AAT Intermediate

sarahuk3

Hi Everyone,

I am studying depreciation and disposals at the moment and cannot find any literature on the following:

If I depreciate a fixed asset for the year and the nbv calculates as nil, do i enter this as normal in the main ledger?

Thank you

Sx

PhilW

Hi Sarah

If the NBV is nil then the asset is fully depreciated.
If the asset is still being used then it is of value to the business but this is not being truely reflected in the BS.

It suggests to me that the depreciation rate applied is too high, as the point of depreciation is to spread the cost of the asset over its useful life in the business.

If it's to be disposed of in this current year, then normally depreciation wouldn't be applied but this depends on company policy.

sarahwilson

If the NBV is nil because the asset has been depreciated too highly, do you do anything to put it right? You can't go back over previous years and amend the rate of depreciation but surely you can't have an asset with a nil value can you?

PhilW

If the asset is of value to the business then I believe it should be given a value, but how you determine that value I'm not sure and would depend on the type of asset. If it was a motor vehicle , then you could easily look up a value online for the type of vehicle and the year of registration but how you would determine the value with other asset categories, I'm not sure. If it was e.g. a personal computer then they hold very little material value. I guess its a policy matter for the company?

In larger businesses such as the one I work for, we use Oracle databases for our fixed asset registers and we have all of our estate assets valued every five years. Technically, you can't go back and change what has occurred in previous years however when we apply a new professional valuation, the in year depreciation charge may change and previous years over/under depreciation is recorded in a field called Backlog depreciation.

sarahwilson

How likely is this to happen in reality? Are there assets that would be classed as having no residual value once they had been used for a set amount of time or is it not very likely this will occur?

PhilW

It depends on the type of asset and the business. In my line of work (Government Department) we often have to assign a value to an asset which has been fully depreciated but how likely it is to happen in a private company I do not know.
I'm not sure if its the residual value of the asset that is in question or the value of the asset to the company in order to carry out its business? I think maybe this is a question for Peugot as he seems very knowledgeable about assets.