Professional Documents
Culture Documents
3
Why Look at an Airline?
4
Depreciation – The
Concept
1
Time
Consumed as
Depreciation
Expense
Depreciation is not
an attempt to
establish the value
of an asset.
Depreciation is not a
measure of the decline
in value of an asset.
Depreciation Defined
9
B Depreciation
E
E
G
N
I 96 97 98 99 00 01 02 03 04 05 D
N
I
N Life of the Asset N
I
G
N
G
Depreciation is a
process of allocation,
not valuation.
Depreciation
Unused Used
Income
Depreciation
Expense Depreciation for Statement
the current year
Balance
Accumulated
Depreciation Total depreciation to Sheet
date of balance sheet
12
Long-Term Assets
Long-Term Assets
Have a useful life of more than one year.
Are acquired for use in the business.
Are not intended for resale to customers.
Are reported at carrying (book) value.
14
Management Issues related to
Accounting for Long Term Assets
Management Issues
16
Management Issues
17
Issues Related to Long-Lived Assets
Asset Service Potential
Use in business operations
Acquisition Disposal
Book Value
Time
Accounting Issues
Allocation of cost
Measuring Recording
Cost Accounting For post Disposals
acquisition expenses.
Issues Related to Long-Lived Assets
Asset Service Potential
Use in business operations
Acquisition Disposal
Book Value
Time
Accounting Issues
Allocation of cost
Measuring Recording
Cost Accounting For post Disposals
acquisition expenses.
Acquisition cost of Property,
Plant, and Equipment
1
Expected Benefit Approach
22
Economic Sacrifices Approach
23
Measuring the Carrying Value of
Long-Lived Assets
24
1
Hypothetical Case – A Truck
26
1
Discounted Present Value
28
Net Realizable Value
29
1
Historical Cost
31
Replacement Cost
32
Possibilities
33
Possibilities
34
“Value” of Asset
35
Acquisition cost of Property,
Plant, and Equipment
37
Revenue-Expense Association
The Matching Principle
Three principles govern the inclusion of
an expense in the matching process:
Association of cause and effect
Systematic and rational allocation
38
Cost Flows in a Manufacturing Firm
Used Unfinished
DL WIP WIP Inv.
MOH FG Inv.
Sales
- COGS
Income = Gross Margin
Statement
- S&A Period
Costs
= Net Income
Revenue-Expense Association
The Matching Principle
Three principles govern the inclusion of
an expense in the matching process:
Association of cause and effect
Systematic and rational allocation
Immediate recognition
40
Factors in Computing
Depreciation
Factors in Computing
Depreciation
The calculation of depreciation requires
three amounts for each asset:
Cost
Useful life
Salvage value
43
Depreciation Methods
Based on Time
Straight-Line
Accelerated
Sum-of-the-years’-
digits
Declining Balance
44
Depreciation Methods
Based on Activity Level
Productive output
Service quantity
45
Depreciation
46
Depreciation
47
Depreciation
48
Types of Accounting
Changes
Types of Accounting Changes
50
What Can Change?
Pattern of Depreciation
51
Methods of Depreciation
Straight-Line Method
Straight-Line Depreciation –
The Rationale
Decline in service potential relates
primarily to the passage of time.
53
Straight-Line Method
Known Estimated
Appropriate if an
asset is expected Estimated
to benefit all
periods equally.
Straight-Line Method
= $9,000
Depreciation Schedule
Salvage Value
Straight-Line Method
$10,000
$9,000
Depreciation
Depreciation
Expense $8,000
Expense is
$7,000
$6,000
$5,000
$4,000
$3,000 reported on the
Income
$2,000
$1,000
Statement.
$0
2001 2002 2003 2004 2005 2006
For the year ended December 31
$60,000
$50,000 $50,000
Book Value is
Book Value
$40,000 $41,000
$32,000
reported on the
$30,000
$23,000
$20,000
Balance Sheet.
$14,000
$10,000
$5,000
$0
2001 2002 2003 2004 2005 2006
As of December 31
Methods of Depreciation
Declining-Balance
Accelerated Depreciation –
The Rationale
Superior Performance
Obsolescence
59
Accelerated Depreciation
Repair
Costs
Depreciation
Double-Declining-Balance Method
Step 1:
Straight-line 100 %
=
depreciation rate Useful life in periods
Step 2:
Double-declining- Straight-line
= 2 ×
balance rate depreciation rate
Double-Declining-Balance Method
A Constant Rate
Step 3:
Depreciation Double-declining- Beginning period
= ×
expense balance rate book value
A Declining Balance
Ignores salvage
value.
Double-Declining-Balance
Method
On December 31, 2001, equipment was
purchased for $50,000 cash.
The equipment has an estimated useful
life of 5 years and an estimated residual
value of $5,000.
Calculate the depreciation expense for
2002 and 2003
63
Double-Declining-Balance Method
Step 1:
Straight-line 100 %
= = 20%
depreciation rate 5 years
Step 2:
Double-declining-
= 2 × 20% = 40%
balance rate
Step 3:
Depreciation
= 40% × $50,000 = $20,000 (2002)
expense
Double-Declining-Balance
Method
2002
Depreciation:
40% × $50,000 = $20,000
2003
Depreciation:
40% × ($50,000 - $20,000) = $12,000
65
Double-Declining-Balance Method
Depreciation Accumulated Undepreciated
Expense Depreciation Balance
Year (debit) Balance (book value)
2001 $ 50,000
2002 $ 20,000 $ 20,000 30,000
2003 12,000 32,000 18,000
2004 7,200 39,200 10,800
2005 4,320 43,520 6,480
2006 2,592 46,112 3,888
$ 46,112 Below salvage value
$8,000
Annual
$6,000
$4,000
$2,000
$0
1 2 3 4 5
Life in Years
Double-Declining-Balance
Depreciation $20,000
$15,000
Annual
$10,000
$5,000
$0
1 2 3 4 5
Life in Years
Reporting Depreciation
Property, plant, and equipment:
Land and buildings $ 150,000
Machinery and equipment 200,000
Office furniture and equipment 175,000
Land improvements 50,000
Total $ 575,000
Less Accumulated depreciation (122,000)
Net property, plant, and equipment $ 453,000
Let’s Compare
Delta Air Lines
Delta Air Lines
74
Delta Air Lines
Losing money
Average age of aircraft 8.8 years (9.6 in
2000)
Changed depreciation assumptions in
1993
75
Delta Air Lines
76
Singapore Airlines
Singapore Airlines
78
Singapore Airlines
79
Delta Singapore
81
Delta Air Lines . . .
20-year depreciable life
82
Singapore Airlines . . .
10-year depreciable life
83
Life Salvage Depr. Exp
(in Years) Value Per $100
Singapore Airlines
< 4/01/89 8 10% $11.25
> 4/01/89 10 20% 8.00
86
Useful Life
Comparison . . .
88
Useful Life
Singapore Air
Delta Air
Useful Life - Factors
Technology
Singapore has newer aircraft
Aircraft Use
Frequent takeoffs and landings
Maintenance
Remember Valuejet?
90
Financial Considerations
Singapore Air
Delta Air
Delta Air Lines
93
Delta Air Lines
94
Look at Exhibit 2
1993 1992
95
Life Salvage Depr. Exp
(in Years) Value Per $100
Singapore Airlines
< 4/01/89 8 10% $11.25
> 4/01/89 10 20% 8.00
Average Delta
Gross Value Air
Singapore Difference in
Air Depreciation
Look at Previous Delta Policies
Delta’s
Average
Current Policy
Gross Value
Delta’s Difference in
Previous Depreciation
Policy
Delta Vs. Singapore
99
Delta Vs. Singapore
100
Look at the age of the aircraft
Age
Delta 8.8
Singapore 5.1
Difference in age 3.7
Assume a 3% - 4% annual
inflation in the mid to late 80s.
101
Average Gross Value $8,872
3.5% Inflation x 3.7 Years 12.95%
Increased Value $1,150
Adjusted Gross Value $10,022
Increased Singapore’s
Value Rate
Additional
Depreciation
Delta Vs. Singapore
Savings in depreciation
expense due to more liberal $288
assumptions
Savings in depreciation due to
92
older aircraft
Total savings Delta over
$380
Singapore
103
Delta Vs. Singapore
104
Singapore Airlines
105
Singapore Airlines
2. Long-haul Airline
Average passenger trip length in 1993
was 2,720 miles (Delta = 969)
106
Singapore Airlines
107
Singapore Airlines
108
Delta Air Lines
109