A PPE is carried at its cost less any accumulated depreciation and any accumulated impairment losses
Cost
The amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognized in accordance with the specific requirements of other PFRSs
Depreciation
The systematic allocation of the depreciable amount of an asset over its useful life
Depreciable amount
The cost of an asset, or other amount substituted for cost, less its residual value
Residual value
The estimated amount that an entity would currently obtained from disposal of the asset, after deducting the estimated costs 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) The period over which an asset is expected to be available for use by an entity; or (b) The number of production or similar units expected to be obtained from the asset by an entity
Factors considered in determining the useful life of an asset
Expected usage of the asset
Expected physical wear and tear
Obsolescence
Legal and similar limitation on the use of the asset (e.g., the government places an age limit for public utility buses)
Physical depreciation
Relates to an asset's deterioration and wear down over a period of time
Functional or economic depreciation
Arises from an asset's obsolescence or inadequacy to perform efficiently
Types of obsolescence
Functional obsolescence - occurs when an asset loses value due to its outdated sign
Locational or Economic obsolescence - occurs when a property loses value because of negative influence from external factors, e.g., a flood or landslide in the area, establishment of an airport, construction of railway tracks, and the like
Technical obsolescence - occurs when a new product or technology replaces an old, e.g., abacus is replaced by calculators
Physical obsolescence - occurs when an asset loses value due to misuse or poor maintenance
Inadequacy
Results when an asset is no longer appropriate because of an increased volume of operations
Each significant part of an item of PPE is depreciated separately
Depreciation is recognized as expense (in profit or loss) unless it is included in the cost of producing another asset
Depreciation starts when the asset is available for use, in the manner intended by management
When depreciation stops
Derecognized (i.e., sold or disposed of)
Classified as held for sale under PFRS 5
Fully depreciated
Carrying amount
The amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses
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)
Buildings are depreciated because they have limited useful life
PAS 16 prohibits the use of depreciation method that is based on revenue
PAS 16 requires an annual review of the depreciation method and the estimates of useful life and residual value at each year-end
Common methods of depreciation
Straight-line method
Sum-of-the-years' digits method (SYD)
Double declining balance method
Units of production method
Straight-line method
Depreciation is recognized evenly over the useful life of the asset
Straight-line method calculation
Annual depreciation = Depreciable amount ÷ Useful life
Accelerated depreciation methods
Depreciation charges decrease over the useful life of the asset, meaning, depreciation is higher in the early years of the asset's useful life and lower in the later years
Sum-of-the-years' digits (SYD) depreciation
Depreciation is computed by applying a series of fractions to the depreciable amount of asset, where the fraction is derived by dividing the asset's remaining useful in life by the sum of the digits of the useful life
Philosophy behind accelerated depreciation
The non-generating capacity of the asset declines due to passage of time, so higher depreciation should be recognized in the early years of the asset's useful life when higher revenues are generated
Applications of accelerated depreciation
Sum-of-the-years' digits (SYD)
Double declining balance
Sum-of-the-years' digits (SYD) depreciation
1. Depreciation is computed by applying a series of fractions to the depreciable amount of asset
2. A fraction is derived by dividing the asset's remaining useful in life by the sum of digits in the life of the asset
3. The decreasing fractions are multiplied to the depreciable amount of the asset to determine the accelerated depreciation
SYD formula
SYD Denominator = Life x (Life + 1) / 2
Double declining balance method
1. Depreciation is computed by applying a fixed rate on the asset's carrying amount, rather than depreciable amount
2. The double declining rate is computed as 2 / Useful life
3. The residual value is considered only at the latter part of the asset's useful life by adjusting the depreciation charge(s) so that the carrying amount does not fall below the residual value
Alternative solution for double declining balance
The carrying amount as of any year can be computed by successively multiplying the asset's cost by the excess of 100% over the double declining rate for a number of times equal to the period for which the accumulated depreciation is to be determined
Increasing a depreciation charge under double declining balance method
When the double declining balance method results to a longer depreciation charge in a year compared to the previous year, the asset's carrying amount is depreciated over the remaining useful life under the straight line method to eliminate the increasing charge
Partial year depreciation
When an asset is either acquired or disposed of during the year, the full year depreciation charge should be prorated during the accounting periods involved to achieve proper matching
In practice, proration is normally done on the basis of the nearest full month
Depreciation
The process of allocating the cost of an asset over its useful life
Depreciation is calculated at the end of each month (or at the beginning of the following month) when an asset has been acquired or disposed of
Depreciation calculation methods
1. Straight line
2. Sum of the years' digits (SYD)
3. Double declining balance
Straight line depreciation: Depreciation for each full year = (Cost - Salvage value) / Useful life
SYD depreciation: Depreciation for each year = (Cost - Salvage value) * (Remaining useful life / Total useful life)
Double declining balance depreciation: Depreciation for each year = 50% of the previous year's carrying amount