Page 249 - DMGT104_FINANCIAL_ACCOUNTING

Unit 10: Accounting and Depreciation for Fixed Assets

Introduction Notes

1. This Statement deals with depreciation accounting and applies to all depreciable assets,
except the following items to which special considerations apply:
(i) Forests, plantations and similar regenerative natural resources;

(ii) Wasting assets including expenditure on the exploration for and extraction of
minerals, oils, natural gas and similar non-regenerative resources;
(iii) Expenditure on research and development;

(iv) Goodwill;
(v) Live stock.
This statement also does not apply to land unless it has a limited useful life for the
enterprise.
2. Different accounting policies for depreciation are adopted by different enterprises.
Disclosure of accounting policies for depreciation followed by an enterprise is necessary
to appreciate the view presented in the financial statements of the enterprise.

Definitions

3. The following terms are used in this statement with the meanings specified:
3.1 Depreciation is a measure of the wearing out, consumption or other loss of value of a
depreciable asset arising from use, affluxion of time or obsolescence through
technology and market changes. Depreciation is allocated so as to charge a fair
proportion of the depreciable amount in each accounting period during the expected
useful life of the asset. Depreciation includes amortisation of assets whose useful
life is predetermined.
3.2 Depreciable assets are assets which
(i) Are expected to be used during more than one accounting period; and
(ii) Have a limited useful life; and

(iii) Are held by an enterprise for use in the production or supply of goods and
services, for rental to others, or for administrative purposes and not for the
purpose of sale in the ordinary course of business.
3.3 Useful life is either (i) the period over which a depreciable asset is expected to be used
by the enterprise; or (ii) the number of production or similar units expected to be
obtained from the use of the asset by the enterprise.
3.4 Depreciable amount of a depreciable asset is its historical cost, or other amount
substituted for historical cost in the financial statements, less the estimated residual
value.

Explanation

4. Depreciation has a significant effect in determining and presenting the financial position
and results of operations of an enterprise. Depreciation is charged in each accounting
period by reference to the extent of the depreciable amount, irrespective of an increase in
the market value of the assets.

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