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Depreciation Vocabulary
Book Value: Historical cost of the asset less
Property, plant & equipment accumulated depreciation.
utilization and retirement Accumulated Depreciation: Total depreciation
recorded since acquisition.
Asset Cost: Purchase cost plus any
capitalized expenditures.
Residual Value: Estimated resale value of the
asset upon retirement.
Useful Life: Estimated life of asset in years,
hours of service, or per unit of output.

Depreciation Methods of Depreciation

The use of assets during the period
should be reported as an expense of
that period. Straight-line: This method
Accounts estimates this cost by using recognizes equal periodic
a systematic method to allocate the depreciation charges over the
recorded costs. assets life.
Depreciation = Cost less salvage value
useful life(years, etc)

Factors Affecting the Periodic

Methods of Depreciation
Depreciation Charge

Asset cost
Residual or salvage value Accelerated methods:
Sum-of-the-years-digitsThis method
Useful life yields decreasing depreciation in each
successive year.
Declining-balanceThis method
provides decreasing charges by applying
a constant percentage rate to a declining
asset book value.


Methods of Depreciation Impairment

2. When is an asset impaired?
Service hours: This depreciation method An asset is impaired when the
is based on the theory that purchase of recoverable amount is less than the
an asset represents the purchase of a
number of hours of direct service.
book value of the asset.

Productive output: This method is based on

the theory that an asset is acquired for the
service it can provide in the form of
production output.

Methods of Depreciation Impairment

Group and Composite 3. How should an impairment loss
Methods be measured?
This approach treats an entire group of assets as
The impairment loss is the difference
if the group were one asset.
between the carrying amount (CA)of
Group: Used when the assets in the group the asset and the assets recoverable
are similar. amount (RA).
Composite: Used when the assets in the
The RA is the higher between
group are related, but dissimilar.
present value of estimated future
cash flows from the asset and fair
value less cost to sell.

Impairment Impairment
Before the end of an assets useful life, 4. What information should be disclosed
events occur that impair its value. about an impairment?
This requires an immediate write-
down of the asset. Disclosure should include a description
1. When should an asset be reviewed for of the impaired asset, reasons for the
possible impairment? impairment, a description of the
measurement assumptions, and the
An impairment review should be
conducted whenever there has been a
business segment or segments affected.
material change in the way an asset is
used or in the business environment.


International Accounting for

Asset Impairment
IFRS 36 requires that a company recognize
an impairment loss whenever the
recoverable value of an asset is less than its
book value.
Recoverable value- The higher of the selling
price of the asset or the discounted cash
flows associated with the assets use.
IFRS 36 allows for the reversal of an
impairment loss if events in subsequent
years suggest the asset is no longer

Asset Retirement by Exchange

(Dissimilar Asset)
1. Remove old asset from books: debit
Accumulated Depreciation; credit the
2. Record new asset at fair market
value: debit asset
3. Record any cash received or paid:
debit or credit Cash as appropriate.
4. Record any gain or loss: debit loss
account or credit gain account.

Asset Retirement by Exchange

(Similar Asset)
Gain or Loss =
(FMV New Asset + Cash Received)
(Book Value Old Asset + Cash Paid)
If answer is greater than zero, record a
If answer is less than zero, record a