Depreciation,

Depreciation, Impairments,
Impairments,
and
and Depletion
Depletion

Chapter
11

Chapter
11-1
 Depreciation
Depreciation -- Method
Method of
of Cost
Cost Allocation
Allocation

Depreciation is the accounting process of allocating

the cost of tangible assets to expense in a systematic
and rational manner to those periods expected to
benefit from the use of the asset.

Allocating costs of long-term assets:

Fixed assets = Depreciation expense
Intangibles = Amortization expense
Natural resources = Depletion expense

Chapter
11-2
 Depreciation
Depreciation -- Method
Method of
of Cost
Cost Allocation
Allocation
Factors Involved in the Depreciation Process
Three basic questions:
(1) What depreciable base is to be used?
(2) What is the asset’s useful life?
(3) What method of cost allocation is best?

Chapter
11-3
 Depreciation
Depreciation -- Method
Method of
of Cost
Cost Allocation
Allocation
Methods of Depreciation
The profession requires the method employed be
“systematic and rational.” Examples include:
(1) Activity method (units of use or production).
(2) Straight-line method.
(3) Sum-of-the-years’-digits.
Accelerated methods
(4) Declining-balance method.
(5) Group and composite methods.
Special methods
(6) Hybrid or combination methods.

Chapter
11-4
 Depreciation
Depreciation -- Method
Method of
of Cost
Cost Allocation
Allocation
E11-5 (Depreciation Computations—Four Methods): Maserati
Corporation purchased a new machine for its assembly process on
August 1, 2012. The cost of this machine was $150,000. The
company estimated that the machine would have a salvage value of
$24,000 at the end of its service life. Its life is estimated
at 5 years and its working hours are estimated at 21,000 hours.
Year-end is December 31.

Instructions: Compute the depreciation expense under the

following methods.
(a) Straight-line depreciation. (c) Sum-of-the-years’-digits.
(b) Activity method (d) Double-declining balance.

Chapter
11-5
 Depreciation
Depreciation -- Method
Method of
of Cost
Cost Allocation
Allocation
Straight-line Method
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.
2012 $ 126,000 / 5 = $ 25,200 x 5/12 = $ 10,500 $ 10,500
2013 126,000 / 5 = 25,200 25,200 35,700
2014 126,000 / 5 = 25,200 25,200 60,900
2015 126,000 / 5 = 25,200 25,200 86,100
2016 126,000 / 5 = 25,200 25,200 111,300
2017 126,000 / 5 = 25,200 x 7/12 = 14,700 126,000
$ 126,000
Journal entry:

2012 Depreciation expense 10,500

Accumultated depreciation 10,500

Chapter
11-6
 Depreciation
Depreciation -- Method
Method of
of Cost
Cost Allocation
Allocation
Exercise (Activity Method):
Depreciation expense= Estimated cost per unit * actual units used in period
Where, Estimated cost per unit = (depreciable base/estimated total units of use)

Chapter
11-7
 Depreciation
Depreciation -- Method
Method of
of Cost
Cost Allocation
Allocation
Exercise (Sum-of-the-years’-digits Method)
Depreciation Exp =
[Number of years left/ Sum of (years digits in Useful life)] * Depreciable base

Chapter
11-8
 Depreciation
Depreciation -- Method
Method of
of Cost
Cost Allocation
Allocation
# Declining Balance Method
Depreciation Exp = # * 1/Useful life * Book Value
Where # = the desired speed of the decline

Chapter
11-9
 Depreciation
Depreciation -- Method
Method of
of Cost
Cost Allocation
Allocation
See Exercise 11-1 for similar example

Chapter
11-10
 Depreciation
Depreciation –– Other
Other Issues
Issues

Changes in Depreciation Rate

Accounted for in the period of change and
future periods (Change in Estimate)
Not handled retrospectively
First, establish NBV at date of change in
estimate. (Requires
( calculation of past
depreciation based on old assumptions)
Second, use NBV and new assumptions to
calculate depreciation from date of change
Example of change in estimate in Chapter 4 and Ex 11-11
Chapter
11-11
 Impairments
Impairments
When the carrying amount of an asset is not
recoverable, a company records a write-off referred
to as an impairment.
Examples of events that may lead to an impairment:
a. Decrease in the market value of an asset.
b. Change in the manner in which an asset is used.
c. Adverse change in legal factors or in the business climate.
d. An accumulation of costs in excess of the amount originally
expected to acquire or construct an asset.
e. A projection or forecast that demonstrates continuing losses
associated with an asset.
Chapter
11-12
 Impairments
Impairments
Measuring Impairments (BE 11-8)
1. Review events for possible impairment.
2. If the review indicates impairment, apply the
recoverability test.
i) If the sum of the expected future net cash flows
from the long-lived asset is less than the carrying
amount of the asset, an impairment has occurred.
3. Assuming an impairment, the impairment loss is the
amount by which the carrying amount of the asset
exceeds the fair value of the asset. The fair value is
the market value or the present value of expected
future net cash flows.
Chapter
11-13
 Impairments
Impairments
Illustration 11-16
Accounting for
Impairments

Chapter
11-14
 Impairments
Impairments
Ex 11-16 is example of impairment for asset used in
operations
Ex 11-17 is example of impairment for asset held
for resale

Chapter
11-15
 Depreciation
Depreciation -- Method
Method of
of Cost
Cost Allocation
Allocation
Group/Composite Depreciation Methods
Large corporations owning many long-term assets
have a choice as to whether to record depreciation on
an asset-by-asset basis, or on a group basis using
composite/group methods.
Group method used when the assets are similar in
nature and have approximately the same useful lives.
Composite approach used when the assets are
dissimilar and have different lives.

Chapter
11-16
 Depreciation
Depreciation -- Method
Method of
of Cost
Cost Allocation
Allocation
Group/Composite Depreciation Methods
1. Record original assets as Asset Group
2. Compute depreciation rate based on original group
i) Calculate and sum straight line depreciation for each
individual asset in original group
ii) Divide result by total cost of group of assets
3. Depreciation expense is total cost * depreciation rate.
4. If group has dissimilar assets with differing useful lives,
calculate composite life by dividing depreciable base of
group by the annual depreciation expense calculated
5. See BE 11-6 and extension for future purchases and sales

Chapter
11-17
 Presentation
Presentation
Presentation of Property, Plant, Equipment,
and Natural Resources
Depreciating assets, use Accumulated Depreciation.
Depleting assets may include use of Accumulated Depletion
account, or the direct reduction of asset.

Basis of valuation (cost)

Pledges, liens, and other commitments
Depreciation expense for the period.
Disclosures
Balances of major classes of depreciable assets.
Accumulated depreciation.
A description of the depreciation methods used.
Chapter
11-18
  Under both iGAAP and U.S. GAAP, interest costs incurred during
construction must be capitalized.

 iGAAP, like U.S. GAAP, capitalizes all direct costs in self-

constructed assets.

 The accounting for exchanges of nonmonetary assets has recently

converged between iGAAP and U.S. GAAP.

 iGAAP permits the same depreciation methods (straight-line,

accelerated, units-of-production) as U.S. GAAP.

Chapter
11-19
  As discussed in the Chapter 4 Convergence Corner, iGAAP permits
asset revaluations (which are not permitted in U.S. GAAP).
Consequently, companies that use the revaluation framework must
follow revaluation depreciation procedures.

 iGAAP also uses a fair value test to measure the impairment loss.
However, iGAAP does not use the first-stage recoverability test
used under U.S. GAAP—comparing the undiscounted cash flows to
the carrying amount. Thus, the iGAAP test is more strict than U.S.
GAAP.

Chapter
11-20