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Financial Accounting for Managers

Fixed Assets Depreciation

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Fixed Asset
• Fixed Assets
– Held for the purpose of producing or supplying goods
or services and not for sale in the normal course of
business.
– Represent future economic benefits which are
expected to be consumed at a slow pace (generaly
over more than one financial year)
• Categories
– Property, Plant and equipment
• Acquisition, Allocation and Disposal
– Intangible Asset
– Natural Resources

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Cost of acquisition
• Purchase price
┼ Taxes, octroi, stamp duty, Import duties if any
┼ Directly attributable costs to bring to the
premises
┼ Borrowing costs till the date the machined is
commissioned to use
┼ Cost of installation, dismantling, etc.

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Objective behind Depreciation

• According to the matching concept, revenues
should be matched with expenses in order to
determine the accounting profit.
• The cost of the asset purchased should be
spread over the periods in which the asset will
benefit a company

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Non-Depreciable Asset
• Freehold Land
– It has an indefinite useful life, and it retains its value
indefinitely.
• Leasehold Land (Long Lease)
– It has an unexpired lease period not less than 50
years
• Investment Property
– Which construction work and development have been
completed
– Which is held for its investment potential

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Accounting for Depreciation

• Depreciation Amount
• Useful life estimation
– Technology
– Ecology
– Regulations
– Contractual terms

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Depreciation Methods
• SLM
• Accelerated Depreciation methods
– WDV
– SOYD
• Production Units

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SLM or FIM
• Depreciation is computed by dividing the
depreciable amount of the asset by the
expected number of accounting periods of its
useful life.
Depreciation = Cost of Asset – Estimated Residual Value
Estimated Useful Economic Life

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• Useful economic life

• The period over which the present owner
intends to use the asset
• Residual Value
– The amount received after disposal of the asset

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RBM
• According to this method, depreciation is charged
on the book value of the asset each year. Thus
the amount of depreciation goes on decreasing
every year.
• The formula for calculating the rate of
depreciation under diminishing balance method
(where ‘n’ = years of economic life of the asset) is
as follows:
𝑛 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒
1−
𝐴𝑐𝑞𝑢𝑖𝑠𝑖𝑡𝑜𝑛 𝐶𝑜𝑠𝑡

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Which method to consider?

• Simplicity
• Managerial motives
• Cost of record keeping
• Tax laws
• Legal requirements

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Few problems
• Partial accounting periods
• Assets of low unit cost
– Write off in a particular year
• Change of depreciation method
• Depreciating the components of an asset
– Depreciate each part separately
• Fully depreciated asset

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Capital and Revenue Expenditure

a. Capital Expenditure
b. Revenue expenditure
c. Treating a as b or b as a

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A Few more points

• Disposal of depreciable assets
• Result of sale of fixed assets
• Revaluation of an asset

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Intangible Assets
• An identifiable non-monetary asset without
physical substance
• Amortisation over the useful life

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