Chapter 11- Depreciation, impairment and disposition
Depreciation: means of cost allocation
o It is a process of allocating the depreciable amount of a property, plant, and equipement asset
to expense in a systematic manner to those periods expected to benefit from its use.
FACTORS CONSIDERED IN THE DEPRECIATION PROCESS
What asset components are depreciated separately
o Componentization policy: decision on which assets to recognize separately
Identify each part of PP&E asset whose cost is a significant portion of the total asset cost
as a separate component
Group together significan components with similar useful lives and patterns of providing
Add together the costs of the remaining parts of the asset, none of which is individually
significant. These may be depreciated as single component, taking into account the nature
of the different parts
Group together individual minor assets to depreciate as one component based on the
similarity of their useful life and pattern of consumption
What is the asset’s depreciable amount: difference between asset’s cost (or revalued amount) and
its residual value
o Residual value: the estimated amount a company would receive today on disposal of the asset,
less any related disposal costs, if the asset were at the same age and condition it is expected to
be in at the end of its useful life
Over what period is the asset depreciated
o Useful life: the period during which the asset is expected to be available for use by the entity
Also can be stated through number of units of product/service that the asset is expected
o Depreciation begins when asset is available for use
o Depreciation ends when asset is derecognized or held for sale
What pattern best reflects how the assets economic benefits are used up
o The resulting depreciation should reflect the pattern in which the asset benefits are expected
to be used up by the entity.
Straight line method: where depreciation is considered a function of the passage of time.
Declining method: higher depreciation expense in the earlier years and lower charges for
later periods through a percentage that remains constant throughout the assets life.
Assets residual value is not deducted.
Activity method (units of production): where depreiciation is calculated according to the
usage or productivity.
*note* depreciation is only an estimate
1 OTHER DEPRECIATION ISSUES
How should depreciation be calculated for partial periods?
o Policies are usually set to simplify the processes
o If using the declining method, remember to proportion it accordingly to years of service and
not the ending of periods
How are revisions to depreciation rates made and reported?
o A change in these variables (expected pattern of consumtion, expected useful life, and
estimated residual value) requires that either the depreciation method or rate also be changed.
o NOT ALOUD to correct the records, or make a catch-up adjustment for any differences
They account for changes in estimate proactively; i.e., in the period of change and in the
future, if applicable
Indication of impairment: assets must be assessed for indications