IV.

Evaluation of the depreciation method:

1. General evaluation of the depreciation:
- Depreciation method helps companies state the amount of expenses incurred
as a result of using an asset during an accounting period correctly match with
the revenue that the asset use intends to generate in the same period.
- It also helps companies or organization accurately report assets at their net
book value.
- The higher the depreciation expenses, the lower the taxable income. So,
companies can get more tax savings if the depreciation of an asset is higher.
- However, asset value decrease over time as the result of asset uses that likely
cause an asset’s wear and tear. Hence, companies must adjust an asset value to
it’s the net remaining value.
2. Detailed evaluation of the depreciation:
a) Straight line method:
- Advantages:
 The simplicity of this method is easy to understand and easy to apply used
by businesses
 The depreciable cost of the asset in which case the asset is depreciated to
zero or the net scrap value can be facilitated.
 The same amount of amortization is charged to the profit and loss account
every year, making it easy to compare profits for different years.
 This method is useful for assets with consistent annual usage and a
predictable useful life.
 This method can be easily applied to long-term assets
 Straight-line depreciation is suitable for less expensive items, such as
furniture, that can be written off within the asset's defined legal, estimated
or commercial life.
- Disdvantages:
 When comparing asset utilization over two years, this method does not
accurately reflect the difference in asset utilization.
 Cost-revenue matching is not necessary when this method is used for
long-term assets
 Rapidly evolving technology in the field of software accounting limits the
use of the straight-line method of depreciation to certain depreciable
assets.
 The straight-line method does not account for loss of efficiency or
increases in repair costs over the years and is therefore not suitable for
expensive assets such as plant and equipment.

b) Reducing balance method:

- Advantages:
  Under the reducing method, the business is able to claim a larger
depreciation tax deduction earlier on.
 The reducing balance method makes sense for assets that lose their
value quickly, like new cars and other vehicles. For these assets,
reducing balance depreciation better matches depreciation expense with
the actual decline in fair market value.
- Disdvantages:
 If the company already has a tax loss for the year, it won't benefit from
an extra tax deduction so a company may not want a bigger tax break
early on.
 the calculation is more complex.
c) Sum of digit method:
- Advantages:
 The sum of the years’ digits depreciation method is allowed under many
accounting standards, including U.S. GAAP and IFRS, and is accepted for
tax reporting.
 The higher up-front deduction allows for a reduction in income tax
expense in the early years of an asset’s useful life.
 It can be applied to the assets subject to rapid obsolescence, such as
computers.
- Disdvantages:
 The sum of the years’ digits depreciation method does not create larger
tax deductions. The higher up-front deductions during the early years will
be followed by lower deductions in later years and accordingly higher
income tax expense.
 Using accelerated methods of depreciation raises the risk of recaptured
depreciation. If an asset will be sold at a higher price than its current book
value, the difference will be recognized as taxable income by tax
authorities.
V. Differences Between Accounting Standards IAS16 and VAS 03 Regarding
Fixed Assets
IAS 16 loại trừ:
(a) real estate, plant and machinery (PPE) classified as held for sale.
(b) biological assets associated with agricultural activities.
(c) mineral rights and mineral reserves such as oil, gas and similar non-
renewable resources.
VAS 3 does not provide the following:
 IAS 16 requires the application of this accounting standard to properties
that are under construction/development for future use as investment properties
but have not yet met the requirements of investment properties. VAS 03 does
not regulate this issue.
IAS 16 explains two additional terms as business-specific value and
impairment loss. According to IAS 16, recoverable value is the amount above
the net selling price of an asset and its use value. Under VAS 3, recoverable
value is the amount recovered from the future use of the asset, including the
carrying amount of the asset upon disposal.