DEPRECIATION

 Matter of cost allocation, not valuation

 Systematic allocation of cost
 Allocating depreciable amount over the asset’s useful life (straight line)
 Objective; To have each period benefiting from the use of the asset to bear an equitable share of cost.

Causes of Depreciation;
 Wear and tear due to usage or passage of time (even idle)
 Natural Disaster
 Disease or Decay (animals & wooden eqpt)
 Action of elements (dust, rain, fire, etc.)

Kinds of Depreciation
1. Physical Depreciation;
o Related to wear and tear and deterioration over a period
2. Functional or Economic Depreciation;
o Supersession;
 New assets available, performs same function
 Much better assets for less cost
o Obsolescence;
 Outdated, no future demand
 Encompasses inadequacy and supersession
 Catchall for economic or economic depreciation
o Inadequacy;
 due to increase in volume of operation the asset is no longer capable to be effective and
efficient to such operation.

Factors to Determine Depreciation;

 Residual Value
o Net selling price at the end of asset’s useful life
 Depreciable amount
o Max amount of Accumulated Depreciation
 Useful Life

Compute Depreciation using;

Uniform Charge;
 Straight line;
o Based on passage of time
o Depreciable amount / Useful life
o 100% / Useful life = Straight line rate

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 o Cost, allocated over the periods the asset is used (Deprcn. Are equal each period)

 Composite and Group Method;

o Deprcn. = Total cost x Comp/Gr. rate
o Composite; for dissimilar
 Total depreciable amount / Annual depreciation. = Composite life
 Total annual depreciation. / total cost = Composite rate
o Group; for similar

Variable charge or Activity Method;

 Service Hours
o Based on labor hours
o Cost, allocated based on proportionate service hours over the period asset is used
o Actual hours worked * depreciation rate = depreciation expense
o Depreciation rate = Depreciable amount / total working hrs.
 Production method;
o Based on units produced
o Cost, allocated based on proportionate units produce over the years asset is used in production
o Yearly output * rate = depreciation expense
o Depreciation rate = Depreciable amount / total output

Decreasing charge or Accelerated Methods;

- Philosophy; assets are capable to produce more revenue in earlier years than later years.
- Depreciation of asset decreasing over time
- Repairs should also be allocated over the useful life (Increasing over time)
- Depreciation and repairs equalize each other, therefore the overall effect is uniform charge
 SYD;;
o Depreciable amount * Remaining years / SYD
o Sum of half year’s digit = Useful life * 2, then proceed with usual procedure.
 Double Declining;
o Adaptation of declining method but not using an equation
o Depreciable amount * Straight line rate x 2
o Aka 200% method
o We ignore residual value
o At the end of the useful life, we do not use the rate, we simply deduct the residual value to get
the depreciation for that period.

Change in Useful life;

 Get the carrying amount for the period when the change in useful occurred

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  Then, compute for the depreciation with the new remaining useful life against the carrying amount
(new depreciable amount)

Change in Depreciation Method;

 Same as change in useful life
 Get carrying amount
 Adopt the new method accordingly

PROPERTY, PLANT AND EQUIPMENT

Nature and Characteristics;
 Tangible
 Used in production, to earn for rentals
 Includes movable property, unlike Investment property where only immovable ones are included
 Can be used for more than one period (Non-Current Asset)

Specific Items of PPE;

 Factory Building
 Machines used in production
 Land where the factory is located
 Etc.

Recognition Requirement;
 Recognize only when; (1) can be measured reliably, and (2) future economic benefit is expected to flow
to the entity through the asset

Initial Measurement;
 At Cost
o Purchase price
o Other Directly Attributable costs (DACs)
o Initial estimate of dismantling cost and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs.
Subsequent Measurement; either (applied to entire class)
 Cost model
o Recognize depreciation
o Doesn’t recognize change in fair value, but discloses it.
o Historical cost – Accumulated Depreciation – Accumulated Impairment loss = Carrying amount.
 Revaluation model
o Carried at revalued carrying amount
o Revalued C.A = Fair Value – Subsequent Accumulated Depreciation –Accumulated Impairment
Loss

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Acquisition through;
1. Cash basis
o Cash Price Equivalent
 Purchase price + DACs
o Bought in Lump Sum;
 Apportion price based on Relative Fair Value
2. On Account
o Cost = Invoice Price – Discount
 Discount not taken  Other Expense “Purchase Discount Loss”
 Discount; taken or not, still deduct
3. Installment
o Cash Price Equivalent over Installment Price
o Installment price – Cash Price = Interest (to be amortized)
o No Available cash price
 PV of all payments + down payment
4. Issuance of Share capital
o Measurement Order of Priority;
 FV of Share
 FV of Asset
 Par or Stated Value of share
5. Issuance of Bonds Payable
o Measurement Order of Priority;
 FV of Bonds Payable
 FV of asset
 Face Amount of Bonds Payable
6. Exchange
o Commercial Substance – there’s significant change in cash flow due to exchange
o There’s Commercial Substance
 Fair Value of asset given + Cash paid (or minus (-) Cash received)
 Gain or loss is recognized
o No Commercial Substance
 Carrying amount of asset given + Cash paid (or minus (-) cash received)
 No gain or loss recognized
o Trade In – A form of Exchange
 Property  Part Payment, Balance payable in cash or other form.
 Measurement order of priority;
 Fair Value of asset given + Cash Paid
 Trade in Value of asset given + Cash Paid
7. Donation

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 8. Government Grant
9. Construction

INVESTMENT PROPERTY
Nature and Purpose;
 Held for Capital Appreciation
 To earn rent (held by owner under Finance Lease)
 Not used in production(PPE) , and not for sale in ordinary course of business (Inv.)
 Immovable Properties (land and building only)
 PAS 40 Applicable Standard

Investment Property vs Owner-Occupied Property; (Examples)

Investment Property Owner-Occupied Property
Held for Capital Appreciation Held for use in production
To earn rent (leased out under operating lease) Leased under Finance Lease
Not used in production
Land Held for a currently undetermined use

Presentation in Financial Statement; (Leased to an Affiliate)

 Consolidated; Owner-Occupied Property
 Individual; Investment Property

Part IP, Part OOP;

 Can be sold or leased out separately
o Account the portion separately, Owner-Occupied Property and Investment Property
 Can’t be sold or leased out separately
o Recognize as Investment Property
 Ancillary Services
o Significant; Treat as Owner-Occupied Property
o Not Significant; Treat as Investment Property

Recognition Requirement;
 Can be measured reliably
 Economic benefit is expected to flow to the entity through the asset

Initial Measurement;
 At Cost (Include Transaction Costs)
o Purchase Price
o DACs
 Professional Fees, Property Transfer Tax, Etc.

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Subsequent Measurement;
 Cost Model
o FV Fluctuations are not recognized
o Annual depreciation, charge against profit or loss for the year.
 Fair Value Model
o Equipment such as lift or air-conditioning is often an integral part Investment Property.
 Generally included in the fair value of the Investment Property
o Office leased on Furnished Basis, FV of Furniture generally included in the FV of Office
o FV Fluctuations year to year, recognized in profit or loss
o No Depreciation shall be recorded

Transfers; (IP  OOP, Vice versa and others)

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INVENTORIES
 assets held for sale in ordinary course of business
 supplies to be used in production
 assets that requires further processing
Classes of Inventories
 Trading Concern
 Manufacturing Concern
o Raw materials
o Work in Process
o Finished Goods
o Factory or Manufacturing Supplies
Periodic
 Uses "Purchases" account
 Does physical count of inventories each year end.
 Thus, determining COGS at year end
 Generally used by those who sell inventories that are not expensive
o Low price, high volume
Perpetual
 Uses "Merch. Inv." instead of "Purchases”
 Merch Inv. are maintained during the accounting period
 COGS are recognized as sales are made
 Generally used by entities who sell expensive things.
o High price, low volume

 Inventory Shortages and Overages are close to COGS (if Normal)

 If Abnormal  Other Expense

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Gross Method
 Records purchases at gross price
 Not deducting cash discounts at initial measurement
 Cash discounts are recognized when paid within the discount period
 When cash discounts are not taken, no additional account are made, just straight up payment entry.
Net Method
 Record purchases at net amount
 deducting cash discounts at the time of purchase
 When cash discounts are not taken, recognize purchase discount lost along with the normal entry for
payment.
 “Purchase Discount Lost” are recognized as other expense
 Represents theoretically correct historical cost
Items Included:
 Assets held for sale in ordinary course of business
 Assets to be used in production
 Those that are in process, requiring further processing
 Those that are ready for sale.

MEASUREMENT;
Initial - COST
Subsequent - LCNRV

Included in Cost
 Purchase Price
o Import Duties
o Irrecoverable Taxes
o Other directly attributable costs (DACs)
 Conversion Cost
 Other costs to bring the inv. to its current condition and location
NRV
 Estimated selling price minus estimated cost of disposal and completion

Methods of recording Inventories’

 FIFO
 Weighted Average
 FIFO is more used than weighted average

Freight Terms (Who owns Inventories);

1. FOB Shipping point
 Inv. in transit are owned by the buyer
 Buyer shoulders shipping other costs
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 2. FOB Destination
 Ownership is transferred to buyer when inv. Are received
 Seller shoulders shipping and other costs

Who actually paid the goods-in-transit?

1. Freight Collect - Buyer paid the shipment cost, when it is the seller’s responsibility
2. Freight Prepaid - Seller paid the shipment cost, when it the buyer’s responsibility

 FOB Destination and FOB Shipping point - Determines the ownership

 Freight Collect and Freight Prepaid - Determines who actually paid the freight and other charges,
not the party who is supposed to pay such charges.

COST FLOW;
Average Cost and FIFO method
 For Homogenous products
 Beg. Inv. + Purchases = TGAS
o TGAS may be  Inv. End or COGS  Allocate using FIFO or Average cost method

Specific Identification
 For Heterogenous products
 Not interchangeable
 Argument for; Cost corresponds with actual physical flow of goods.

Relative Sales Price

 Used when Inventories are acquired at lump-sum and has different sales price

GROSS PROFIT METHOD

 Used to estimate value of inventory when it can’t be counted physically or costly if can.

Reasons for use;

 Inv. Destroyed by fire, disasters, theft, etc.  amount of inv. Required for insurance purposes
 To prove correctness and reasonableness of physical count
 For interim financial statements
o Physical count unnecessary

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