1. Profile photo of Rustam says

    Mr Moffat, ive read somewhere that IFRSs require businesses to charge depreciation under exact rules, namely 1st whole year of 50% of reducing balance method (to help new businesses in the 1st year to pay out the corporation tax) and other years are to be charged under direct method according to estimated useful life. am i right?
    Also, one more question arose curiosity in me: if EUL is estimated too low then running expenses will be higher. So the profits could be manipulated and taxes reduced. so, 2 questions 1)who estimates the depreciation in-policy and is it controllable by tax collector bodies? and 2) what is more beneficial for ltd. Co.,ultimately, for example, having undervalued Assets or undervalued profits (if not only depreciation concerned, in general).
    Thank you.

    • Profile photo of John Moffat says

      First, please ask questions like this in the Ask the Tutor Forum – not as a comment on a lecture.

      Second, you have read wrong! IFRS’s do not require anything of the sort. (What is required is what is written in the Lecture Notes and what I say in the lecture). Tax authorities have their own rules (which are different in different countries) but they cannot tell any business how they should charge depreciation in their accounts. (The tax will recalculate the profits for tax purposes, but we do not change our accounts – in our accounts we do what we think is most sensible). You will learn about this in Paper F6, but tax is irrelevant for Paper F3. (And I do explain all of the above in the lecture).

      This answers your second question – the way we charge depreciation is whatever we think is most sensible, and will not affect the tax payable in the slightest. (The tax authorities do not charge tax on the profit we report for all sorts of reasons – not just the depreciation policy. They have forms that they use to adjust our profit simply in order to calculate the tax.)

      I would also point out that it is not a question of over or under valuing assets in our financial statements – the value show in the Statement of financial position is never intended to show a ‘true’ value. We depreciate in order to spread the cost of the asset over its expected life.

      I do suggest that you watch all of the lectures on depreciation again, because I explain all of the above in the lectures.

      • Profile photo of Rustam says

        Thank you! And, by over or undervaluing the assets i meant what are the benefits of charging more or less depreciation, sir? Because it effects both PPI (SOFP) and Running costs (SPL) and…i need more explanation:)what’s the reason…

      • Profile photo of John Moffat says

        There are no benefits – we are not doing it to make a benefit (that is not the purpose of accounting – we are trying to show a fair view of what is happening).

        Over the life of the asset, the total depreciation will be the same – whichever method we use.

  2. avatar says

    Kindly help with this question

    On 1 October 2013 a machine was bought for $25,000. The depreciation policy for this class of
    asset is 20% WDV (written down value). What are the amounts for depreciation expense in
    respect of this machine for the year ended 31 December 2013, 31 December 2014 & 31 December 2015 ?

    A- $5,000 for each year
    B- 2013: $1,250, 2014: $4,750, 2015: $4,300
    C- 2013: $5,000, 2014: $4,000, 2015: $3,200
    D- 2013: $1,250, 2014: $5,000, 2015: $4,000

    • Profile photo of John Moffat says

      The ‘trick’ here is that the question does not say whether to time apportion the depreciation, or to have a full years charge in the year of purchase.

      If we were to time apportion, then:

      In the first year, the depreciation will be 20% x 25000 apportioned for 3 months (Oct to Dec), so x 3/12. This gives a figure of $1250.

      In the second year it will be a full 20% of the carrying value, so 20% x (25000 – 1250) = 4750.

      You should be able now to calculate the third year yourself. However, this does not come to one of the four choices.

      So… must be a full years charge in the year of purchase.
      This means that in the first year it is 20% x 25000 = 5,000.
      In the second year it will be 20% x (25000 – 5000) = 4000
      You can now calculate the third year yourself and you will find that it is one of the four choices :-)

      • avatar says

        Hi John
        Thanks for the answer to the above question.
        What approach would you kindly suggest for one to use, ie between “timing” and whole year’s deprn when not specified in an exam question. I’m asking since one would wanna avoid wasting time trying the one “method” only for the other one to be correct, as my colleague and I just discovered from your answer. Regards

      • Profile photo of John Moffat says

        I don’t know where Mahrukh found the question, but in the real exam you always time apportion the depreciation unless the questions says to do different.

  3. Profile photo of nikki says

    Good Afternoon, why do we balance the Accumulated Depreciation a/c from the 2nd year? (That’s @ the 8mins 27secs point) How come we don’t balance for.the 1st yr (1400)? Thanks!!

  4. avatar says

    very good explanation, but if we create a separate account for each car, then it will increase the number of accounts in the balance sheet and if one account for all car and the same for accumulated depreciation, then we will not have the the price of each car for each year.

    • Profile photo of John Moffat says

      @M. Osman Kamran, But we don’t need ‘the price of each car for each year’.

      We only have one car account. Many companies keep an asset register with details of each individual asset, but this is nothing to do with the double entry.

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