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  1. Hello Mr Moffat,

    Please I have a practical question on depreciation (considering impairment). If we have an asset with an initial cost of $1,000, useful life of 5 years and is to be depleted under the straight line method (meaning $200 annual depreciation charge)
    .
    If at the end of year 2 (NBV is $600), there is an impairment charge of $100 (Partly impaired thereby reducing the carrying value to $500), how do we compute the straightline depreciation charge in year 3?

    Do we back out the impairment loss only from original cost of the asset (1000 – 100 = 900) then divide by 5, in order to get the depreciation charge for year 3 or,

    we divide the carrying amount (500) by the remaining useful life of the asset (that is 500/3) and then the 500 becomes the revised cost of the asset for year 4 and year 5, or

    We treat the impairment charge separately, then depreciate over the remaining useful life of the asset. That is, 100/3,=33.3, which is then used to reduce the $200 annual charge (1000/5)….I actually think this is the same as option 2.

    Or we ignore the impairment and still put a $200 depreciation charge in year 3 (this I doubt, because it will mean total depreciation charged over the life of the asset will be more than the cost)

    I am a bit confused and will appreciate a response on this plus the reason as well.

    Thanks in advance

  3. Hi

    Sir i have a question please…Reducing balance method says an asset benefits us more in starting years than coming years but we charge same rate, for example 20% each year why is that as it has to be fair basis…i am having a lot of confusion….please advice….thanks

    • Although the % is the same, it is a % of a reducing balance (a % of the net book value each year rather than on the original cost). Therefore the actual depreciation expense each year is higher at the start and then gets lower year after year.

      I do suggest that watch the next lecture working through example 2 from the free lecture notes, which is reducing balance depreciation.

  5. I have a question that if we purchase an asset and we know that its value will increase instead of decrease with the passage of time(e g, we purchase a building and we know that its value will increase with time).Should we depreciate such an asset or not??

    • Yes – you have to depreciate per IAS 16 (if it is an asset with a limited life).
      The purpose is not to show a true value, but to spread the cost over the useful life.

      (If the value does increase substantially, then you are allowed to revalue – but this is a separate issue.)

  8. if the question says charge a full years depreciation charge on the year of purchase , and the asset was purchased on 31dec and the year end is on that day do we still charge a full years charge?

    • Ask yourself “What does it mean when it says “a full years depreciation in the year of purchase””?

      Was it bought during the year? YES? Then charge a full year’s depreciation! It’s as simple as that.

      The same (apparently) illogical thinking goes into “and none in the year of sale” If we sell on 31 December, is it there as at the end of the year? NO? Then no depreciation.

    • It means that in the year that you bought the asset you charge depreciation for the whole year – even if you only had the asset for part of the year.

      (The alternative is proportionate depreciation, in which case if you only bought the asset (say) 9 months through the year, then you only charge depreciation for the 3 months that you owned it. With ‘a full years charge in the year of purchase’ you would calculate depreciation as though you had owned it for the whole year.)

  12. Beautifully explained 馃檪 馃檪
    I loved all of you鈥檙e lectures, Simple and easy to understand the topic. From the basic to the most difficult areas were well explained with examples :):)

    Thanks so much!

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