chap 11 - depreciation

chap 11 - depreciation - D EPRECIAT ION Amortization: the...

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DEPRECIATION - Amortization: the general, systematic process of expensing depreciable amount of PPE to those periods that benefit from its use; can also specifically refer to the process for intangible assets o Depreciation: amortization of PPE o Depletion: amortization of natural resource assets - Cost allocation rather than a valuation approach. Valuating an asset every period is too costly 4 Factors to Consider in the Depreciation Process - Asset components: o Identify each significant component of a PPE; group similar (useful life/benefits) significant components o Group together all other remaining, insignificant components of a PPE; can be depreciated as one o Group together all minor assets and separate by similar life and usage - Depreciable Amount o [cost – residual value] / useful life o Review residual value regularly as changes in the environment might affect depreciable amount o PE GAAP: (cost – residual value) / useful life OR (cost – salvage value) / useful life Residual value is more commonly used o Residual value: net amount expected to be received for the asset today if it were of the age and condition expected at the end of its useful life o Salvage value: estimated net realizable value at the end of the asset’s life - Depreciation Period o Period the asset is expected to be available for use; can be units of production, mileage, etc o Depreciation begins when the asset is available for use; ends when the asset is derecognized o Depreciation continues even if the asset is idle or taken out of service o Useful life is different from physical life due economic factors, physical factors, and legal
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chap 11 - depreciation - D EPRECIAT ION Amortization: the...

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