SPECIFICATION AND

VALUATION
WHAT IS ASSET AND NET BOOK
VALUE?!
FIXED ASSETS

• Assets acquired not for resale.

• Help to earn revenue for more

than 1 financial year.
 NET BOOK VALUE

Net book value (NBV) refers to a company’s assets or how the assets are
recorded by the accountant. NBV is calculated using the asset’s original cost –
how much it cost to acquire the asset – with the depreciation, depletion, or 
amortization of the asset being subtracted from the asset’s original cost.

The formula for calculating NBV is as follows:

Net Book Value = Original Asset Cost – Accumulated Depreciation
 
Where:
•Accumulated Depreciation = Per Year Depreciation x Total Number of Years
WHAT IS DEPRECIATION?!
DEPRECIATION
 DEPRECIATION
I. It is the loss in the value of the property due to is use, life,
wear, tear, decay and obsolescence.
II. The general annual decrease in the value of a property
is known as annual depreciation.
III. Usually, the percentage rate of depreciation is less at the
beginning and generally increase during later years.
 CAUSES OF DEPRECIATION
Economic factors, depletion, time and physical deterioration
are the primary causes of depreciation.

I. Wear and tear

II. Erosion, Rust, Decay, etc
III. Economic factors
IV. Obsolescence
V. Inadequacy
VI. Time factor
OLD NEW
 OBSOLESCENCE

The value of property or structures become less by change

in style, in structure, in design, etc. due to new inventions
etc…
It has been classified into internal and external obsolescence
 INTERNAL OBSOLESCENCE

1. Poor on eccentric original design

2. Change in type of construction
3. Change of kind of construction
4. Change in utility demand
EXTERNAL OBSOLESCENCE

1. Poor original location

2. Change in character of the district
3. Specific detrimental influences such as due to construction
of factories, building traffic locations and noises etc…
4. Zoning laws
DEPRECIATION
1) This is the physical loss in the
value of the property due to
wear & tear, decay ect.
2) Depreciation depends on its
original condition, quality of
maintenance and mode of use.
3) this is variable according to
the age of the property. More the
age, more will be the amount for
the depreciation.
4) there are different methods by
witch the amount of depreciation
can be calculated.
OBSOLESCENCE
1) The loss in the value of the
property is due to change of
design, fashion, in structure of
the other, change of utility,
demand.
2) obsolescence depends on
normal progress in the arts,
inadequacy to present or
growing needs etc.
3) this is not dependent on age
of the building. A new building
may suffer in its usual rent due to
obsolescence.
4) At present there is no
method of calculation of
obsolescence.
 METHODS OF CALCULATING
DEPRECIATION

I. Straight line method

II. Constant percentage method
III.Sinking fund method.
IV. Units-of-output
V. Reducing Balance
VI.Double-declining-balance
VII.Revaluation
VIII.Sum-of-the-years'-digits
 STRAIGHT LINE METHOD:

• A fixed asset is depreciated by an equal amount per year

ANNUAL DEPRECIATION = Original cost (C)- Scrap value(Sc)

Expected useful life(n)
Advantages of Straight line method:
 Simple, easy to understand and to apply
 It provides uniform charge every year
 It’s calculated on original cost over the life time

Disadvantages
 Depreciation is not related to the usage factor
 It ignores the fact that in the later years of the life of
the asset, efficiency of the asset declines.
 Loss of interest on investment in the asset is not
accounted for
REDUCING BALANCE METHOD

• Reducing Balance Depreciation is a method of

calculating depreciation whereby an asset is
expensed at a set percentage.
• When the cost of asset, residual value and useful
life of an asset is given:

r = 1 – (S/C)1/n

Where:
• r = Rate of depreciation
• n = Estimated useful life of asset
• S = Residual value after the expiry of useful life
• C = Original cost of asset
An asset’s useful life is determined to be three years
Cost of the asset is £2,000.
Residual Value is £500.
Rate of depreciation is 50%.

How will you calculate the Depreciation expense for these three years?
RATE OF DEPRECIATION:

If n = 3 years, S = £64,000 and C = £1,000,000

calculate rate of depreciation.

r = 1 – (64,000/1,000,000)1/3

= 1 – 40/100

= 60/100

= 60%
• Advantage
- Overall expenses ( including repairs and
maintenance) charged for the use of a fixed
asset would be fairly constant.

• Disadvantages

- Difficult to calculate.
- Assets are always left with a small value at
the end of useful life.
DIFFERENCES BETWEEN STRAIGHT LINE METHOD
AND REDUCING BALANCE METHOD
STRAIGHT LINE METHOD
The rate of depreciation and the amount
remain constant
Cost of assets each year forms the basis of
determining depreciation percentage
The value of an asset at the end of its life is
zero.
As the asset ages, the cost of its repair goes
up. But as mentioned in point number one, the
depreciation amount remains unchanged. This
diminishes annual profit.
Computation of depreciation under straight
line method is relatively easy and
straightforward
REDUCING BALANCE METHOD
The rate of depreciation remains unchanged
but the amount gradually decreases
Book value of assets forms the basis of
determining depreciation percentage
The value of an asset at the end of its life is
never zero
As the asset ages, the cost of its repair goes
up, but so does the depreciation amount.
These two balance each other and hence there
is little or no effect on annual profit/loss
Computation of depreciation under reducing
balancing method is always possible, but it
comes with its own share of complexities.
BY
DIVYA , JEYAKUMAR, SARJUN.