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Depreciation
What is depreciation?
Depreciation is an
allowance or provision made in the financial records of a business
or association for "wear and tear" and "technical
obsolescence "on plant and equipment. The idea of depreciation is
to spread the cost of that capital asset over the period of its
"useful life to the entity" that currently owns it. If the full
cost of the asset were to be borne in the year that it was
purchased, then that year's expenditure would be unfairly penalised
whilst expenditure during the remaining years, which were still
receiving the benefit from the asset, would not be affected.
What does it apply to and for how long?
Depreciation relates to
capital assets shown on a Balance Sheet as Non-Current Assets. These
assets are purchased to be used by the association and are generally
not for resale. e.g. a filing cabinet, a photocopier, a microfiche
reader, a computer, office chairs, tables. Most of these would come
under the heading of Office Furniture and Equipment.
However each item of furniture and equipment may not last
as long as another. It may wear out, prove inadequate or become
technically obsolete.
Therefore when considering
the question of depreciation, the "useful life" to the
association of each depreciable asset should be estimated and the
"depreciable amount" ( i. the historical cost less the net amount
expected to be recovered on the disposal of that asset at the end of
its useful life based on today's values and not some time in the
future) should be calculated.
A computer may
last six to ten years but it is highly probable that the maximum
"useful life" for depreciation purposes might be regarded as
three to five years due to the incredible advance in computer
technology rendering it "out-of -date" (obsolescent) - to be
relegated to some minor use, sold, part exchanged or just 'dumped'
due to it being too costly to repair/maintain. As an example: if the
computer cost $3000, was expected to be replaced after four years
with a greater capacity machine with additional features and could
be expected to sell for $400 at the end of the four years - the
useful life would be four years and the depreciable amount would be
"$3000 less the residual value $400=$2600"
What is included in the Depreciable/Historical cost?
This cost may include:
- Original purchase price, cost of construction or estimated value "at the date it is first put into use or held ready for use"
- Cost of freight, cost of installation, other taxes, duties such as sales tax, customs duty (or goods and services tax!) if applicable.
Small or Minor Assets
Some assets being
used in an association may be relatively inexpensive and it is
advisable to set maximum limits below which an item will not be
capitalised and therefore written off in the year of purchase- say
$300 or where the estimated effective life of the item is less than
3 years. Again this limit must be taken in the context of the
association as a whole. If the total assets of the association are
only $1000, then an item of $300 would be a "material" amount
and should be shown as an asset on the Balance Sheet. Items such as
a pencil sharpener, even if this is a very expensive one costing say
$50, should be regarded as revenue expenditure - in this instance
"Stationery" - part of the annual expenditure of the
association. It does no harm to keep a perpetual up-dated inventory
of small but useful minor assets so that these are not missed!
What method of Depresciation should be use and what is involved
There are two
main methods of calculating depreciation:
It is a matter of choice
which of the two methods is selected. "Prime cost" gives a
constant charge from year to year, whilst "Diminishing Value"
decreases from year to year so that the earlier years bear a larger
allocation of the asset's cost. The latter method is equal to one
and-a-half times the prime cost depreciation rate. Once a method has
been chosen, it should not be varied but rates should be subject to
an annual review to reflect useful life, usage, obsolescence and net
amount anticipated on disposal.
In either case an
agreed percentage (see below) is deducted from the value of the
asset each year. The difference between the two methods is the
figure upon which the calculation is made. "For example:" For
most general items of plant and equipment.
| Method |
Effective life in
years |
Annual Depreciation
(%) |
Calculated
on | |
| Prime cost |
Less than
3 |
100% |
Initial depreciable
amount | |
|
3 to 5 |
40% |
|||
|
5 to 6
2/3 |
27% |
|||
|
6 2/3 to
10 |
20% |
|||
|
10 to 13 |
17% |
|||
|
13 to 30 |
13% |
|||
|
30 and
over |
7% |
|||
| Diminishing value |
Less than
3 |
100% |
1st year initial
depreciable | |
|
3 to 5 |
40% |
amount | ||
|
5 to 6
2/3 |
27% |
subsequent years
amount | ||
|
6 2/3 to
10 |
20% |
remaining after
deducting | ||
|
10 to 13 |
17% |
depreciation written off in
all | ||
|
13 to 30 |
13% |
previous years from
depreciable | ||
|
30 and
over |
7% |
amount | ||
| More specifically: |
Effective life in
years |
Prime cost
(%) |
Diminishing Value
(%) | |
| Air-conditioners - ducted |
15 |
13 |
20 | |
| Air-conditioners - room units |
10 |
17 |
25 | |
| Alarms |
20 |
13 |
20 | |
| Carpets |
5 |
27 |
40 | |
| Computers |
5 |
27 |
40 | |
| Electronic Calculators |
10 |
17 |
25 | |
| Curtains |
7 |
20 |
30 | |
| Furniture |
15 |
13 |
20 | |
| GR0, Census lndexes on Fiche |
10 |
17 |
25 | |
| Microwave ovens |
7 |
20 |
30 | |
| Photocopiers |
10 |
17 |
25
|
How is Depreciation shown in the Accounts of a Society?
In the Income and Expenditure Account for the year ended,
the amount of Depreciation charged should be shown as a separate
item and also the figure for the previous year should be included
amongst the comparative figures for that year.
In the Balance Sheet as at the end of the year, Fixed
Assets are usually shown under Non-Current Assets at the Net
(written down) Value and the reader is usually referred to
accompanying notes which show (including comparative figures for
previous year):
| Fixed Assets at cost or at an independent or Committee valuation | $xxxxx | |
| Less accumulated Depreciation | $yyyyy | |
| Net (written down) value | $zzzzz |
Records
Adequate records must, of course, be kept by the association for the life of
each of the various assets for accounting and audit purposes:
- depreciated value of each asset at the start of the financial year
- cost and date first used or held ready for use of each additional asset acquired during the income year
- rate and amount of depreciation written off for each asset
- depreciated value of each asset at the end of the financial year
- cost and sale price, dates of acquisition and disposal and the depreciation value of any asset disposed of during the income year.
Note: This information leaflet is not intended to cover the entries where an asset is retired or disposed of nor the question of revaluation of depreciable assets and calculation of depreciation of buildings; for these more complex entries, an accountant should be consulted.
Library
books tend to appreciate in value although some of these may need to
be "weeded" as they become out-of-date and supply misleading
information. Individual microfiche, as opposed to sets of indexes,
may, for convenience, be written off in the year of purchase.
References
- "Recommendations and General Guidance Notes For Family History Societies" FFHS, 1993
- "Guide to Depreciation", Australian Taxation Office,1997, ISBN 0 644 382546
- "A Tax Guide for New Small Businesses", Australian Taxation Office, 1995, ISBN 0 644 43158
- "Model Financial Accounts - An XYZ Presentation", Centre For Professional Development, 1997, ISBN 1 86 33 9080 4
- Depreciation of Non-Current Assets, Australian Accounting Standard, AAS 4 (issued 6.96), prepared by the Public Sector Accounting Standards Board of the Australian Accounting Research Foundation and by the Australian Accounting Standards Board.
These notes are prepared for the assistance of family
history and member societies of the Federation. They do not purport
to provide a full account of depreciation or provide detailed
accounting advice. Societies should refer to an accountant for any
advice where required.
Last modified: 28 February 2006