At the end of its useful working life, it may be scrapped or sold. The historical original cost of the asset 2. All other costs incurred to get the asset into a revenue-earning capacity.
Those costs may include delivery, installation, stamp duty, dealer charges, etc. Consider the examples in the text book, pg. Depreciation — Straight line method Depreciation Accumulated Carrying Year expense depreciation value 2, 2, 13, 2, 4, 11, 2, 7, 8, 2, 9, 6, 9.
Therefore, they are likely to generate more revenue in early years of their life and less in later years. The reducing balance method follows the principle that If an asset earns more revenue in a particular year, greater amount of depreciation is allocated in that year.
Depreciation methods: which one to use? The account is a negative asset account because it is shown as a deduction to the asset account on the statement of financial position. It is a revaluation increment. However, it is difficult to ensure the reliability of the fair value of the asset. Businesses can seek for professional valuers to determine the fair value of the asset.
The business must have fulfilled its obligations to the customer. In most cases this means that the goods required have been supplied. Objective, verifiable evidence must be available to confirm the amount of revenue earned invoice, receipt or contract. Practice questions Exercise Homework Exercise Quick Article Links.
Key provisions of IFRS 5 relating to assets held for sale Held-for-sale classification In general, the following conditions must be met for an asset or 'disposal group' to be classified as held for sale: [IFRS 5. Immediately before the initial classification of the asset as held for sale, the carrying amount of the asset will be measured in accordance with applicable IFRSs.
Resulting adjustments are also recognised in accordance with applicable IFRSs. Non-current assets or disposal groups that are classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell fair value less costs to distribute in the case of assets classified as held for distribution to owners.
Impairment must be considered both at the time of classification as held for sale and subsequently: At the time of classification as held for sale. Any impairment loss is recognised in profit or loss unless the asset had been measured at revalued amount under IAS 16 or IAS 38, in which case the impairment is treated as a revaluation decrease. After classification as held for sale. Assets carried at fair value prior to initial classification.
For such assets, the requirement to deduct costs to sell from fair value may result in an immediate charge to profit or loss. Subsequent increases in fair value. A gain for any subsequent increase in fair value less costs to sell of an asset can be recognised in the profit or loss to the extent that it is not in excess of the cumulative impairment loss that has been recognised in accordance with IFRS 5 or previously in accordance with IAS Non-current assets or disposal groups that are classified as held for sale are not depreciated.
Whereas 90, represent the cost benefits yet to be extracted. However, following are some examples which many students might misinterpret as causes of depreciation are not. Rather these examples can be one the causes of impairment. Useful life is a unit to estimate how long asset will operate under reasonably optimum circumstances. Useful life may expressed in terms of years, hours, production runs, units or any other way deem fit. For entity asset is good for use until it can operate economically with favourable cost-benefit balance.
Under normal circumstances asset is only useful for the entity until the benefits of using the asset exceed the cost of using the asset hence the term useful life.
Even after the end of useful life asset may still very well be in working condition but no longer economical, efficient or effective. Residual value also called salvage value or scrap value is an estimated amount asset may fetch on disposal at the end of its useful life.
Though the terms residual, scrap and salvage value are used interchangeably but they do have a little different meaning. Total depreciable amount is the amount of cost the asset will loose over its useful life. Noncurrent assets are the opposite of current assets like inventory and accounts receivables.
Noncurrent assets such as real estate properties and manufacturing plants are tangible or fixed physical assets that cannot be easily liquidated. This is especially true with commercial real estate, where it typically takes longer than a fiscal year to close on the sale of a property.
But noncurrent assets may likewise include intangible items, such as intellectual properties like design patents. Such items' useful lives typically exceed one fiscal year and are unlikely to be liquidated within that time frame.
Instead, patents take an amortization approach, where their costs are spread out over their useful lives, which can span many years--even decades. Like amortization, depreciation is an accounting method where the cost of a tangible asset is likewise spread out over the course of its useful life. For this reason, a rule created by the International Accounting Standards Board mandates that the depreciation of a noncurrent asset is must be itemized as an expense on a company's financial statements.
As an ancillary effect, depreciation helps companies budget their resources so that they don't have to a shell out a lump-sum of cash when they first purchase big-ticket items. Noncurrent assets can be depreciated using the straight-line depreciation method, which subtracts the asset's salvage value from its cost basis and divides it by the total number of years in its useful life. Thus, the depreciation expense under the straight-line basis is effectively the same for every year it is used.
Long-term investments like bonds are also deemed noncurrent assets because companies ritually hold onto these vehicles for more than a year. Financial Statements.
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