Depreciation, Impairment & Disposition
Depreciation = systematic allocation of an asset’s depreciable amount over its useful life. It is not a valuation exercise — the asset is not being marked to market each period; the cost is simply being matched to the periods that benefit from it. ACC 926 Module 11.
ADMN 201 mentions depreciation as “spreading an asset’s cost over its useful life.” ACC 926 supplies the methods, the impairment trigger logic, and the disposal mechanics.
Three Inputs to Depreciation
Depreciation = (Cost − Residual Value) / Useful Life
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Depreciable Amount
| Input | Definition | Notes |
|---|---|---|
| Cost | Capitalized cost (see PPE) | Includes ARO, capitalized borrowing |
| Residual Value | Estimated amount recoverable at end of useful life | Reviewed each period |
| Useful Life | Period the asset is expected to be used by this entity | Reviewed each period |
Residual value and useful life are estimates — when revised, the change is applied prospectively.
Depreciation Methods
graph TD D[Depreciation Methods] D --> SL[Straight-Line<br/>Equal expense per period] D --> DB[Declining Balance<br/>Higher expense early] D --> SYD[Sum-of-Years-Digits<br/>Accelerated] D --> UoP[Units of Production<br/>Tied to actual usage]
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| Method | Formula | When to use |
|---|---|---|
| Straight-Line | (Cost − Residual) / Life | Asset used evenly over time |
| Declining Balance (DB) | Net Book Value × DB Rate | Asset more productive early; tax-friendly |
| Double-Declining Balance | NBV × (2/Life) | Aggressive front-loading |
| Sum-of-Years’ Digits | (Cost − Residual) × (Years remaining / Sum of digits) | Front-loaded, less aggressive than DB |
| Units of Production | (Cost − Residual) × (Units this period / Total units) | Output varies (vehicles, machines) |
Declining balance does not subtract residual from the base — depreciation simply stops once net book value reaches residual value.
Depletion (Natural Resources)
Depletion per unit = (Cost − Residual) / Total estimated units
Depletion expense = Per-unit rate × Units extracted
Cost includes acquisition, exploration, development, and restoration costs.
Impairment
Carrying amount > recoverable amount → impair.
IFRS — Rational Entity Model (IAS 36)
flowchart TD Start[Indicator of impairment?] Start -->|No| Stop1[No test] Start -->|Yes| RA[Compute Recoverable Amount<br/>= max of FV less costs to sell, Value-in-use] RA --> CMP{Recoverable Amount<br/>< Carrying Amount?} CMP -->|No| Stop2[No impairment] CMP -->|Yes| Loss[Impairment Loss<br/>= CA minus Recoverable Amount]
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- Indicators: market value decline, technological obsolescence, physical damage, adverse change in use, evidence of impaired performance.
- Recoverable amount = max(FV less costs to sell, value-in-use). Value-in-use = PV of expected future cash flows from the asset.
- Reversal allowed if conditions change (except for goodwill).
ASPE — Cost Recovery Model
Two-step:
- Recoverability test: carrying amount > sum of undiscounted future cash flows? If yes →
- Loss measurement: loss = carrying amount − fair value.
- Reversal NOT allowed under ASPE, ever.
| IFRS Rational Entity | ASPE Cost Recovery | |
|---|---|---|
| Trigger | Indicator-based | Indicator-based |
| Test 1 | Recoverable amount < CA? | Undiscounted CF < CA? |
| Loss measure | CA − recoverable amount | CA − fair value |
| Reversal | Permitted (not goodwill) | Prohibited |
Held for Sale
When management commits to a plan to sell, the asset is highly probable to be sold within 12 months, and is available for immediate sale in present condition:
- Stop depreciating.
- Measure at lower of carrying amount and fair value less costs to sell.
- Present separately on the balance sheet.
Disposition
Gain/Loss on disposal = Proceeds − Net Book Value at disposal date
Net Book Value = Cost − Accumulated Depreciation − Accumulated Impairment.
| Disposition type | Treatment |
|---|---|
| Sale | Recognize gain/loss for difference |
| Exchange | See PPE non-monetary exchange rules |
| Abandonment | Recognize loss equal to remaining net book value |
| Involuntary conversion (insurance proceeds) | Gain/loss = proceeds − NBV |
Final-period depreciation is recorded up to the disposal date before computing gain/loss.
Cross-Course Connections
- PPE — depreciation begins at the cost capitalized under PPE rules
- IntangiblesAndGoodwill — finite-life intangibles are amortized using the same logic; goodwill is not amortized
- IFRSvsASPE — impairment models differ in name and mechanics
- AccountingEquation-FinancialStatements — depreciation hits the income statement; accumulated depreciation reduces the asset on the balance sheet
- Depreciation-FixedAssets — connection page
Key Points
- Depreciable amount = Cost − Residual Value; allocated over useful life
- Methods: straight-line · declining balance · sum-of-years-digits · units of production
- DB does not subtract residual from base — stops at residual
- Estimates (residual, life) revised prospectively
- IFRS impairment = Rational Entity Model: discounted recoverable amount; reversal allowed
- ASPE impairment = Cost Recovery Model: undiscounted CF screen; no reversal
- Held for Sale: stop depreciating, measure at lower of CA and FV less costs to sell
- Gain/Loss on disposal = Proceeds − NBV (after final depreciation through disposal date)