DEPRECIATION- OTHER CONSIDERATIONS
1. Depreciation charge for the asset purchased/ disposed during the year.
The depreciation expense calculated is assumed to the charge for a whole accounting period. But what if the asset was purchase or disposed during an accounting period shall we charge for the prorate basis the number of the day assets remained within the organization. If the depreciation charge had been calculated based on the production basis this might be calculated easily, how if the asset is being depreciated on straight line basis, in practice calculating per day depreciation becomes difficult. For this purpose, a general practice is to charge depreciation for full accounting period in the year asset was bought and no depreciation in the year the asset was sold.
Another way is to charge depreciation for full accounting period if the asset was bought before the mid of that accounting period and nil depreciation if the asset was bought in second half of the period. Similarly, if the asset was sold during the 1st half of the accounting period no depreciation is charged for that period, where as if the asset is sold during the second half of the accounting period a full period expense is charged.
2. Change in Depreciation Methods
Different depreciation methods are based on different assumptions of how the asset had been used. Resultantly the amount of Depreciation charge using different method will also differ. Changing the depreciation method will result in different amount being charged in profit and loss and could potentially attractive for some want manipulation in accounting results.
For this reason, best accounting practices discourage the change in depreciation method and shall be applied across whole class of similar assets. However, if the change in accounting method has become necessary in order to reflect more true and fair view for the affairs of the company, then its effects shall be applied respectively along with the comparison of its effect on profit and loss.
Following could be reason for change in depreciation method;
· Statuary compulsion: – The law of the country/ state may require to charge a specific method of deprecation for specific class of assets.
· Required by an Accounting Standard: – First time adoption to a specific set of accounting framework (e.g., IFRS or GAAP) may require to follow a specific depreciation method to be followed. Further, changes in existing accounting framework may require to change the depreciation method.
· Management may decide itself or on advice on its auditors to change the depreciation method to present more reflective use of its assets.
3. Provision for Depreciation is not a fund for replacement of an asset.
The debit side of accounting entry of Deprecation is charges as expense to profit and loss account of the period and the credit side of the same entry is recorded in the accumulated depreciation account, which is maintained as provision in books of accounts. This account always carries a credit balance.
Because of this credit balance, some manager considers accumulated depreciation account as a fund being created as replacement cost of the asset. This consideration is not appropriate as depreciation is a non cash, un-realized expense used to allocate the capital expenditure over the useful life of an asset. At the end of useful life asset may or may not be replaced and further the cost of replacement may considerably different for the balance accumulated depreciation accounts carry.
