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Chapter 11

Management and Organizational Studies 3360A/B Chapter Notes - Chapter 11: Impaired Asset, Book Value, Market Capitalization

Management and Organizational Studies
Course Code
MOS 3360A/B
Christina Maco

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Depreciation, Impairment, and Disposition- Chapter 11
Depreciation- Method of Cost 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-lived assets:
o Fixed assets = depreciation x
o Intangibles = amortization x
o Natural resources = depreciation x
Factors involved in the depreciation process
o 3 basic questions
What depreciable base is to be used?
What is the asset's useful life?
What method of cost apportionment is best?
o Depreciable base for the asset
Cost - residual value = depreciable amount
Residual value- what you get for the asset at the end of its useful life
Salvage value- what you get for the asset at the end of its physical life
IFRS uses residual value
ASPE allows the use of salvage value and residual (residual is more common)
o Estimation of useful lives
Useful life- how long the asset will be able to produce what you are using it for
Also known as service life or productive life
Useful life often differs from physical life- until it is down to its bare bones
Companies retire assets for 2 reasons
Physical factors (decay, wear and tear)
Economic factors (inadequacy, supersession, and obsolescence)
When do we start depreciating an asset?
When it is ready for use- when it is in place and in the condition necessary for it
to be able to operate as management intends
When does depreciation end?
When the useful life is over
When it is derecognized
Dispose of it
Sell it
Methods of allocation and calculation
o The resulting depreciation should reflect the pattern in which the asset benefits are
expected to be used up by the entity
o Straight-line method
Cost - residual value / estimated useful life- IFRS
Cost - salvage value / estimated physical life- ASPE (if given salvage)
Relies on 2 assumptions
The asset actually does deliver equal economic benefits each year
Maintenance expense is about the same each period (assuming constant
revenue flows)
o Diminishing balance method (decreasing charge/ accelerated amortization)
Take percentage applied to net book value (cost A/D + Impairment losses)
Don’t consider depreciable amount
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