Tag Archives: Useful Life

Depreciation Expense of Property, Plant & Equipment

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Depreciation Expense of PropertyIn a recent opinion piece by Michael Evans on CFO World, he gives a very clear description of how companies can improve depreciation of corporate property:

A common problem in corporate real estate is when a property comes to the end of its useful life and needs to be sold and there is the dawning realization that the net book value of the property is well in excess of the potential sales proceeds. Bad news – an unwelcome hit to the profit and loss (P&L) account and substantially lower cash receipts than may have been expected.

In the story, he details several points that are often overlooked:

  • Owned properties are recorded at historic costs
  • Property is usually depreciated using a straight line method
  • Cost increases with capital improvements
  • Replaced assets should be written off
  • Assign the correct residual value
  • Employ the proper useful life

The combination of overinflated cost bases and excessive useful lives and residual values that bear little relation to the market mean that all too often the depreciation of property assets is understated and net book values are overstated in property accounts. So when you’re looking to sell that corporate property and you’re facing a huge loss – don’t blame the corporate real estate team, don’t blame the property market – blame the depreciation policy, stupid.

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More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Determining the Useful Life of an Asset Under IFRS

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Under IFRS, what is the useful life or recovery period of an asset?

  • This may be equal to, or may be considerably less than, its technical or physical life
  • The determination of the useful life involves a good deal of uncertainty and subjectivity
  • The estimate should be reasonable, fair and prudent

For example:  A laptop computer as a rule of thumb has a five or six year useful life.  The reality is that while there are many old XP operating system laptops still in use that are eight to ten years old.

The key is that the business organization must develop  a depreciation procedures manual that details how the four basic depreciation elements are determined for each of the asset classes or types used by the business organization.  Once these procedures are developed, they must be followed consistently:

  • What is the cost of the asset
  • What is the useful life
  • What is the salvage value of the asset at the end of its useful life
  • What is the pattern of benefit or usefulness derived from the asset likely to be.  Which in turn determines the method of depreciation used.

Questions or comments about this post? We invite you to respond in the space below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Change the Useful Life on an Active Asset

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How can you change the useful life of an asset without altering prior accumulated depreciation and only impact the calculations going forward?

The Remainder Life method provides the user with the ability to shorten or lengthen the useful life of an asset at any time during the original recovery period. When the Remainder Life method is selected, Bassets eDepreciation will amortize the net book value as of the effective date of the change to Remainder Life in equal amounts over the new remaining life. There are four key pieces of information shown below:

The start date is the effective date to begin the remainder life calculation and the new useful life can be entered in both years and months. The original method is stored to ensure the accuracy of the prior calculation.

Changing the useful life of an asset will not alter the total amount of depreciation of that asset. However, it will impact the amount that is depreciated by year. For instance if a $6,000 asset was using straight line depreciation over 5 years, then the annual depreciation amount would be $1200 or $100 per period. If the useful life was then changed to 1 year after 2 years have already been depreciated, the remaining $3,600 would be spread over 12 months or $300 per period.

Questions or comments about this post? We invite you to respond in the space below.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

A Guide To Basic Depreciation Calculation

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The tax laws and accounting standards that apply to the depreciation of business assets can be complex, confusing and difficult to decipher. This guide to basic Depreciation Calculations has been developed to make the complex task of depreciating your business assets as easy as possible. This will also assist you in understanding the basic concepts of depreciation, as well as, the methodology used by The Bassets Fixed Asset System to enter depreciation information and perform required calculations.

The information required for the depreciation calculations are as follows:

  • Property Types:  In general, depreciation is allowed on tangible and intangible property with a limited useful life of more than one year that is used in a trade or business or held for the production of income.
  • Service Date:  IRS rules define when an asset is placed in service and depreciation of the asset may begin. An asset is considered to be placed in service when it is first placed in a condition or state of readiness and availability for a specifically assigned function.
  • Useful Life:  Depreciation is allowed on tangible and intangible property with a useful life (Recovery Period or Amortization Period) of more than one year.
  • Cost Basis:  The basis is equal to asset’s purchase price. You may need to make some adjustments, under a number of different circumstances.
  • Depreciation Methods:  The Tax rules allow various methods to depreciate assets, including MACRS — Modified Accelerated Cost Recovery System and SL — Straight Line.
  • First Year Conventions:  When a piece of property is placed in service, you are required to use a particular convention to determine the depreciation deduction you will get for the first year.

This modified version of a White Paper is intended to give you a better understanding of the basic depreciation concepts. You can find more detailed version, including a comprehensive example, on the Bassets White Papers page.

 

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

 

Determine Eligible Property for Depreciation

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This is the first question many people have when dealing with fixed assets.  What property am I allowed to depreciate?

Well, depreciation is basically a deduction for capital expenditure.  It is considered a reasonable allowance for the wear and tear of assets used in a trade or business or for the production of income.

Property is eligible for depreciation if meets all these conditions:

  • It is used for business or held for production of income.
  • It has a useful life exceeding one year.
  • It wears out or loses value over time.

Property is not eligible if:

  • The property has one year or less expected useful life.  This property can be deducted as current expenses in the year it is purchased.
  • The property disposed in the same year it is purchased.

Now I hope that gives you a better understanding of what you can depreciate.  If you have any questions about specific property, leave them in the comments.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.