INTERMEDIATE ACCOUNTING 1
PART TWO
DEPRECIATION METHODS
PAS 16 requires management to choose the method
that best reflects the expected pattern of consumption
of the future economic benefits embodied on the asset.
PAS 16 prohibits depreciation method that is based
on revenue.
Uniform or Fixed Charge Methods: Under these
methods, depreciation is a function of time or caused
by passage of time rather than as a function of
usage.
3 types of Uniform or Fixed Charged Methods:
• Straight-line Method
• Group Method
• Composite Method
Variable Charge Methods:
Under these methods, depreciation is a function of
usage rather than a function of time. Thus,
depreciation is related to the estimated production
capability of the asset and is expressed in a rate per
unit of output or per hour of use.
2 types of Variable Charge Methods:
• Units of Production (Output) Method
• Working Hours Method
Accelerated or Decreasing Charge Methods:
The decreasing charge or accelerated methods provide
higher depreciation in the earlier years and lower
depreciation in the later years of the life of the asset.
2 types of Accelerating or Decreasing Charge
Methods:
• Sum-of-the-Years Digits (SYD) Method
• 200% diminishing Balance (Double-declining
Balance) Method
• 150% diminishing Balance Method
Other Depreciation Methods:
These methods of depreciation may be of use
especially if the items of PPE are of low-value and
are regularly acquired and disposed of.
3 types of Other Depreciation Methods:
• Retirement Method
• Replacement Method
• Inventory Method
STRAIGHT LINE METHOD
Depreciation expense is computed as:
Depreciable amount ÷ Estimated Useful Life
Or
Depreciable amount x Straight-line rate*
*NOTE: Straight-line rate is computed as 1 ÷ Useful
Life.
GROUP AND COMPOSITE METHOD
Composite and group methods are similar in
application except that composite method applies to
dissimilar items of PPE and group method applies to
similar items of PPE. Accumulated depreciation is
maintained and related for the total group. Thus,
accumulated depreciation is not related to any
individual items of PPE.
Depreciation expense is computed as:
Total Cost x Composite or Group Rate
Composite or Group Rate = Total Annual Straight-
line Depreciation ÷ Cost
Composite or Group Life = Total Depreciable
Amount ÷ Total Annual Straight-line Depreciation
Composite or group rate, once computed, is constant
regardless of subsequent replacement, additions or
disposals.
Since accumulated depreciation account is not related
to any individual items of PPE, there is no gain or
loss on disposal or sale of items of PPE.
UNITS OF PRODUCTION (OUTPUT) METHOD
AND WORKING HOURS METHOD
The two methods above are essentially the same
except on the denominator used to compute
depreciation.
Periodic depreciation computed under these methods
varies in proportion of use. Thus, when the asset is
not used during the period, no depreciation is
recognized.
Depreciation expense is computed as:
Depreciable Amount ÷ Total Estimated Output or
Hours x Actual Output or Hours during the year
NOTE: Depreciable amount divided by the total
estimated output or hours is known as the
depreciation rate per output or per hour,
respectively
SUM-OF-THE-YEARS DIGITS (SYD) METHOD: Declining rate computation depends whether it is
Under the sum of years' digits method, the double declining or 150% declining balance method.
depreciation is computed by multiplying the
For double-declining:
depreciable amount by a series of fractions whose
numerator is the digit in the life of the asset and Declining rate = Straight-line rate x 200%
whose denominator is the sum of the digits in the
For 150%-declining:
life of the asset.
Declining rate = Straight-line rate x 150%
Depreciation expense is computed as:
Depreciable Amount x Decreasing No. of Years ÷ RETIREMENT METHOD AND REPLACEMENT
METHOD
SYD
SYD is computed as: The original cost of an asset is retained on the books
and charged as expense only when the asset is retired
n x [(n+1) ÷2] where n = life of the asset or replaced. Therefore, no depreciation is record
until the asset is retired or replaced. Any salvage
proceeds received on the asset retired or replaced is
DECLINING BALANCE METHODS deducted from the expense recognized.
Under the declining balance method, a fixed or Depreciation expense is computed as:
uniform rate is multiplied by the carrying amount
Tools Retired x Original Cost – Proceeds from
of the asset in order to arrive at the annual
Disposal
depreciation.
Or
Declining balance method could be double-declining
(200%) or 150% declining which is the same in Tools Replaced x Replacement Cost – Proceeds
concepts. from Disposal
Depreciation expense is computed as:
For the first year: Cost x Declining Rate
For the subsequent years: Carrying Amount x
Declining Rate
INVENTORY METHOD
Depreciation is computed as the difference between
costs at the beginning and end of the period after
adjustments for costs or acquisitions and salvage
proceeds from the retired assets. Thus, depreciation
is computed after conducting physical count.
CHANGE IN ACCOUNTING ESTIMATE
Change in accounting estimate results from change in
depreciation method, useful life and/or residual
value. Change in accounting estimate should be
accounted for prospectively.
Steps in accounting for change in accounting
estimate:
Step 1: Determine the carrying amount of PPE as at
the beginning of the period of change (latest carrying
amount before the change). This will serve as the
basis of new estimate (“as if” new cost).
Step 2: Apply the change by depreciating the carrying
amount on Step 1 using the revised depreciation
method, useful life, and/or residual value.
PRESENTATION OF DEPRECIATION EXPENSE
GENERAL RULE:
Expense in Profit or Loss
EXEMPTION:
As part of the cost of another asset if it is attributable.
(E.g. depreciation of factory building as overhead cost
is part of cost of inventories)
REVALUATION MODEL
Under revaluation model, property, plant and
equipment is carried at revalued amount, being the
fair value at the date of revaluation less any
subsequent accumulated depreciation and less
subsequent accumulated impairment loss.
The frequency of revaluation depends upon the
movements in the fair value of the items of property,
plant and equipment being revalued. When a fair value
of a revalued asset differs materially from its
carrying amount, a further revaluation is
necessary.
Some items of PPE may experience significant and
volatile movements in fair value this necessitating
annual revaluation. Such frequent or annual
revaluations are unnecessary for items of PPE with
only insignificant movements in fair value. Instead,
revaluation every three to five years may be
sufficient.
Revaluations are applied to an entire class of PPE.
The items within a class of property, plant and
equipment are revalued simultaneously in order to
avoid selective revaluation of assets and the
reporting of amounts which are a mixture of costs and
values at different dates.
If simultaneous revaluation is not possible,
revaluation can be done on a rolling basis provided
revaluation of the class of assets is completed within a
short period of time and provided the revaluations
are kept up to date.
The revalued amount of an item of property, plant and
equipment is based on the following:
• Fair Value – the fair value is determined by
appraisal normally undertaken by a professional
valuers.
• Depreciated Replacement Cost or Sound Value –
when fair value is not available.
On initial recognition, the following template shall be
used in accounting for revaluation:
ACCOUNTING FOR REVALUATION
The difference between the carrying amount and the
revalued amount is known as Revaluation Surplus
and should be presented net of applicable tax.
On initial recognition, revaluation surplus should be
accounted for using:
a. Proportional Method – the accumulated
depreciation at the date of revaluation is restated
proportionately with the change in gross carrying
amount of the asset so that the carrying amount of the
asset after the revaluation equals the revalued amount.
b. Elimination Method – the accumulated
depreciation is eliminated against the gross carrying
amount of the asset and the net amount restated to the
revalued amount of the asset.
Subsequent accounting:
a. Transfers to retained earnings:
b. Revaluation decrease
When an asset’s carrying amount is decreased as a
result of revaluation, the decrease shall be recognized
as an expense. However, a revaluation decrease shall
be charged directly against any revaluation surplus
to the extent that the decrease is a reversal of a
previous revaluation and the balance is charged to
expense.
c. Revaluation decrease
When an asset’s carrying amount is increased as a
result of revaluation, the increase shall be credited to
revaluation surplus. However, a revaluation increase
shall be recognized as income to the extent that it
reverse a revaluation decrease of the same asset
previously recognized as an expense.
Presentation of Revaluation Surplus:
On the statement of Comprehensive Income:
Revaluation surplus is presented as part of Other
Comprehensive Income, net of tax.
On the statement of Financial Position:
Revaluation surplus is presented as a cumulative
balance within Shareholders’ Equity section, net of
tax.
 DECOGNITION
BASIC CONCEPTS
Derecognition refers to the removal of a previously
recognized item of property, plant and equipment
from the entity’s statement of financial position.
The carrying amount of PPE is derecognized when: (a)
it is disposed or sold; and (b) no future economic
benefits are expected from the asset’s use or disposal.
On derecognition, the difference between the
carrying amount of the PPE and the net disposal
proceeds, if any, is recognized as Gain or Loss,
Presented within Profit or Loss.
If the asset derecognized is revalued previously, any
balance in revaluation surplus is transferred directly
to retained earnings and does not affect gain or loss.
  SUBSEQUENT COSTS
BASIC CONCEPTS
An entity uses the recognition criteria when
determining whether subsequent costs can be
capitalized.
Capital Expenditure – these are subsequent costs that
meets the definition of the asset and meets the
recognition criteria for assets. Thus these are costs
capitalized as part of PPE.
Revenue Expenditure – a subsequent costs that does
not qualify under the recognition criteria and these
costs are expensed immediately.
NOTES:
Future economic benefits may be in the form of:
a. An extension in the asset’s useful life
b. An increase in asset’s capacity or efficiency
c. An improvement on safety
 PRESENTATION AND DISCLOSURES
PRESENTATION
Property, Plant and Equipment is presented as
Noncurrent Assets in the Statement of Financial
Position.
DISCLOSURES
Information about each class of property, plant and
equipment:
For each class of property, plant and equipment,
disclose the following:
• Basis for measuring carrying amount
• Depreciation method(s) used
• Useful lives or depreciation rates
• Gross carrying amount and accumulated
depreciation and impairment losses
Reconciliation of the carrying amount at the
beginning and the end of the period, showing:
ADDITIONAL DISCLOSURES
• Restrictions on title and items pledged as securities
for liabilities.
• Expenditures to construct property, plant and
equipment during the period.
• Contractual commitments to acquire property,
plant and equipment.
• Compensation from third parties for items of
property, plant and equipment that were impaired,
lost or given up that is included in profit or loss.
PAS 16 also encourages, but does not require, a
number of additional disclosures.
For revalued property, plant and equipment:
• The effective date of the revaluation.
• Whether an independent valuer was involved.
• For each revalued class of property, the carrying
amount that would have been recognized had the
assets been carried under the cost model.SSSS
• The revaluation surplus, including changes during
the period and any restrictions on the distribution of
the balance to shareholders.