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Depreciable assets are physical objects that retain their size and
shape but that eventually
wear out because obsolete. They are not physica1ly consumed, as are
assets such as supplies, but nonetheless their economic usefulness
diminishes over time. Examples of depreciable assets include buildings
and all types of equipment, fixtures, furnishings—and even
railroad tracks. Land, however, is not viewed as a depreciable asset, as it
has an unlimited
useful life. .
Each period, a portion of a depreciable asset’s usefulness expires.
Therefore, a corresponding portion of its cost is recognized as
depreciation expense.
Depreciation is a measure of the wearing out, consumption or other loss
of value of a depreciable asset arising from use, efflux ion of time or
obsolescence through technology and market changes. Depreciation is
allocated so as to charge a fair proportion of the depreciable amount in
each accounting period during the expected useful life of the asset.
Depreciation includes amortization of assets whose useful life is
predetermined. The depreciation method applies to all depreciable assets,
except the following items to which special considerations apply:—
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Depredation Is Only an Estimate
The use of an estimated useful life is the major reason that depreciation
expense is only an estimate. In most cases, management does not know in
advance exactly how long the asset will remain in use.
Useful life is either (i) the period over which a depreciable asset is
expected to be used by the enterprise; or (ii) the number of production or
similar units expected to be obtained from the use of the asset by the
enterprise.
Depreciable amount of a depreciable asset is its historical cost, or other
amount substituted for historical cost2 in the financial statements, less the
estimated residual value.
Explanation
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commissioning as well as for additions to or improvement thereof. The
historical cost of a depreciable asset may undergo subsequent changes
arising as a result of increase or decrease in long term liability on account
of exchange fluctuations, price adjustments, changes in duties or similar
factors.
4. The useful life of a depreciable asset is shorter than its physical life and
is:
(i) Pre-determined by legal or contractual limits, such as the expiry dates
of related leases;
(ii) Directly governed by extraction or consumption;
(iii) Dependent on the extent of use and physical deterioration on account
of wear and tear which again depends on operational factors, such as, the
number of shifts for which the asset is to be used, repair and maintenance
policy of the enterprise etc.; and
(iv)Reduced by obsolescence arising from such factors as:
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reached the end of their useful lives and have operated under conditions
similar to those in which the asset will be used.
8. The quantum of depreciation to be provided in an accounting period
involves the exercise of judgment by management in the light of
technical, commercial, accounting and legal requirements and
accordingly may need periodical review. If it is considered that the
original estimate of useful life of
an asset requires any revision, the unamortized depreciable amount of the
asset is charged to revenue over the revised remaining useful life.
9. There are several methods of allocating depreciation over the useful
life of the assets. Those most commonly employed in industrial and
commercial enterprises are the straight-line method and the reducing
balance method. The management of a business selects the most
appropriate method(s) based on various important factors e.g., (i) type of
asset, (ii) the nature of the use of such asset and (iii) circumstances
prevailing in the business. A combination of more than one method is
sometimes used. In respect of depreciable assets which do not have
material value, depreciation is often allocated fully in the accounting
period in which they are acquired.
10. The statute governing an enterprise may provide the basis for
computation of the depreciation. For example, the Companies Act, 1956
lays down the rates of depreciation in respect of various assets. Where the
management’s estimate of the useful life of an asset of the enterprise is
shorter than that envisaged under the provisions of the relevant statute,
the depreciation provision is appropriately computed by applying a higher
rate. If the management’s estimate of the useful life of the asset is longer
than that envisaged under the statute, depreciation rate lower than that
envisaged by the statute can be applied only in accordance with
requirements of the statute.
11. Where depreciable assets are disposed of, discarded, demolished or
destroyed, the net surplus or deficiency, if material, is disclosed
separately.
12. The method of depreciation is applied consistently to provide
comparability of the results of the operations of the enterprise from
period to period. A change from one method of providing depreciation to
another is made only if the adoption of the new method is required by
statute or for compliance with an accounting standard or if it is
considered that the change would result in amore appropriate preparation
or presentation of the financial statements of the enterprise. When such a
change in the method of depreciation is made, depreciation is recalculated
in accordance with the new method from the date of the asset coming into
use. The deficiency or surplus arising from retro sportive recompilation
of depreciation in accordance with the new method is adjusted in the
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accounts in the year in which the method of depreciation is changed. In
case the change in the method results in deficiency in depreciation in
respect of past years, the deficiency is charged in the statement of profit
and loss. In case the change in the method results in surplus, the surplus
is credited to the statement of profit and loss. Such a change is treated as
a change in accounting policy and its effect is quantified and disclosed.
13. Where the historical cost of an asset has undergone a change due to
circumstances specified the depreciation on the revised unamortized
depreciable amount is provided prospectively over the residual useful life
of the asset.
DAPRECIATION METHOD
THE DECLINING-BALANCE
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Depreciation Expense = Remaining Book Value X Accelerated
Depreciation Rate
The accelerated depreciation rate remains constant through out the life of
the asset. Hence, the rate represents the “fixed-percentage’ described in
the name of this depreciation method. The book value (cost minus
accumulated depreciation) decreases every year and represents the
“dec1ipin-ba1ance.’
$17,000-$2,000
100000 miles =$0.15 Depreciation per Mile
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At the end of each year, the amount of depreciation to be recorded is
determined by mñtip1y- mg the 15-cent rate by the number of miles the
truck has been driven during the year After the truck has gone
100,000miles, it is fully depreciated, and the depreciation process is
stopped
This method provides an excellent matching of expense with revenue.
However, the method should be used only when the total units of output
can be estimated with reasonable accuracy Also, this method is used only
for assets such as vehicles and certain types of machinery Assets such as
buildings, computers, .and furniture do not have wellc1efined “units of
output’
In many cases, units-of-output is an accelerated method. Often assets are
used more extensively in the earlier years of their useful lives than in the
later years.
MACRS
Most businesses use a depreciation method called MACRS (Modified
Accelerated Cost Recovery System) in their federal income tax returns.
Some small businesses also use this method-in their financial statements,
so they do not have to compute 4epréciation in several different ways
MACRS is based on the declining-balance method, but should be
considered for use in financial statements only if the designated recovery
periods” and the assumption, of no salvage value are reasonable. For
publicly traded companies, the use of MACRS m financial statements is
usually not considered to be in conformity with generally accepted
accounting principles.
SUM-OF-THE-YEARS-DIGITS
Sum-of-the-years’ digits, or SYD, is a form of accelerated depreciation It
generally produces results that lie between the -double-declining-balance
and 150 percent-declining-balance methods.
SYD is a traditional topic that is- included m many accounting textbooks
But it is the most complex of the accelerated methods-especially when
partial years are involved SYD is rarely used in today’s business world.
Only 6 of the 600 corporations surveyed—less than 1 percent—make any
use of this method Because of its complexity, it is even less frequently
used in small businesses SYD is seldom used for income tax purposes,
because tax laws usually define allowable depreciation rates in terms the
declining-balance method for these reasons, we defer coverage of the
mechanics of this method to later accounting courses.
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DEPRECIATION METHOD IN USE
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Practical
study
HBL established operations in Pakistan in 1947 and moved its head office
to Karachi. Our first international branch was established in Colombo, Sri
Lanka in 1951 and Habib Bank Plaza was built in 1972 to commemorate
the bank’s 25th Anniversary.
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Rating
HBL is currently rated AA (Long term) and A-1+ (Short term) and has a
balance sheet size of over USD 11 billion. It is the first Pakistani bank to
raise Tier II Capital from external sources.
Tangible
Surplus on revaluation of fixed assets to the extent of the incremental
depreciation charged on the related assets is transferred by the Bank to
un-appropriated profits (net of deferred tax).
All operating assets are being depreciated over their expected economic
lives using the straight-line method from the date the assets are available
for use.
Depreciation is calculated so as to write-off the assets over their expected
economic lives at the rates specified to these financial statements. The
depreciation charge for the year is calculated after taking into account
residual value, if any. The residual values, useful lives and depreciation
method are reviewed and adjusted, if appropriate, at each balance sheet
date.
Fixed assets and capital work-in-progress, are stated at cost or revalued
amount less accumulated depreciation, where applicable, and
accumulated impairment losses (if any).
Cost of fixed assets of foreign branches includes exchange differences
arising on translation at year-end rates. Land and buildings
are revalued by independent professionally qualified values with
sufficient regularity to ensure that the net carrying amount does
not differ materially from the fair value. Surplus arising on revaluation is
credited to the ‘surplus on revaluation of fixed assets’
account (net of deferred tax). Under the provision of the Companies
Ordinance, 1984, deficit arising on revaluation of fixed assets is adjusted
against the balance in the above surplus account.
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Depreciation on addition and deletion of tangible assets during the year is
charged in proportion to the period of use.
Normal repairs and maintenance are charged to the profit and loss
account as and when incurred. However, renewals are capitalized.
Gain or losses arising on the disposal of fixed assets are included in
income currently. Surplus on revaluation of fixed assets (net of deferred
tax) realized during the year is transferred directly to un-appropriated
profit.
Intangible
Intangible assets having a finite useful life are stated at cost less
accumulated amortization and accumulated impairment losses, if any.
Such intangible assets are amortized using the straight-line method over
their estimated useful lives. Amortization is charged at the rate stated.
Amortization on additions and deletions of intangible asset during the
year is charged in proportion to the period of use. The useful life and
amortization method are reviewed and adjusted, if appropriate at each
balance sheet date.
Intangible assets having an indefinite useful life are stated at acquisition
cost.
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Data Collection Method
Primary Data
BOOKS
14th Edition
Chapters# 4, 9
Web site
www.wikipedia.org
www.investorwords.com/1416/depreciation.html
www.investopedia.com/terms/d/depreciation.asp
www.businessdictionary.com/definition/depreciation.html
Secondary Data
Organization
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Web site
http://www.habibbankltd.com
SWOT Analysis
Strength Weakness
Habib bank is one of an old bank of Surplus on revaluation of fixed
Pakistan there fore they have great assets (net of deferred tax) realized
reputation in country. during the year is transferred
directly to un-appropriated profit.
Habib bank has many fix assets in
foam of Lands and buildings.
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Conclusio
n
Conclusion
In this assignment we discuss the depreciation of different assets. In my
opinion the commercial banks are the best example of assists
depreciation.
Today's commercial banks are more diverse than ever. We can find a
tremendous range of opportunities in commercial banking, starting at the
branch level where you might start out as a teller to a wide variety of
other services such as leasing, credit card banking, international finance
and trade credit.
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Recommendations
As we already discuss that the Habib bank is one of an old bank they
have a good reputation and there fixed assets are in large of numbers they
using a proper the straight-line method which is very successful
depreciation method and I recommend them to keep it continues because
it is very supportive method.
References
BOOKS
14th Edition
Chapters# 4, 9
Web site
www.wikipedia.org
www.investorwords.com/1416/depreciation.html
www.investopedia.com/terms/d/depreciation.asp
www.businessdictionary.com/definition/depreciation.html
http://www.habibbankltd.com
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