Depreciation Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. In other words, depreciation applies the accruals concept to the capitalised cost of a non-current asset and matches this cost to the period that it relates to.
Depreciation methods There are many methods of depreciating a non-current asset with the most common being:. Required Prepare the extracts of the statement of financial position and statement of profit or loss for the year ended 31 March 20X2.
Useful life and residual value IAS 16 requires that estimates of useful life and residual value be reviewed at the end of each reporting period.
If either changes significantly, the change should be accounted for over the useful life remaining. This is referred to as a prospective adjustment rather than a retrospective adjustment. Required Demonstrate how the machine should be accounted for in the years ended 31 March 20X1, 20X2 and 20X3 and prepare extracts of the statement of profit or loss and statement of financial position for each year.
Depreciation of significant parts Some assets may comprise more than one significant part ie where the cost of each part is significant in relation to the total cost of the item. Where this is the case, each of those parts must be depreciated separately over their own individual useful lives.
The separate components of the property are made up as follows:. Required Calculate the annual depreciation charge for the property for the year ended 31 March 20X2. If the revaluation model is adopted, this should be applied to all assets in the entire class ie if you revalue a building, you must revalue all land and buildings in that class of asset.
Revaluations must also be carried out with sufficient regularity so that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Accounting for a revaluation There are a series of accounting adjustments that must be undertaken when revaluing a non-current asset. These adjustments are indicated below. The initial revaluation You may find it useful in the exam to first determine if there is a gain or loss on the revaluation with a simple calculation to compare:.
However, the gain should be recognised in the statement of profit or loss to the extent that it reverses a revaluation decrease ie a revaluation loss of the same asset which had previously been recognised in profit or loss. The asset had a useful life at that date of 40 years. Required Calculate the revaluation gain and prepare the journal entry to account for the revaluation. Revaluation losses A revaluation loss should be charged to profit or loss. However the loss should be recognised in other comprehensive income and debited to the revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset.
Any additional loss must be charged as an expense in the statement of profit or loss. Required Calculate the revaluation loss and prepare the journal entry to account for the revaluation. Depreciation of revalued assets The asset must continue to be depreciated following the revaluation. However, now that the asset has been revalued the depreciable amount has changed. Reserves transfer The depreciation charge on the revalued asset will be different to the depreciation that would have been charged based on the historical cost of the asset.
As a result of this, IAS 16 permits a transfer to be made of an amount equal to the excess depreciation from the revaluation surplus to retained earnings. Be careful, in the exam a reserves transfer is only required if the examiner indicates that it is company policy to make a transfer to retained earnings in respect of excess depreciation on revalued assets.
If this is not the case, then a reserves transfer is not necessary. Working papers should be clear that this is how the issue has been addressed. The sample should give an appropriate spread across all fixed asset categories, opening balances and additions, and should concentrate on higher value assets.
It is not unusual to find the situation where freehold property has not been depreciated, but often the reason given for non-depreciation is not valid. FRS The only exception to this is therefore where any depreciation charge and the accumulated depreciation would not be material.
For this to occur, there must be a high residual value, a long economic life or both. FRS Glossary defines residual value as:. If this treatment is to be adopted, it is essential that the auditor undertakes testing to consider the following questions. If there has been no expenditure at all on repairs and renewals for the past five to ten years, then it may be more difficult to justify a high residual value and long economic life. Whilst this may be more likely it must still be demonstrated and if this is not the case, then the difference should be depreciated.
It might be easy to successfully claim that the annual depreciation charge would be immaterial, but the accumulated depreciation is often ignored, and it can become material in time.
It is essential to ensure that the adequacy of depreciation rates is considered and documented during each audit. In doing this, the auditor should also consider the useful economic life of assets in terms of their use within the entity. Over-depreciation of assets can also be a problem. It can be hard to determine who owns what and what each party can legally claim depreciation for. There is where the value of a professional Quantity Surveyor is realised.
This will also help ensure legal compliance when it comes to claiming depreciation, in the case of an ATO audit. If either of these scenarios apply to you as a hotel owner or operator, you can visit our commercial property depreciation page for more information. Hotel freehold vs leasehold — what does this mean for depreciation?
Date: 06 Jul By: BMT team. Tags: Commercial Property , hotel depreciation , hotels. Comment: 0. When hoteliers request a tax depreciation schedule for their property, there are usually three main scenarios: Freehold , which is where the client owns the building only, not the business that operates from it Leasehold , where the client owns the business only, not the actual property The client owns both the business and the building Depending on which of these situations apply, how depreciation can be claimed will vary.
Contents: Scenario 1 — Freehold Scenario 2 — Leasehold Scenario 3 — The client owns both the business and the building How a tax depreciation schedule can help Scenario 1 Freehold In a freehold scenario, the client owns the actual building or the property, but the not the hotel business that operates from it.
Scenario 2 Leasehold In this situation, the client owns the business only; not the actual building. Scenario 3 — They own both the business and the building Usually but not always in this scenario, there are separate entities to take into consideration. How a tax depreciation schedule can help When a property owner and hotel operator are both claiming depreciation for various assets in the same building, things can quickly get confusing.
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