4. Depreciation Accounting

Depreciation is the charge to the statement of profit or loss to reflect the consumption of an asset in a period. By applying depreciation charges, we are consistent with the ACCRUALS / MATCHING CONCEPT i.e. applying the cost of using the asset to the statement of comprehensive income for the same period.

All tangible non-current assets should be depreciated on a systematic basis per I.A.S. 16, with the exception of land.

This is because land is seen to appreciate in value.

Intangible non-current assets are amortized over their useful economic life (this is just another term for depreciation).

4.1 Depreciation has dual effects:

(a) depreciation is charged as an expense in the P&L account

(b) The corresponding credit is accumulated in the provision for depreciation account in the balance sheet to offset against the original cost of the fixed assets.

Dr   Depreciation expense                     xx

       Cr Accumulated Depreciation           xx

1.5 Residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.(IAS16)

1.6 Carrying amount (Net book value) is the amount at which an asset is recognized after deduction any accumulated depreciation and accumulated impairment losses.

The balance of accumulated depreciation on the SOFP is the total accumulated depreciation. This is always a credit balance brought forward in the ledger account for depreciation. The non-current asset accounts are unaffected by depreciation. In the SOFP of a business, the total balance on the "Accumulated Depreciation" account is set against the value of non-current asset account to derive the NBV of the non-current asset.

4.2 Depreciation methods

The depreciation method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity.

4.2.1 Straight line method 直線折舊法

Depreciation per annual           =Original cost – estimated residual value

Estimated useful Life

4.2.2 Reducing balance method 余額遞減法/加速折舊

This method of depreciation is generally used for assets which tend to lose more value in the initial years and require greater maintenance in the later years. A good example would be a brand new motor vehicle.  Motor vehicles tend to depreciate rapidly in the earlier years and require very little maintenance.

Depreciation per annual = Depreciation rate% × opening NBV

Example：A machine was bought on 1 Jan. 2010 for $5,000, with useful life 6 years. It is depreciated on reducing balance method with reducing rate 20%.

Year       Opening NBV×20%   Depn. Exp. A.D.      NBV

              1            5000*20%                  1,000            1,000     4,000

2            4,000*20%                 800               1,800     3,200

3            3,200*20%                 640               2,440     2,560