Finance

Reading Handout

AS = 6 DEPRECIATION ACCOUNTING

AS -6 deals with the selection and application of appropriate methods of accounting for depreciation of tangible fixed assets and related disclosures.

Definition: A measure of wearing out, consumption or other loss of value of a depreciable assets arising from use, efflux of time or obsolescence through technology and market changes.

Amount to be charged as depreciation is based on three criteria:

• Historical cost or other amount substituted for historical cost on revaluation of the depreciable asset;

• Expected useful life of the depreciable asset; and

• Estimated residual value of the depreciable asset.

Method of depreciation to be selected based on the type of asset, nature of its use and circumstances otherwise prevailing.

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Diagrammatic representation of Depreciation

AS 10 = ACCOUNTING FOR TANGIBLE FIXED ASSETS

Fixed Assets = Assets that have on-going Productive Use that spans more than 1 accounting period AND are Not Held for Sale in normal course of business.

• A Fixed Asset may be either purchased by the company from a manufacturer / supplier of such asset, or self constructed, at a cost which is referred as its Historical Cost.

• It will have an expected useful / economic life, over which it will be used – that may be measured in terms of its manufacturing capacity, the period at the end of which it will become obsolete (either due to technological changes or loss in the market of the product that is manufactured using it) or in terms of contract period for the right to use such asset. The actual life may be more or less than this useful life, due to repairs & maintenance, product market life, etc.

• At the end of this useful life the asset has to be retired & disposed. Such disposal may be done by extinguishing / destroying the asset or by selling the asset at an Estimated Residual Value or Net Salvage Value or Scrap...