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Chapter 11

RSM220H1 Chapter Notes - Chapter 11: Financial Statement, University Of New Mexico School Of Law, Capital Cost Allowance

Rotman Commerce
Course Code
Dragan Stojanovic

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Chapter 11: Depreciation, Impairment, and Disposition
Factors Considered in the Depreciation Process
Asset Components
-Under both IFRS and ASPE, recognition of separate components is necessary for depreciation
Identify each part of a PPE asset whose cost is a significant portion of the total asset cost as a separate
Grouping together significant components with similar useful lives and patterns of providing economic
Add together the costs of the remaining parts of the asset, none of which is individually significant.
These may be depreciated as a 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
Depreciable Amount
-Depreciable amount = asset’s cost – residual value
-Residual value: estimated amount a company would receive today if it disposed of the asset
-No depreciation recognized if the residual value > carrying amount
-IFRS requires reviewing the residual value at each year end
-Under ASPE, depreciation charge is based on the higher of two amounts:
Cost – salvage value over the life of the asset
Cost – residual value over the asset’s useful life
Salvage value: estimate of the asset’s NRV at the end of its life
Depreciation Period
-Begins when asset is available for use
-Ends when the asset is derecognized or classified as held for sale, whichever is earlier
Methods of Allocation
-Some argue that a straight-line method should be used b/c it isn’t always easy to identify the pattern in which
the benefits are received
-Canadian companies required to use the capital cost allowance approach for tax purposes
-Larger companies are likely to use one method for tax purposes and a different one for financial reporting
-Depreciation method affects the SFP and the I/S
Depreciation – Methods of Calculation
-Straight-line method
Widely used method
If asset doesn’t deliver equal economic benefits each year or if the maintenance expenses aren’t the
same each year, this method isn’t appropriate
Distorts rate of return analysis (income/assets)
-Diminishing balance method
Higher depreciation expense in the earlier years -> most assets offer greater benefits in its early years
Disadvantage -> maintenance costs are often higher in later periods
Declining-balance method uses a depreciation rate that stays constant over the asset’s useful life
Asset’s residual value not deducted when calculating depreciation expense
oThe depreciation rate is applied to the net book value (cost – acc. Depreciation)
When the residual value is reached, no further depreciation
-Units of Production method
Depreciation expense = (cost – residual value)/total estimated hrs
This method is only appropriate in a few situations
Depletion of Mineral Resources
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