Good day everyone, we are now in the part 2 under the topic of Property, plant
and equipment. And in this video presentation we will be focusing on The
depreciation of the property plant and equipment
Let me start by discussing the flow of our presentation which contains the
following major topics”
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First is the overview about Depreciation and Recognition
Second is the different Depreciation Methods used by companies
Next one is the Depletion of Natural Resources
And also Depreciation of Assets used in Mining activities
Lasltly, Exploration for and Evaluation of Mineral Resources
Bago naten I discuss ang depreciation lets have an introduction kung baket nga
ba tayo nagkakaroon ng depreciation
Introduction
The Property, Plant and Equipment except Land, normally are usable for a number of
years after which the assets have relatively little value either for service or for sale.
Since kase ang property plant and equipment is naguundergo ng usage such as for use
in production, in manufacturing business, for use in sale in merchandising and also for
use in rendering service.
Additionally, The difference between the original cost of a PPE and any remaining value
when it is retired or worn out is an expense that should be allocated in a period which
the asset is being used.
Meaning Cost minus carrying value ng PPE is the expense na iaalocate naten sa period
na kung saan ginamit yun PPE
The portion that is allocated to expense in a particular period is referred to as
depreciation, depletion and amortization.
So now lets talk about the definition of Depreciation
Depreciation
The process of allocating the depreciable amount of an asset over its useful life in a
systematic and rational manner. And Each part of an item of property, plant and
equipment with a cost in relation to the total cost of the item shall be depreciated.
And take note that, Depreciation is not as much a matter of valuation. It is a matter of
cost allocation in recognition of the "expense”
And that expense may be a part of costs of goods manufactured if yun related asset or
PPE is needed or use in producing a product like Factory equipment and machinery.
And if yun related PPE naman is used more on operating the business then we included
that depreciation in operating expenses
Factors involved in the Depreciation Process
a. Cost or Revalued amount – which is the purchase price of the asset or the PPE.
b. Residual value - (salvage value or scrap value) it is the amount that an entity
would currently obtain from disposal of the asset. This amount is normally
deducted from cost in computing the depreciable base of the asset.
c. Estimated useful life- the period over which an asset is expected to be available
for use by an entity. Ito yun years kung hanggang kalian lang naten pwede
gamitin yun asset.
d. Asset’s pattern of use- the usage of the asset over the estimated useful life
And also there are factors affecting the DETERMINATION OF ESTIMATED USEFUL LIFE
Physical factors
a. Expected usage of the asset is a usage that is assessed by reference to the asset’s
expected capacity or physical output
b. Expected physical wear and tear – which depends on the operational factors such
as number of shifts the asset is used, repair and maintenance and maintenance of asset
while idle.
c. Passage of time which is normally due to non use since depreciation is a continues
process.
Functional Factors
a. Technical Obsolescence or yun pagiging outdated na ng asset kase naluluma na
sya because of passage of time for example yun mga product or asset na binebenta that
produces no demand in the market.
b. Inadequacy – which arises when the asset is no longer useful to the entity or hindi
mo na mamagamit talaga yun asset.
c. Legal or similar limits – such as yun mga asset na mayron expiration of use or
exoiry date of the related leases.
So, that’s factor involving the depreciation process
RECOGNITION OF DEPRECIATION
Kalian ba naten nirerecognized ang depreciation
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First of all, Depreciation begins when an asset is available for use. Kailan naten
masasabi na available for use na ang isang asset, kapag yun asset or yun PPE
na yun is nasa location and condition na sya where the business is operating or
producing goods or rendering a service.
Thus recognized it as an expense for the period which the asset is being used.
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Second Depreciation is recognised even if the fair value of the asset exceeds its
carrying amount, as long as the asset's residual value does not exceed its
carrying amount. So fair value which is the amount of an asset that will be sold in
the market or market value and yun carrying value is yun book value ng asset
which is cost less accum. depreciation.
Moreover, Depreciation ceases when the asset is derecognized.( so
derecognition occur when the asset is reclassified as held for use or included in
disposal group.)
However, Depreciation continues even if the asset becomes idle or is retired from
active use, unless the asset is fully depreciated.
Lastly, we normally accounted depreciation by debiting depreciation Expense
and crediting accumulalted Depreciation. Depreciation expense is reported in the
income statement while accumulated depreciation is reported as a contra asset
in the related asset or PPE.
So now lets dicuss different methods in determining depreciation expense
DEPRECIATION METHOD
The depreciation method used should reflect the pattern in which the assets’s future
economic benefits are expected to be consumed.
These Methods are as follows:
A. Time Factor methods
1. Straight Line Method
2. Sum-of-the-years’ digit Method
3. Double Declining Method
4. 150% declining Method
5. Declining Balance Method
B. Activity or Use-factor Methods
1. Service hours Method
2. Productive Output Method
C. Multiple Asset depreciation Methods
1. Group Method
2. Composite Method
So to discuss further those depreciation methods lets have an illustration.