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Slides: 22
AS-6 weblink
Depreciation is a measure of the wearing out, consumption or
other loss of value of a depreciable asset arising from use,
effluxion of time or obsolescence through technology and market
changes. Depreciation includes amortisation of assets whose useful
life is predetermined.
Depreciable assets are assets which (i) are expected to be used
during more than one accounting period; and (ii) have a
limited useful life; and (iii) are held by an enterprise for use in the
production or supply of goods and services, for rental to others, or
for administrative purposes and not for the purpose of sale in
the ordinary course of business.
Depreciable amount of a depreciable asset is its historical cost, or
other amount substituted for historical cost in the financial
statements, less the estimated residual value
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Determinants of
depreciation
historical cost or other amount substituted for the
historical cost of the depreciable asset when the
asset has been revalued
expected useful life of the depreciable asset
the period over which a depreciable asset is
expected to be used by the enterprise; or
the number of production or similar units expected
to be obtained from the use of the asset by the
enterprise. (depletion of wasting non-regenerative assets)
Methods of Depreciation
Two most common methods
Straight line method (SLM)
Reducing balance or written down value method
(WDV)
The management selects the more appropriate
method based on the following factors:
Type of asset (prone to fast obsolescence)
Nature of usage of asset (frequent/infrequent)
Circumstances prevailing in the business (plant
operating below its normal capacity)
Tax considerations
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SLM
solutio
n
Annual
depreciation is
uniform
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WDV
solution
Annual
depreciation is
declining
Same for SLM
and WDV
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Requirements of Companies
Act
Act lays down the rates of depreciation in respect of various assets
if firm estimates the rates to be higher, they can apply the higher rate
if firm estimates the rates to be lower, it can only be applied in accordance with the
statute and has to be disclosed
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Consistency Principle
Change of depreciation method can be done only
When required by some law
When required by some accounting standard
When change results in more appropriate presentation
e.g. switch from SLM to WDV after introduction of MAT
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Additional
Depreciation
charged to
revaluation
Depreciation
for Fixed Assets
reserve instead
of
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Disclosures in F/S
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