International Financial Reporting Standards (ifrs)

What assets can be Depreciated?

• building,
• land improvements and
• equipment,
• as these assets’ benefit or service ability will decline over its useful life.
• For land, usually it has unlimited useful life and in fact, the usefulness will increase over time, therefore it is not appropriate to depreciate this asset.

Depreciation methods

• In calculating depreciation, companies can use one from four methods;
• Straight-line
• Declining-balance
• Total-of-year-digits
• Units-of-activity

Straight-line

Cost	-	Salvage value	=	Depreciable cost
RM60,000	-	RM4,000	=	RM56,000

• Using useful life, which involves two steps of calculation:
• 1. Calculate the depreciable cost.

Depreciable Cost	÷	Useful life (in years)	=	Depreciation expense
RM56,000	÷	4	=	RM14,000

• 2. Calculate the depreciation expense per year.

Declining-balance Method

100%	÷	Useful life (in years)	x	2	=	Annual rate
100%	÷	4	x	2	=	50%

• Determine the annual depreciation rate. This rate remains constant during useful life and usually it is double of the straight-line rate.

Book value at beginning of year	x	Annual rate	=	Depreciation expense
RM60,000	x	50%	=	RM30,000

• Calculate the depreciation expense per year. Unlike other method, this method does not use depreciable cost, on the other hand, it will use the book value recorded at the beginning of the year. Thus, book value for first year of asset operation is the cost of the asset. The depreciation expense for first year (2010) is:

Total-of-year-digits Method

Cost	-	Salvage value	=	Depreciable cost
RM60,000	-	RM4,000	=	RM56,000

• This method is also categorizes as accelerated-depreciation method, which produces descending amount of depreciation expense throughout assets’ useful life. There are three steps of calculation:
• 1. Total up the digit numbers of useful life.
• Total of year digits (when useful life is 4 years)
• = 1 + 2 + 3 + 4
• = 10
• 2. Calculate the depreciable cost.

Depreciable cost	x	Digits fraction	=	Depreciation expense
RM56,000	x	4/10	=	RM22,400

• 3. Calculate the depreciation expense per year.
• Digits fraction is a ratio between balance years of useful life (including the current year) with the total of year digits (computed in step 1). For year 1, the balance years of 4 divided with total of 10. So, one-year depreciation expense for year 1 is RM22,400 (as shown in solution above). Same procedure of calculation applies for another year, but with different digits fraction. The fraction becomes smaller considering the remaining years of useful life.

Total-of-year-digits Method

Year	Annual depreciation expense	Accumulated depreciation	Book value
2010	56,000 x 4/10 = 22,400	22,400	37,600
2011	56,000 x 3/10 = 16,800	39,200	20,800
2012	56,000 x 2/10 = 11,200	50,400	9,600
2013	56,000 x 1/10 = 5,600	56,000	4,000

• The depreciation schedule below shows the detail:

Units-of-activity Method

Cost	-	Salvage value	=	Depreciable cost
RM60,000	-	RM4,000	=	RM56,000

• 1. Calculate the depreciable cost.

Depreciable cost	÷	Total activity unit	=	Depreciation rate per unit
RM56,000	÷	100,000 machine hours	=	RM0.56 per machine hour

• 2. Determine the rate of depreciation per unit of activity.

Depreciation rate per unit

x

Annual rate

=

Depreciation expense

• 3. Calculate the depreciation expense per year.
• Assume that actual usage or activity during four years for PAH as follows: 2010, 29,000; 2011, 28,000; 2012, 25,000; and 2013, 18,000. Therefore, depreciation calculation for these years are as follows:

Units-of-activity Method

Year	Annual depreciation expense	Accumulated depreciation	Book value
2010	29,000 x 0.56 = 16,240	16,240	43,760
2011	28,000 x 0.56 = 15,680	31,920	28,080
2012	25,000 x 0.56 = 14,000	45,920	14,080
2013	18,000 x 0.56 = 10,080	56,000	4,000

Retirement of PPE

2014 Jan 1	Accumulated Depreciation – Equipment		80,000
		Equipment		80,000
	(To record the retirement of equipment)

• Company can retire their asset in two conditions, i.e. after the asset’s benefit been fully utilized and fully depreciated, or before it is fully utilized and depreciated. The following illustration used for both circumstances.
• Example
• Hardy’s Pest Control Ltd. purchased an equipment on January 1, 2006 with cost RM80,000. Hardy uses straight-line for depreciation with estimation of 8-year useful life and no salvage value.
• After fully depreciated.
• After used the equipment for eight years, on January 1, 2014, Hardy retires the equipment. The accumulated depreciation recorded for period January 1, 2004 until December 31, 2011 is RM80,000 (RM80,000 ÷ 8 years useful life x 8 years). Therefore, the equipment is fully depreciated (zero book value).
• The retirement should be recorded as follows:

Presentation of PPE in Financial Statement

XYZ Company Balance Sheet (Partial) At December 31, 20xx
ASSETS: Current Assets		RM	RM
------ ------ ------
Property, Plant and Equipment (PPE)
Land			307,750
Land Improvement		73,500
Less: Accumulated Depreciation		9798	63,702
Building		195,800
Less: Accumulated Depreciation		9,290	186,510
Vehicle		120,000
Less: Accumulated Depreciation		26,667	93,333
Net total of Property, Plant and Equipment			651,295

• The following is an example of PPE presentation in balance sheet.