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Lecture 10

RSM220H1 Lecture 10: Week 10 Depreciation, Impairment, and Disposition

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Rotman Commerce
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Amy Kwan

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Week 10: Depreciation, Impairment, and Disposition March 26, 2018 Depreciation is a method of cost allocation Determining depreciation expense 1. What asset components are depreciated separately 2. What is assets depreciable amount 3. Over what period is asset depreciated 4. What pattern best reflects how assets benefits are used up Components Each significant part of PPE asset should be depreciated as separate component Multiple components may be grouped if they have same useful lives and depreciation methods Parts of PPE asset that are not individually significant can be grouped and depreciated as single component Calculating depreciation Depreciable amount Original cost less estimated residualsalvage value Residual value is net amount expected to be received for asset today if it were of the age and in the condition expected at the end of its useful life Residual value should be reviewed at least annually under IFRS Depreciate as long as residual value lower than carrying amount Salvage value is estimated NRV at end of assets life (not at end of useful life) IFRS does not permit salvage value Depreciation period Begins when asset is available for use Ends when asset is derecognized or classified as held for sale Useful life and physical life are not the same Useful life also know as economic life Period of time over which asset will produce revenue for company Factors affecting useful life: Economic factors Obsolescence Physical factors Wear and tear Legal life Expiration of contract Depreciation method Reflect pattern of benefits expected from use of asset Also factor in simplicity, cost, perceived economic consequences Straight line Simple Assumes constant usage, other costs same each year Distorts rate of return analysis Diminishing balance Best match of some assets productivity to cost More depreciation in earlier years when asset has greatest balance Maintenance costs increase in later periods, reducing benefits Does not deduct residual value Rate of depreciation = (100useful life)*2 Activity Appropriate if usage not function of time Difficult to estimate total number of units over life of asset Natural resources Depleted over time as resources are removed Use activity method Depletion charge initially debited to inventory Debited to COGS once resource is sold If equipments useful life is clearly linked to life of resource, is also amortized using units of production method
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