PPE part 2

• Cost model


  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  • Functional obsolescence - occurs when an asset loses value due to its outdated sign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