PROPERTY PLANT AND EQUIPMENT (PART – 2)

 After the initial measurement the entity chooses either the (a) cost model or the
(b) revaluation model as its accounting policy and applies that policy to an entire
class of PPE.
 Under the cost model, a PPE is carried at its cost less any accumulated
depreciation and any accumulated impairment losses.
DEPRECIATION

 Depreciation – is the systematic allocation of the depreciable amount of an asset

over its useful life (PAS16.6)
 Depreciable amount – is the costs of an asset, or other amount substituted for
cost, less its residual value
 Residual Value – is the estimated amount that an entity would currently obtain
from disposal of the asset, after deducting the estimated cost of disposal, if the
asset were already of the age and in the condition expected at the end of its
useful life.
 Useful life – (a) period over which an asset is expected to be available for use by
an entity. (b) the number of production or similar units expected to be obtained
from the asset by an entity.

FACTORS IN DETERMINING THE USEFUL LIFE OF AN ASSET:

a. Expected usage of the asset
b. Expected physical wear and tear
c. Obsolescence
d. Legal and similar limitation on the use of the asset.

KINDS OF DEPRACIATION
1. Physical Depreciation – This relates to an asset deterioration and wear -down over a
period of time.
2. Functional or economic depreciation – This arises from an asset’s obsolescence or
inadequacy to perform efficiency.
OBSOLESCENCE – means the process of becoming no longer useful or outdated.
TYPES OF OBSOLESCENCE:
a. Functional Obsolescence – occurs when an asset losses value due to its outdated
designs.
b. Locational or economic obsolescence – occurs when a property loses value because of
negative influences from external factors (e.g. flood, landslide, volcanic eruption,
construction of an airport or railway track).
c. Technical obsolescence – occurs when a new product or technology replaces an old.
d. Physical obsolescence – occurs when an asset loses value due to misuse or poor
maintenance.

RECOGNITION OF DEPRECIATION

 Each significant part of an item of PPE is Depreciated separately. For example the
engines and the airframe of an aircrafts are depreciated separately.
 Depreciation is recognized as expense (in profit or loss) unless it is included in
the cost of producing another asset. For example, the depreciation of a factory
building is included in the cost of inventories.
 Depreciation starts when the asset is available for use in the manner intended by
management.
 Depreciations stops when the asset is
a. Derecognized (i.e. sold or disposed of)
b. Classified as held for sale under PFRS 5
c. Fully depreciated. An asset is fully depreciated when its carrying amount is
zero or equal to its residual value, However, if the residual value decreases
below the carrying amount, the decrease is recognized as an additional
depreciation.
 Depreciation does not cease when the asset becomes idle or is retired from
active use.
 Land is not depreciated because it has an unlimited useful life (with certain
exceptions, such as quarries and landfill sites). Building have depreciated
because they have limited useful life.

DEPRECIATION METHODS
1. STRAIGHT LINE METHOD – under this method, depreciation is recognized evenly over
the useful life of the asset. The depreciation is computed as:

Annual depreciation = Depreciable amount ÷ Useful life

EXAMPLE: STRAIGHT LINE METHOD
On Jan. 1, 2011 an entity acquired a piece of equipment for P100,000. The equipment is
estimated to have a useful life of 5 years and a residual value of P20,000.

Solution:

Initial cost (historical cost) of equipment 100,000

Residual Value (20,000)
Depreciable amount 80,000
Divided by: Estimated useful life 5
Annual depreciation 16,000

Depreciation table:

Date Depreciation Accumulated Carrying amount

Depreciation
Jan. 1, 2011 100,000
Dec. 31, 2011 16,000 16,000 84,000
Dec. 31, 2012 16,000 32,000 68,000
Dec. 31, 2013 16,000 48,000 52,000
Dec. 31, 2014 16,000 64,000 36,000
Dec. 31, 2015 16,000 80,000 20,000
80,000

2. SUM-OF-THE YEARS DIGIT – depreciation is computed by applying a series of fractions to

the depreciation amount of the asset. A fraction is derived by dividing the asset’s
remaining useful life by the sum of digits in the life of the asset.
SYD Denominator = Life x [(Life + 1) ÷ 2]

EXAMPLE: Sum-of-the-years digits method

On Jan. 1, 2011, an entity acquired a piece of equipment for P100,000. The equipment is
estimated to have a useful life of 5 years and a residual value of P20,000.

Initial cost (Historical cost) of equipment 100,000

Residual Value (20,000)
Depreciable Amount 80,000
SYD Denominator = Life x [(Life + 1) ÷ 2]
SYD Denominator = 5 x [(5 + 1) ÷ 2] = 15

Date Depreciable SYD rate Depreciation Accumulated Carrying

amount Depreciation amount
1/1/11 100,000
12/31/11 80,000 5/15 26,667 26,667 73,333
12/31/12 80,000 4/15 21,333 48,000 52,000
12/31/13 80,000 3/15 16,000 64,000 36,000
12/31/14 80,000 2/15 10,667 74,667 25,333
12/31/15 80,000 1/15 5,333 80,000 20,000
80,000

3. DOUBLE DECLINING BALANCE METHOD – depreciation is computed by applying a fixed

rate on the asset’s carrying amount, rather than the depreciable amount. Unlike the
other depreciation methods, the double declining method initially ignores the residual
value.
 The residual value is considered only at the latter part of the asset’s useful life by
adjusting the depreciation charges so the carrying amount does not fall below
the residual value.

Double Declining rate = 2 ÷ Life

EXAMPLE: Double Declining Method
On Jan. 1, 2011, an entity acquired a piece of equipment for P100,000. The equipment is
estimated to have a useful life of 5 years and residual value of P20,000.

Double Declining rate = 2 ÷ Life

Double Declining rate = 2 ÷ 5 = 40%
Depreciation Charges:

Year Depreciation
2011 (100,000 x 40%) 40,000
2012 (100,000 – 40,000 x 40%) 24,000
2013 (100,000 – 40,000 – 24,000 x 40%) 14,400
2014 (100,000 – 40,000 – 24,000 – 14,400 x 40%) 8,640

 The amount derived from 2014 is P8,640. If this amount is recognized, the
carrying amount of the equipment on Dec. 31, 2014 would fall below P20,000
residual value: (100,000 – 40,000 – 24,000 – 14,400 – 8,640) = 12,960 carrying
amount vs P20,000 residual value. The minimum carrying amount of an asset
with a residual value is equal to the residual value. Accordingly, Only the excess
of the equipment’s carrying amount as of December 31, 2013 over the residual
value is recognized as depreciation in 2014. See Computation below:
Carrying amount on 12/31/2013 (100,000 – 40,000 – 24,000 – 14,400) 21,600
Residual Value (20,000)
Depreciation for 2014 1,600

 The asset is fully depreciated in 2014. Therefore, no depreciation is recognized in

2015. The depreciation table is shown below:

Date Depreciation Accumulated Carrying Amount

Depreciation
1/1/2011 100,000
12/31/2011 40,000 40,000 60,000
12/31/2012 24,000 64,000 36,000
12/31/2013 14,400 78,400 21,600
12/31/2014 1,600 80,000 20,000
12/31/2015 - 80,000 20,000
80,000