AFM291-ch11 (1)

AFM291-ch11 (1) - Chapter 11 Chapter Depreciation...

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AFM 291 chapter 11 1 Chapter 11 Chapter 11 Depreciation, Impairment, and Disposition Depreciation, Impairment, and Disposition
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AFM 291 chapter 11 2 Depreciation – Concept Depreciation is a means of cost allocation It is NOT a method of valuation Depreciation involves: Allocating the cost of capital assets to expense (matching principle) in a systematic and rational manner to periods expected to benefit from use of assets The terms depreciation and amortization are used interchangeably
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AFM 291 chapter 11 3 Factors in the Depreciation Process Questions to be answered: 1. What asset components are depreciated separately? 2. What amount of the asset’s cost is to be depreciated? 3. What is the asset’s useful life (period of depreciation)? 4. What pattern and method of cost apportionment is best for this asset? => Which depreciation method best matches the way this asset is used/consumed?
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AFM 291 chapter 11 4 1. Components Depreciated Separately Each significant part of a PP&E asset should be identified and depreciated as a separate component Multiple components may be grouped for calculating depreciation if they have same useful lives and depreciation methods Parts of each PP&E asset that are not individually significant can be grouped and depreciated as a single component Application of components for the purpose of depreciation is required by both private entity GAAP and IFRS . However, IFRS is more detailed and strict.
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AFM 291 chapter 11 5 2. Depreciable Amount Depreciable amount is initially calculated as: Original cost of the asset less estimated residual value (or salvage value) IFRS does not permit the use of salvage value Residual value is the net amount expected to be received for the asset today if it were of the age and in the condition expected at the end of its useful life Salvage value is the asset’s estimated net realizable value at the end of the asset’s life Residual value should be reviewed regularly (at least annually under IFRS) Depreciation continues as long as residual value is lower than asset’s carrying amount
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AFM 291 chapter 11 6 3. Depreciation Period Depreciation begins when the asset is available for use Depreciation ends when the asset is derecognized or classified as held for sale . An asset’s useful life and physical life are not the same (expressed in time or units) Useful life is sometimes referred to as the economic life —the period of time over which the asset will produce revenue for the company Factors affecting useful life are: economic factors (e.g. obsolescence) physical factors (e.g. wear and tear) legal life (e.g. expiration of contract)
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AFM 291 chapter 11 7 4. Choice of Depreciation Method Depreciation method determines the systematic allocation of the depreciable amount over the asset’s useful life Depreciation should reflect the pattern of benefits expected from the use of the asset (matching) Additional considerations for choosing a particular
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This note was uploaded on 12/15/2010 for the course AFM 291 taught by Professor Clark during the Spring '10 term at Waterloo.

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AFM291-ch11 (1) - Chapter 11 Chapter Depreciation...

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