Depreciation
Depreciation is the process of allocating the cost.
Question: Why do we have to allocate the cost?
Answer: We simple have to allocate the cost because the
expected number of years or periods where in we expect to
use the asset also benefit from that asset, and since there is a
reduction in the value of that asset it is only proper that this
asset or the specific share should be assign for that specific
asset. The factors that we have to consider in the
depreciation process are:
- cost or revalued amount
- cost is the purchase price + directly attributable
cost + PV of the estimated restoration or
decommissioning cot
- residual value
- the expected amount that you will be realized
when you disposed the asset at the end of its useful life
- also called salvage value or scrap value, is the
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
- estimated useful life, and
- the number of years you expect to use the asset
- is the period over which an asset is expected to
be available for use by an entity or the number of
production or similar units expected to be obtained
from the asset by an entity
- assets pattern of use
- the systematic method of how do you use the
asset
With respect to the determination of depreciation you have
the factors to considered in determining the asset’s useful
life:
1. Physical Factors
 The expected the usage of the asset by the
enterprise
 The expected physical wear and tear
 Passage of time
2. Functional or Economic Factors
 Technical obsolescence
- naluma yung asset in the sense of may bagong
lumabas na model or may bagong unit na lumabas
 Inadequacy
- yung asset na binili mo is hindi na adequate sa
pangangailangan mo
 Legal or similar limits
Different method of depreciation
The depreciation method should reflect the pattern in which
the asset’s future economic benefits are expected to be
consumed by the enterprise. Ibig sabihin yung pag gamit ng
depreciation method nakadepende sa kung paano mo
ginagamit yung asset. Make sense? Yes. There’s a logic to
that, bakit? Kasi diba ang depreciation lang naman ay pagcha-
charge ng cost over the period na nakikinabang dun si asset.
So kung nagchacharge ka lang nung cost nung asset dun sa
mga period na gumagamit don sa asset, eh diba ang logical
way is I-charge mo yung cost sa pamamaraan kung paano mo
ginagamit yung asset. From that there can be a variety of
depreciation method that can be used to allocate the
depreciable amount of an asset on a systematic basis over its
useful life. These methods are as follows
A. Time factor methods
1. Straight line method
Rule: Divide the depreciable amount over the expected
useful life.
Depreciable amount = cost - salvage value
In straight line method you simply allocating a uniform
charge of depreciation every year to the period
expected to benefit the asset.
Straight line method formula:
= cost or revalued amount - residual value
estimated useful life in years
2. Accelerated methods
a) Sum of the years digit method
- compute first the SYD
= n (n + 1)
2
- n = number of periods / number of years na
ginagamit yung asset
b) Double-declining balance method
- compute first the depreciation rate
- depreciation rate = 2 x 100%
- in short the depreciation rate =2
n
c) 150% or 1.5 declining balance method
- same lang sa kung paano compute-In sa
double declining mag-kaiba lang ng
depreciation rate
- depreciation rate = 1.50
n
- cost x rate = depreciation amount
- tapos sa mga subsequent periods, yung rate
ibabase mo na sa carrying value
- what’s carrying value? That’s the cost less
accumulated depreciation.
- accumulated depreciation means ito yung
mga depreciation na naipon na in the past
periods
d) Declining balance method or 100% method
- depreciation rate:
1-n Residual value
cost
- sa declining balance method or 100% may
mathematical formula to get the rate
Question: Where do we considered the residual value?
Answer: you do not consider the residual value when you are
talking with double declining, 150% declining and declining
balance. Ibig sabihin kapag nag compute ka ng declining
balances cost na agad yon wag mo na tignan yung residual
value.
Aside from time factor method (which is nakabase sa time ng
paggamit) meron din determinant factor (which is nakabase
sa pag-gamit) These methods are as follows:
B) Activity or used factor methods
 - kapag ang pinagbabasehan natin ay variable charge or
activity method ang ibig sabihin lang non ay either the
activity or used factor method assumes that depreciation is
more on a function of use rather than passage of time. So
hindi mo tinitignan dito yung pag lipas ng panahon ang
tinitignan mo is yung pag-gamit.
Question: ano ba ang logic kung bakit ginagamit yung
activity or used factor method?
Answer: We have rationales for the used of this
method:
1. Asset depreciate more rapidly if they are used
full time or over time
2. The reason of direct relationship between
utilization of asset and realization of revenue.
The objection for the used of this method is, this
method assumes that the unit of outputs or service hours will
serves as the basis for depreciation may be difficult to
estimate
1. Service hours method
- rate per hour = depreciable amount / total
productive hours
2. Productive hours method
- rate per hour = depreciable amount / total units
of production
C) Multiple asset depreciation method
- this actually applied by large entities owning various
individual depreciable assets.
1. Group method
- all assets that are similar in nature and estimated
useful life are group and treated as single unit.
2. Composite method
- opposite of group - all assets that are dissimilar in
nature or assets that have different physical
characteristics and vary widely in useful life are treated
and grouped as one single unit.
Depreciation for partial period
- When an asset acquired or disposed of other than at the
beginning or end of the period, partial period calculation of
depreciation is required if the company uses any of the time
factor methods such as: (You start depreciating the asset the
amount the assets is already available for its use unless)
▪ Full year's depreciation is recognized in the year of
acquisition and none in the year of disposal
▪ No depreciation is recognized in the year of acquisition
and full year's depreciation in the year of disposal
▪ Half year's depreciation is recognized in the year of
acquisition and in the year of disposal.
Component Depreciation
- In contrast with the concept of group of composite
depreciation is the concept of component depreciation that
is required by IAS 16. Under this concept, each part of an
item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be
depreciated separately.
- An eternity allocates the amount initially recognized in
respect of an item of property, plant and equipment to its
significant parts and depreciates separately each part based
on their respective useful lives. Afterwards, it depreciates
separately the remainder of the asset cost over the useful life
of the asset.
Depletion of Natural Resources
- Natural resources are wasting assets such as oil, gas,
minerals and timber. These assets are physically exhausted
(nauubos) over the period of use. The cost of the asset
includes the price paid to obtain the property right or the
resource already discovered exploration costs, development
costs, and restoration costs. Depletion is the term used to
describ3 the allocation of the depletablecost of the natural
resource to the periods in which benefits are received. This is
made on the basis of an activity method (productive output
method).
Ang depletion, depreciation at amortization ay pare pereho
lamang ng ibig sabihin nagkakaiba lang kung saan ina-apply
na asset kasi ang depreciation ay ginagamit sa mga tangible
na asset ang amortization ay para sa mga intangible asset
while and depletion ay para sa wasting asset tulad ng natural
resources such as oil, gas etc.
Formula:
Purchase price
Add: Exploration cost
Development cost
Restoration cost
Less: Redisual value
Total depletable cost
Take note that restoration cost always express at its present
value
- Depletion is then computed using the unit of output
method. The activity measure is the number of units of the
resource expected to be extracted over the life of the asset.
The unit depletion rate is computed as
Total depletable cost / total estimated recoverable units
- The unit depletion rate is multiplied by the actual
production for the period to determine the actual depletion
charge for the period. When additional expenditures have
been incurred or estimates are revised, a new depletion rate
has to be calculated. The new depletion rate is based on the
current carrying value of the asset including additional capital
expenditures, the new estimate of the residual value, and the
new estimate if the remaining units as of the beginning of the
year. A new depletion rate is computes as follows:
Carrying value + additional capital expenditures less
residual value
Revised remaining units at the beginning of the year
- The new depletion rate would be used to compute each
year's depletion charge until new estimates or additional
capital expenditures are incurred and another depletion rate
is calculated.
- Depletion expense is considered as an inventoriable cost or
product cost. The depletion related to the sold units is
included in the cost of goods sold in profit or loss section of
the statement of comprehensive income, while the depletion
related to the unsold units is included in the inventory
amount reported in the statement of financial position.
Expenditures after initial recognition
- Kapag nagkaroon ka ng expenses after initial recognition ng
PPE those expenditures may be consider as capital
expenditures or income expenditures. Kapag sinabing capital
expenditures they are capitalizable, remember kapag
sinabing capitalizable they will be added as part of the cost,
pero kapag income expenditure sila expense lang yon which
is charged only to expense.
- Under the recognition principle for PPE, an entity does not
recognized in the carrying amount, the costs of the day-today
servicing of the item.Kapag ganon yung day to day servicing
kasi ayon yung tinatawag nating maintenance cost or
expense so expense lang yon rather these cost are
recognized in profit or loss.
- Subsequent expenditures on PPE are only recognized as
part of the cost of the asset when it is probable that future
economic benefits associated with the item will flow to the
enterprise and the expenditure significantly improves the
condition. Eto lang yung criteria para maging capitalizable
yung subsequent expenditure:
1. The future economic benefit associated with the item
will flow to the enterprise
2. The expenditure was significantly improves the
condition of the asset beyond its originally assessed standard
of performance.