Depreciation - simplified ? - The Book-keepers Forum (UK)

ProBowlUK · Senior Member

Depreciation - simplified ?

Sue T · Veteran Member

This is similiar to the problem I am having on how to address Tool expenditure in Sage.
3 different power tools @ £300+VAT each - Shaun said he would treat them as expenses rather than Capital expenses/assets but I think he thought the total was £300 + VAT in total as I didnt make myself clear.

So I am waiting for you to read my reply Shaun biggrin

Sue

-- Edited by Sue T on Saturday 27th of February 2010 09:03:35 PM

Shamus · Forum Moderator & Expert

Hi Sue, Hi Bob,

For starters you don't have to worry about depreciation in this instance Sue as it will all be covered by AIA so full first year write off.

However, the concept of depreciation is a very important one for you to get your head around Bob.

The explanation below is a bit long winded but I've tried to put it in quite simple terms.

Depreciation is defined within FRS15, tangible fixed assets.

The reason for depreciation is to adhere to the requirements of the accruals (matching) concept (as defined under FRS18, accounting principles) in that income and expenditure must to attributed to the period to which it relates.

When one decides the period over which an item is to be depreciated that is a pure guess based on the estimated useful economic life of the asset. There is of course guidance such as a van being written off over 3 - 5 years.

The reality could be that the asset lasts for less time or indeed that it may last for longer.

I wont dwell on the various methods of depreciation as I am sure that your other materials cover the basic two in detail (straight line and reducing balance).

Long term high value assets such as commercial properties will be periodically reviewed for impairment. They will also be subject to revaluation at set intervals.

If a property that was originally given a useful economic life of 20 years is viewed on subsequent valuation to only have an expected life of 15 years then the depreciation period and amount is adjusted accordingly.

If it is decided that the property being depreciated over 20 years will actually have a useful economic life of 30 years then the depreciation period may be extended and the amount adjusted.

The reason that depreciation is so important is that it is a way of manipulating the profits of an entity. For example, if £10,000 is immediately written off in the P&L then that will reduce profits upon which tax is calculated for that year by £10,000. If the property was however depreciated over ten years then each year only £1000 would be taken to the P&L which means that profit would be reduced by £1000 per year for ten years relating the use of the machine to the period thats its use effects

This of course also means that although £10,000 has been spent on the asset £9000 of it is still subject to tax which means that where AIA is not applicable theres pretty much no reason for a company to buy assets for full immediate consideration... However the tax liability would of course still need to be weighed up against the interest rate being paid for credit.

Note that investment properties (as opposed to commercial properties) work to different rules (SSAP19).

So from the above you will see Bob that if an asset does not last for the full period then the useful economic life of the asset was not as long as the original guess and hence the asset would be fully depreciated to residual value (scrap value if any) in the year that it ceases to be of use by the entity.

I think that he above pretty much describes the concept of depreciation / amortisation.

Knowledge of basic accounting concepts and tangible fixed assets are an important part of what we do. If ever you wanted to read the actual documents just look up FRS15 and FRS18 on the ASB website.

Cheers,

Shaun.

ProBowlUK · Senior Member

I'm getting worried about all this "Asset / Expense".

In the case of a builder or tradesman, aren't his tools Assets rather than Expenses ?
Why else would he take such trouble to maintain them, secure them, and
insure them ?

Shamus · Forum Moderator & Expert

Hi Bob,

it's all a matter of materiality.

The humble stapler has all of the attributes of an asset but one would never dream of capitalising it as it's value puts it more in the category of stationary than an asset.

For exam questions for the most part they don't put you in such a conundrum over asset categorisation.

The other thread that you've probably been reading may have been a little misleading as I agreed with an answer where I shouldn't have answered the question so late at night.

Where assets are written off in the year of purchase under AIA you are still capitalising them even though the entire expense of the item is taken to the P&L in the year of purchase by way of a depreciation charge.

cheers,

Shaun.

tonys · Senior Member

Could someone run through the method of adding Depreciation as a cost to the P & L hence reducing profit ,then adding back deppreciation to calculate Tax Liability, I realise it is a non cash expence.
Thank you

RobH · Expert

Hi Tony,

Quite simple really, just debit depreciation in the P & L and credit charge for year on Balance Sheet.

When you are looking at the tax comp, you will start with the net profet per the accounts and then add some things back, always all of the depreciation, thus making the taxable profit higher but you will deduct the capital allowances, thus bringing the taxable profit down again. You will also add back such things as personal use for motor expenses, entertaining etc.
Hope that helps.

Shamus · Forum Moderator & Expert

Adding back depreciation to calculate tax?

Sounds as though your talking about the cashflow statement rather than the P&L?

For the P&L, the tax liability is calculated after the depreciation charge for the period.

For the entities cashflow the first category of a cashflow statement is income from operating activities which would be :

Operating Profit / Loss
+ Depreciation Charges for the period
- increase in stock / + decrease in stock in the period
- increase in debtor / + decrease in debtors in the period
+ increase in creditors / - decrease in creditors in the period

Hope that this clears things up,

Shaun.

Shamus · Forum Moderator & Expert

Morning Rob,

it was the bit about adding back depreciation to calculate tax that threw me?

think that between our two answers we've got all points covered there!

cheers,

Shaun.

tonys · Senior Member

Thank you, I just felt confused that you allow the Depreciation charge to reduce the profit in the P & L only to add it back on when you calculate the tax. I have just sold my business and am hoping to work as a book-keeper. I passed my basic GCE accounting back in 2005 and am currently completing my AAT diploma at Kaplan in Liverpool. Any advice on any local accounting firms who may be looking for part trained? I live in Ormskirk Lancs between Liverpool and Southport.
Regards

RobH · Expert

Morning Shaun,

With your higher accountancy knowledge you were looking at loftier possibilities, I always go the simple route!!

Lovely day my neck of the woods, just took the rabbit for a walk and for the first time in ages my coat was unzipped!

Shamus · Forum Moderator & Expert

Hi Tony,

just to reiterate the point. You would not add back the depreciation for the period to calculate tax but you would add it back to calculate the cashflow.

The depreciation included in the accounts should have already been subject to any necessary adjustments for impairment etc.

It's a bit barren out there in the jobs front at the moment with your best bet being in temp to perm roles.

March and August are particularly bad times of course as thousands of new ACCA and CAT graduates will be hitting the job markets having received their results in the last week of Feb (aren't the AAT results released about now as well?).

Good luck with the job hunting and the exams,

Shaun.

tonys · Senior Member

Thanks got it!!

Shamus · Forum Moderator & Expert

Hi Rob,

Yep, same on Cannock side as well. Not a cloud in the sky.

Also excellent day as my boys been accepted at the secondary school of choice which is five miles away rather than the one that my house is almost next door to.

When I went to talk to the teachers at the school next door it just felt as though everything was geared towards failure... Learning to learn classes, classes for those who didn't want to take exams, classes for those who wanted a career in the army, A level badminton! (think that last one was actually sports science).

I tried to sell my boy on the school five miles away (it was always going to be first choice anyway but you have to let them think that it's their choice... Like the UK really, I at least allow him to think that it's a democracy!!!) but what really sold Peter on the school five miles away though was that they have huge African snails in the science lab.

If only convincing clients was as easy as offering a free snail if they made the right choice!

talk later,

Shaun.

RobH · Expert

Yes we went through the school transition last year, but I think Harriet would have run a mile from the giant snail. It was considered the best state school in the area but after a term and a half we realised it was a terribly complacent school that just rested on it's laurels. There were some teachers that didn't even know Harriet's name, I think the problem was, she was a good girl who didn't get into trouble! Anyway we have now placed her in a tiny independent school, just 11 of them in her class. It's not a partiularly academic establishment but with so few pupils she can't fail to learn and it is just so friendly...just a bit hard on the pocket!

TCB · Member

Hi

You would add the depreciation back to calculate the tax. Depreciation of an asset is set by the company at a rate they view as appropriate for the asset and as different companies could view this differently and to stop them therefore being taxed differently the depreciation is added back to profit and capital allowances are deducted to get to taxable profit. As already said by Rob earlier.

Acounting profit is different from taxable profit.

Hope this helps

TCB

Amanda · Expert

Hi Shaun,

AAT results were on on the 15th Feb.

Cheers
amanda

ProBowlUK · Senior Member

TCB wrote:

Hi

You would add the depreciation back to calculate the tax. Depreciation of an asset is set by the company at a rate they view as appropriate for the asset and as different companies could view this differently and to stop them therefore being taxed differently the depreciation is added back to profit and capital allowances are deducted to get to taxable profit.

Sorry folks, I'm just as confused as ever.

Depreciation --- AIA --- Capital Allowances --- .....
are there no SIMPLE rules as to when to use which ?

Maybe I'm trying to run before I can crawl ? biggrin

-- Edited by ProBowlUK on Monday 1st of March 2010 07:39:48 PM

Shamus · Forum Moderator & Expert

Sorry Bob. Don't know how else to phrase it.

Try it the other way around. You explain everything related to depreciation to us in as much detail as you possibly can and we'll tell you where you've gone wrong.

Sometimes I find that in writing it down for someone else to read I realise what the holes are in my own understanding... The skip hire thread comes to mind as today when I started writing I had no idea which way the conclusion was going to go as there was complimentary evidence for both sides.

Bookkeeping and accountancy is very much a state of mind that once you're there you can't imagine thinking any other way but looking at it from the outside we might as well be talking ancient Hebrew at times.

Some people never get it, others get it and don't like it. Those that stick with it are those that love it. There's no knowing which category you fit in until you've invested a good six months of your life to it and even then you're only really touching the surface.

Anyway, don't be shy. We were all newbies once and we're happy to help if we can.

Shaun.

ProBowlUK · Senior Member

Ok, here goes ...

Depreciation reduces the value of a Fixed Asset.

Normally goes into the books annually.
Calculated according to what type of asset it is :
Plant, Furniture, Fixtures & Fittings, Office Equipment, Tools, Vehicles, ... .

Often recorded in "Asset Registers" :
Date of purchase, Cost, Service Record, Current Value, ... .

Depreciation is an allowable business expense.
Tax aspect dealt with differently according to type of business :
Sole Traders, Limited Companies, Corporations.

What I'm missing is AIA - when and how to put this in the books.
Also, which depreciations are added-back when preparing Tax statements.
Cannot find these details in any textbooks or course papers.

-- Edited by ProBowlUK on Monday 1st of March 2010 10:26:31 PM

Sue T · Veteran Member

Depreciation of fixed assets is a management decision and not allowable for tax purposes. If depreciation is deducted from the management accounts to report the net profit for tax purposes the depreciation is then added back as the allowable tax claim is the capital allowance applicable to those capital fixed assets. Same with profits and losses on the sale of fixed assets which are accounted for under capital allowances

So no - depreciation is not an allowable business expense. But businesses who qualify for AIA scheme can claim back the whole cost of the assets bought within the HMRC guidelines in the scheme, instead of applying capital allowances or putting in depreciation and then adding it back.

Hope this makes sense, its difficult to explain in words hmm

Sue

-- Edited by Sue T on Monday 1st of March 2010 11:55:50 PM

ProBowlUK · Senior Member

Sue T wrote:

Depreciation of fixed assets is a management decision and not allowable for tax purposes.
If depreciation is deducted from the management accounts to report the net profit for tax purposes the depreciation is then added back as the allowable tax claim is the capital allowance applicable to those capital fixed assets. Same with profits and losses on the sale of fixed assets which are accounted for under capital allowances

So no - depreciation is not an allowable business expense.

So it is not, and it is (?)

How do you know if they are sold at a profit or loss without valuing or Depreciating them ? Then they are allowed "under Capital Allowances" - with or without AIA ?

Like Shaun says, to me ... Books and Ledgers - fine, Tax and Accountancy - yuck(!) biggrin

-- Edited by ProBowlUK on Tuesday 2nd of March 2010 12:22:59 AM

Sue T · Veteran Member

It is easier to do it on paper than explain it correctly - I must admit I depreciate for P&L management monthly reports as a expense and accountants add it back in for end of year figures and use capital allowances or AIA.

Sue

-- Edited by Sue T on Tuesday 2nd of March 2010 12:45:24 AM

Shamus · Forum Moderator & Expert

Evening Bob,

completely appreciate what Sue says about it being difficult to explain but I think that I can see where your problem is so I'm going to have a go.... Now would be a good time to get a coffee as this is going to be a long one.

Normally when one depreciates the value of an asset over its useful economic life then each year a charge is taken to the profit and loss representing the depreciation for that year.

So, if you have an asset that is worth £1000 to be depreciated to £0 over 4 years then on a straight line basis one would take £250 to the P&L for each of the next four years.

The general rule is that there is a full years depreciation in the year that the asset is purchased and then the three years after that.

In the balance sheet the value of the asset will be shown with the depreciation deducted. This is because the balance sheet should not be cluttered with workings but rather these are relegated to a note to the accounts with a reference pointer on the face of the balance sheet.

So you will see that the depreciation charge has been deducted from the assets value and the depreciation charge has also been included in the P&L which will reduce the profit for the year by the depreciation amount.

When the profit or loss is taken over to the share capital and reserves this makes the two parts of the balance sheet balance (depreciation taken from asset, depreciation causes reduction in profit by the same amount).

In year 1 the initial depreciation amount will be charged. In year 2 onwards we only take to the P&L the depreciation for that year. Not the full amount of depreciation charged to the asset as if you think it through the depreciation charged the previous year will already be included in the P&L balance carried forwards from the previous year which is already included in the share capital and reserves area of the balance sheet.

The depreciation applied to the accounts shows as accurately as possible the current economic position of the company.

AIA is not depreciation but Ill cover that later on in the note.

The tax question is a little different. The depreciation charge that has been calculated is what will appear in the P&L as a depreciation expense. Nothing gets added back there.

This forms part of the profit before interest and tax which is an important figure for some of the key ratios used for analysis of a companies accounts.

The next thing to be calculated is the interest. This will then result in the profit before tax.

The actual tax calculation is not simply a matter of taking the profit before interest and applying the tax rate. This is a complex area which you dont want to get into until much later but suffice to say that all the adjustments are applied to the taxable amount here to calculate the tax payable.

The calculations never go anywhere near the face of the balance sheet. You just need to accept that the tax amount is derived from the calculated figures but can seldom be taken as a direct percentage of them.

In your study texts authors may for simplicity may have calculated the tax figure as a percentage of the PBT but that is not really how it works in the real world.

I wont go into tax as that could fill books let alone a single message. What I will do is cover just the depreciation side.

In the tax calculation the depreciation (which is an accounting concept) is added back and the AIA (which is a tax concept) is applied.

The AIA will effectively be a 100% write down in the first year but it may take the depreciation charge some time to catch up with this.

A problem that this raises of course is that the item that is still being depreciated in thee accounts has effectively had it's tax allowance front loaded so if sold before fully depreciated there is an issue between the books and the tax situation.

Tax is never so simple as just removing depreciation and applying AIA. There will be possibly dozens of adjustments applied to come to the tax figure.

The important concept here is that it is extremely unlikely that the tax figure can be calculated directly from the PBT simply by applying a percentage.

I can see how the concept of AIA has confused matters for you but the reality is that at the moment I wouldnt dwell on it until you have depreciation firmly sussed as thats the major concept that you need to get under your belt for starters.

Hope that this helped.

Shaun.

P.S. I've written a reply after midnight again so sure I'll see some glaring error first thing in the morning. If I do expect a follow up post at ten(ish).

-- Edited by Shamus on Tuesday 2nd of March 2010 01:02:47 AM

ProBowlUK · Senior Member

Wow ! Thanks for taking the time for that, really appreciated.

Yes, I can see that I've been trying to take too much on board too soon.

Just wondering, from what I've read here so far, AIA and Capital Allowances don't mix. How do you know which to apply ? Does AIA have an annual limit ?

cheers biggrin

Shamus · Forum Moderator & Expert

Morning Bob,

No probs, glad to help.

from April 2008, for most companies AIA pretty much replaced capital allowances. However, AIA is optional and a company can still opt to apply capital allowances if they so wish... Can't see why myself but it's still an option.

The annual limit on AIA is £50k prorata to the day. So, if a company was set up during the year and traded for only 100 days then the calculation for the allowable AIA would be 50,000/365*100.

Anything above the AIA still uses capital allowances.

If the company is part of a group of companies the AIA is for the whole group, not per company.

Also, AIA is not applicable to cars that have emissions above 120g.

hope that this helps,

Shaun.

lor · Guru

TCB wrote:

Hi

You would add the depreciation back to calculate the tax. Depreciation of an asset is set by the company at a rate they view as appropriate for the asset and as different companies could view this differently and to stop them therefore being taxed differently the depreciation is added back to profit and capital allowances are deducted to get to taxable profit. As already said by Rob earlier.

Acounting profit is different from taxable profit.

Hope this helps

TCB

I find this answer sums it up well!

lor · Guru

Shamus wrote:

Evening Bob,

completely appreciate what Sue says about it being difficult to explain but I think that I can see where your problem is so I'm going to have a go.... Now would be a good time to get a coffee as this is going to be a long one.

Normally when one depreciates the value of an asset over its useful economic life then each year a charge is taken to the profit and loss representing the depreciation for that year.

So, if you have an asset that is worth £1000 to be depreciated to £0 over 4 years then on a straight line basis one would take £250 to the P&L for each of the next four years.

The general rule is that there is a full years depreciation in the year that the asset is purchased and then the three years after that.

In the balance sheet the value of the asset will be shown with the depreciation deducted. This is because the balance sheet should not be cluttered with workings but rather these are relegated to a note to the accounts with a reference pointer on the face of the balance sheet.

So you will see that the depreciation charge has been deducted from the assets value and the depreciation charge has also been included in the P&L which will reduce the profit for the year by the depreciation amount.

When the profit or loss is taken over to the share capital and reserves this makes the two parts of the balance sheet balance (depreciation taken from asset, depreciation causes reduction in profit by the same amount).

In year 1 the initial depreciation amount will be charged. In year 2 onwards we only take to the P&L the depreciation for that year. Not the full amount of depreciation charged to the asset as if you think it through the depreciation charged the previous year will already be included in the P&L balance carried forwards from the previous year which is already included in the share capital and reserves area of the balance sheet.

The depreciation applied to the accounts shows as accurately as possible the current economic position of the company.

AIA is not depreciation but Ill cover that later on in the note.

The tax question is a little different. The depreciation charge that has been calculated is what will appear in the P&L as a depreciation expense. Nothing gets added back there.

This forms part of the profit before interest and tax which is an important figure for some of the key ratios used for analysis of a companies accounts.

The next thing to be calculated is the interest. This will then result in the profit before tax.

The actual tax calculation is not simply a matter of taking the profit before interest and applying the tax rate. This is a complex area which you dont want to get into until much later but suffice to say that all the adjustments are applied to the taxable amount here to calculate the tax payable.

The calculations never go anywhere near the face of the balance sheet. You just need to accept that the tax amount is derived from the calculated figures but can seldom be taken as a direct percentage of them.

In your study texts authors may for simplicity may have calculated the tax figure as a percentage of the PBT but that is not really how it works in the real world.

I wont go into tax as that could fill books let alone a single message. What I will do is cover just the depreciation side.

In the tax calculation the depreciation (which is an accounting concept) is added back and the AIA (which is a tax concept) is applied.

The AIA will effectively be a 100% write down in the first year but it may take the depreciation charge some time to catch up with this.

A problem that this raises of course is that the item that is still being depreciated in thee accounts has effectively had it's tax allowance front loaded so if sold before fully depreciated there is an issue between the books and the tax situation.

Tax is never so simple as just removing depreciation and applying AIA. There will be possibly dozens of adjustments applied to come to the tax figure.

The important concept here is that it is extremely unlikely that the tax figure can be calculated directly from the PBT simply by applying a percentage.

I can see how the concept of AIA has confused matters for you but the reality is that at the moment I wouldnt dwell on it until you have depreciation firmly sussed as thats the major concept that you need to get under your belt for starters.

Hope that this helped.

Shaun.

P.S. I've written a reply after midnight again so sure I'll see some glaring error first thing in the morning. If I do expect a follow up post at ten(ish).

-- Edited by Shamus on Tuesday 2nd of March 2010 01:02:47 AM

Hi Shamus, well explained,would agree with you 99.9%, there is somethnig niggling in my mind I may be wrong though! heres goes -I always thought that assets weren't depreciated in the yr of aquisition. Forgive me if I am wrong.

But a part from that (which you may be correct!) you have again explained something in an easy way.

Shamus · Forum Moderator & Expert

Hi Lorraine,

cheers. I surprised myself as it was at the time of night that I normally have senior moments in my answers!

the depreciation schedule is pretty much down to company policy. I've always been taught to apply first year depreciation and nothing in the year of disposal but provided that it's noted in the accounts and applied consistently then either method should be fine.

Have a look at this from the HMRC website. It gives examples of both cases and doesn't seem to mind which is applied.

http://www.hmrc.gov.uk/manuals/blmmanual/BLM24320.htm

Talk later,

Shaun.

TCB · Member

Hi

I would always start to depreciate an asset from the month it was put into use. So if you bought something midway through the year I would put the 6 months depreciation charge through.

I have seen companies that put a full year through in the year of purchase and others that don't put anything through in the first year. But if you purchase an asset late in the year, say month 10, is it fair to depreciate it by a full year. Also what if you purchased an asset at the start of the year, say month 2, is it fair not to charge depreciation in that year. My answer would be no to both and the fair way would be from the time the asset was purchased.

Also by not depreciating in a year or putting through a full year you obviously effect the profit for the year. Ok it doesn't change your tax but there are many other things that are based on the accounting profit - for example a bonus payment for staff would be based on audited accounts. You could in this example pay too high or too low a bonus depended on your depreciation. There are other examples but won't bore anyone anymore. And obviously depreciation isn't the only method used by companies to adjust the accounting profit!! But accounts should show a true and fair view.

Cheers

RobH · Expert

TCB wrote:
But accounts should show a true and fair view.

Cheers

So I'm still the only who goes with 'there or thereabouts'??!

TCB · Member

RobH wrote:

So I'm still the only who goes with 'there or thereabouts'??!

lol, I like your thinking!!

Shamus · Forum Moderator & Expert

Hi Kenny,

an entities financial statements should always be a true and fair representation of the entities affairs as at the balance sheet date which is why I believe that the first year depreciation is the optimal approach.

When you drive a car off a forecourt it is generally worth around 30% less than it was two minutes previously.

In a similar way a full years depreciation better reflects the value of the entities assets than assuming a completely flat level of depreciation over the depreciation period. So even if one took delivery of an asset the day before the year end I would still apply the full years depreciation as such seems to better reflect the value of the asset.

If you want to depreciate based on month rather than year then there is no restriction PROVIDED that such is applied consistently to all assets of the entity and that the depreciation model is detailed in the companies accounts.

The only real rules here are consistency of application and ensuring that the financial statements give a true and fair representation of the entities affairs.

... Actually, I think that we're agreeing with each other on the results but not how to get there.

Oh and Rob. There's going to be a load of accountant types with torches and pitchforks heading your way... There or there abouts! Ttt. lol

all the best,

Shaun.

-- Edited by Shamus on Tuesday 2nd of March 2010 02:26:32 PM

RobH · Expert

Shamus wrote:

Oh and Rob. There's going to be a load of accountant types with torches and pitchforks heading your way... There or there abouts! Ttt. lol

all the best,

Shaun.

-- Edited by Shamus on Tuesday 2nd of March 2010 02:26:32 PM

Shouting 'burn the heretic'...think I'll ruffle some feathers on Accounting Web!

lor · Guru

Thank you all, have to say it is good to rid of those niggling thoughts! - there are a lot of them in the world of accountancy and taxation, and sure to be plenty more. It is just good to know the reasons why for depreciation in the first year etc....I will have to get my text books out from AAT and check them out to see about what they say about depreciation in the first yr, but I will go with what you guys say, text books are 'theoretical' at the end of the day and I feel are there to teach you the basics not the real world.

So yeah I agree to the extent depreciate in the 1st yr and also per month or part yr as TCB.

Keep the helpful posts coming, I am learning a great deals, cheers all!

Wella · Expert

The course texts for ICB from Ideal Schools advocates x/12th in the first year depending on when purchased within the financial year, excluding month of aquisition and none in year of disposal

Shamus · Forum Moderator & Expert

Morning Bill,

Think that we've got two in a week here where you can come at this from different angles and everyone is correct!

FRS15 Tangible fixed assets states only that depreciation is the measure of the economic benefits of the asset consumed during the period.

Consumption includes the wearing out, using up or other reduction in the useful economic life of the asset whether arising from use, effluxion of time or obsolescence. (Sorry, can't claim that last paragraph as my own. it was a paraphrased quote from FRS15).

Anyway, that ties in with FRS18 Accounting Policies (accruals concept) and the statement of principles in that the cost of the asset is spread over the period to which it relates.

There is no mention within the standards, principles or companies act as to how the depreciation is to be recognised in the first year provided that it is allocated in a systematic fashion over the useful economic life of the asset.

I've had a flick though an analysis of the UK GAAP on this as well and again it comes up pretty lacking in any real detail on this area.

FRS15 is quite clear though on the principle that the actual application of depreciation must be done consistently across all assets of the same class.

So, conclusion would be that provided that the depreciation accurately reflects the assets rate of consumption then there is flexibility on how the asset is depreciated.

For timing that could be :
- first year in full
- Part first year
- Nothing in the first year
- calculated to the month rather than year
and numerous other options.

For actual depreciation method one could adopt :
- Straight Line
- Reducing Balance
- Output / Usage Method
- Sum of digits
- Revaluation
and others if more suited to the clients rate of asset consumption.

Basically its whichever method gives the most accurate reflection of the rate of consumption of the assets value.

What really matters is accuracy and consistency.

Right, that's my depreciation revision done!

talk in a bit,

Shaun.

Wella · Expert

No argument from me on this one (sorry, debate)

Bill

Shamus · Forum Moderator & Expert

Darn it.... I'm going to have to start being more contentious!!!

Must admit that it was more of a revision exercise than a debate though!