an
asset ceases at the earlier of the date that the asset is classified as held for sale
and the date that the asset is derecognized. Therefore, depreciation does not
cease when the asset becomes idle or is retired from active use unless the asset
is fully depreciated. However, under usage methods of depreciation the
depreciation charge can be zero while there is no production.
Factors are considered in determining the useful life of an asset:
A. Expected usage of the asset - Usage is assessed by reference to the asset’s
expected capacity or physical output.
B. Expected physical wear and tear, which depends on operational factors such
as the number of shifts for which the asset is to be used and the repair and
maintenance programme, and the care and maintenance of the asset while idle.
C. Technical or commercial - obsolescence arising from changes or
improvements in production, or from a change in the market demand for the
product or service output of the asset.
D. Legal or similar limits on the use of the asset, such as the expiry dates of related
leases.