CIMA F1 Syllabus B. Financial Statements - IAS 16 Depreciation - Notes ^{2 / 7}

The depreciable amount (cost less prior depreciation, impairment, and residual value) should be allocated on a systematic basis over the asset’s useful life

Residual Value & UEL

• Should be reviewed at least at each financial year-end

• if expectations differ from previous estimates, any change is accounted for  prospectively as a change in estimate.

• for e.g. An asset was purchased in year 1 for $10,000.

  It was assessed to have a residual value of $0 and a useful economic life of 10 years.

  In year 2, the management assessed that the remaining useful economic life of the asset was 12 years.

  Depreciation in year 1 with useful life of 10 years
  ($10,000 - nil residual value) / 10 years = $1,000
  Carrying value of the asset = $10,000 - $1,000 = $9,000

  Depreciation in year 2 with useful life of 12 years
  ($9,000 - nil residual value) / 12 = $750

Which Method of Depreciation should be used?

• It should reflect the pattern in which the asset’s economic benefits are consumed by the enterprise

• Straight-line basis

  For e.g. An item of machinery costing $1,200 is depreciated using straight-line basis at the rate of 10% p.a.

  The amount of depreciation for year 1 will be $1,200 x 10% = 120
  Amount carried forward to year 2 = $1,200 - $120 = $1,080

  The amount of depreciation for year 2 will be $1,200 x 10% = 120
  Amount carried forward to year 3 = $1,080 - $120 = $960

• Reducing balance basis

  For e.g. An item of machinery costing $1,200 is depreciated using reducing balance basis at the rate of 10% p.a.

  The amount of depreciation for year 1 will be $1,200 x 10% = 120
  Amount carried forward to year 2 = $1,200 - $120 = $1,080

  The amount of depreciation for year 2 will be $1,080 x 10% = 108
  Amount carried forward to year 3 = $1,080 - $108 = $972

How often should depreciation methods be reviewed?

• At least annually

• If the pattern of consumption changes, the depreciation method should be changed prospectively as a change in estimate.

Accounting treatment

Depreciation should be charged to the income statement

Depreciation begins when the asset is available for use and continues until the asset is de-recognised

Significant parts are depreciated separately

• If the cost model is used each part of an item of PPE with a significant cost (in relation to the total cost) must be depreciated separately

• Parts which are regularly replaced - depreciate separately

  The replacement cost is then added to the asset cost when recognition criteria are met

  The carrying amount of the replaced parts is de-recognised

Major Inspections for faults (e.g. Aircraft)

The inspection cost is added to the asset cost when recognition criteria are met

If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed

An asset with a component included with a different UEL:

This could be something like Land and buildings - basically you should take the land value away from the total cost and then depreciate the remainder over the UEL of the building.

• Illustration

  Buy House for 100,000. 
  The land has a value of 40,000. 
  UEL of building is 10 years

• Solution:

  The value of the building itself is: 100,000 - 40,000 = 60,000

  Depreciation would be:
  Land 40,000 - zero depreciation
  Building 60,000 / 10 years = 6,000