ISSUES ,GUIDELINES AND STANDARDS OF DEPRECIATION OF FIXED ASSETS

RESPECTED SIR USMAN

Presented By: Group “D”

ZAIN AGHAADNAN SHEIKHALI RAZASALMAN FARSIASIFA MANZOOR

I.A.S (issued at 1 January 2012)

The International Accounting Standards Board is the independent, accounting standard-setting body of the IFRS Foundation. The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee. ..

Objectives of I.A.S (16)

• The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment.

• Users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment.

Assets

Definition: An asset is an economic resource.

Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset.

Types of Assets

Following are two types of assets.

• Current Assets Current assets are cash and other assets expected to be

converted to cash or consumed in a year.

• Fixed Assets Fixed Assets include property, plant, and equipment etc.

These are purchased for continued and long-term use in earning profit in a business

Types of Fixed Assets

Fixed assets are of two types:• Tangible Assets

Tangible assets are those that have a physical substance, such as, building, real estate, vehicles, equipment, and precious metals.

• Intangible AssetsIntangible assets lack of physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises, goodwill, trademarks, trade names, etc

The Principal Issues in Accounting for Fixed Assets

• Recognition of the Assets

• Measurement of Recognition

• Impairment Losses

• Depreciation

Issues

Recognition of the Assets

GUIDELINES

The cost of an item of property, plant and equipment shall be recognized as an asset if;

• It is probable that future economic benefits associated with the item will flow to the entity.

• The cost of the item can be measured reliably.

ALI RAZA

Registration No. 0035

Issues

Measurement of Recognition

GUIDELINES

• An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost.

• The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date.

Cont…

• If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognized as interest over the period of credit unless such interest is capitalized in accordance with IAS 23.

Cost Includes…

• Purchase price

• Import duties

• Non-refundable purchase taxes

• Any costs directly attributable to bringing the asset in workable condition.

• The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Measurement After Recognition

An entity shall choose either the cost model or the revaluation model as its

accounting policy and shall apply that policy to an entire class of property, plant and equipment.

Models

RevaluationCost

Models

Cost Model: After recognition as an asset, an item of property, plant

and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

Revaluation Model: A fixed Asset, whose fair value can be measured reliably

shall be carried at a revalued amount, being its fair value at the date of the revaluation

ASIFA

Registration No. 0042

Issues

Impairment Losses

Impairment Loss

Definition:

An impaired asset is a condition in which an asset's market value falls below its carrying amount and is not expected to recover. ...

GUIDELINES

To determine whether an item of property, plant and equipment is impaired, an entity applies IAS 36 Impairment of Assets.

The carrying amount of an item of property, plant and equipment shall be derecognized:

(a) on disposal; or

(b) When no future economic benefits are expected from its use or disposal

SALMAN

Registration No. 0006

Issues

Depreciati

on

Depreciation

Depreciation is the gradual permanent decrease in the value of an asset from any cause.

Internal

Wear and Tear

Depletion

Types of Depreciation

• Depreciation

• Amortization

• Depletion

Methods of Depreciation

1. Straight Line Method

2. Diminishing Balance Method

3. Units of Production Method

4. Annuity Depreciation

5. Sum of year digits Method

6. Units of time depreciation

7. Group depreciation Method

8. Composite Depreciation Method

ZAIN UD-DIN AGHA

Registration No. 0024

Straight Line Method

An equal portion of the initial cost of the asset is allocated to each period of use.

Depreciation = Cost of Asset – Estimated Residual Value

Estimated Useful Economic Life

Example :

Annual charge for depreciation

= 240-0 3= $80

Year Opening Balance of Asset Depreciation Expense

123

$240 160 80

$80 80 80

Totals $240

Original Cost=$240Scrap Value =$0Expected Life=3 Years

Declining / Diminishing Balance Method

• Declining balance is an accelerated depreciation method. Higher depreciation is charged in early years and smaller amounts in later years.

• Revenues may be higher in early years, declining in later years as efficiency falls. So, according to matching principle depreciation should decline with benefits.

Formula:

Annual Depreciation = Net Book Value * Depreciation Rate

= (Cost – Accumulated Depreciation) * Depreciation Rate

Example

Year Rate Depreciation Expense

Net book Value

012345

---30%30%30%30%30%

---$5400 3780264618521322

$18000 12600

8820617443223000

Total $15000

Original Cost=$18000Scrap Value =$3000Expected Life =5 years

Annual Depreciation :

Units of Production & Service hours Method

• This method depreciate assets in proportion to their actual use rather than as a function with the passage of time.

• This method require an initial estimate of the total number of units of output or service hours expected over the life of the machine.

Formula:• Rate /Service hour=Cost /Exp service hour• Rate/Unit =Cost/Exp Unit of output

Units of Production Method (Example)

• Rate Per unit for Depreciation

=18000-3000/60000

=$0.25 /unit

Original Cost=$18000Scrap Value =$3000Expected Output=60000

Years Units of output Depreciation Net Book Value

012345

--- 15000 16000 20000 10000

12500

$3750 4000 5000 2250 0

$18000 14250 10250 5250 3000 3000

Total $15000

Changes in Depreciation Method

• In Case of newly Acquired Assets Only

• Change Method Applicable to All Assets