Depreciation of fixed assets

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
I am having a mental block! If a fixed asset is depreciated over say 4 years but at the end of the period when it has been depreciated down to NIL, if it still has a significant value how do we put this back on to the balance sheet. Would it be a case of re-assessing the method used before we got to this position? If not what would the bookkeeping entries be?<BR><BR>Thanks for your help.<BR>

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Depreciation of fixed assets

    Hi<BR><BR>You would have ro revalue the assest and establish a revaluation reserve in the balance sheet. Basically this would be Dbeit the asset, credit the reserve.<BR><BR>Neil
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Depreciation of fixed assets

    Read FRS 15 first as revaluing one asset will have a knock on effect on other assets of the same class. Also gives guidance on who does the valuation.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Depreciation of fixed assets

    hey!

    once u depriciate an asstet to 0 value & in reality u find that asset still holds value then u treat it as

    1. if ur selling it - as a profit (unusual profit / profit on disposal)

    2.if ur planing to keep the asset for further use - u will debit asset by the perticular amount & credit revaluation reserve by the same amount.

    hope this help u undestand
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Depreciation of fixed assets

    Why do you want to revalue the asset? The purpose of depreciation is to spread the cost of the asset over it's useful economic life. If your estimate of UEL is wrong there is actually no need to do anything to correct it, it is perfectly acceptable to carry assets at nil value. Depreciation is not used to reflect second hand value of assets in the B/S.

    If the asset is not a building then revaluation is fairly unusual. Also bear in mind that a revaluation will lead to an increase in depreciation and lower profits.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Depreciation of fixed assets
    martinrc wrote:
    Why do you want to revalue the asset? The purpose of depreciation is to spread the cost of the asset over it's useful economic life. If your estimate of UEL is wrong there is actually no need to do anything to correct it, it is perfectly acceptable to carry assets at nil value.

    Are you sure it is acceptable to carry fixed assets at "nil value"? This would not be a "true and fair view" of the business if beneficial use were still being obtained from them. And if partners join or leave such a business, they will unfairly get a profit or loss relative to the true value of the business' assets. Undervaluing it also leaves a firm open to hostile takeovers for "asset stripping".
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Depreciation of fixed assets

    It dosent matter if assets are still being used, they are only carried in the balance sheet to spread their cost over their useful life. If they were meant to have any sort of realistic meaning whatsoever, accounting standards would require revaluations every year of every asset!

    Also take depreciation, I doubt you would hear any cries of foul play if you tried to depreciate a car over 10 years straight line, but we all know you lose a third as soon as its out of the showroom.

    Plus I would of thought a business planning a takeover wouldn't use a financial accounting balance sheet to value things. A balance sheet dosent mean a great deal in that respect, a business looking to "asset stripping" is not really going to use a balance sheet to identify whether the target company is a worthy meal or not. They'd have to be taking a pretty big gamble.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Depreciation of fixed assets
    Frankymo1e wrote:
    martinrc wrote:
    Why do you want to revalue the asset? The purpose of depreciation is to spread the cost of the asset over it's useful economic life. If your estimate of UEL is wrong there is actually no need to do anything to correct it, it is perfectly acceptable to carry assets at nil value.

    Are you sure it is acceptable to carry fixed assets at "nil value"? This would not be a "true and fair view" of the business if beneficial use were still being obtained from them. And if partners join or leave such a business, they will unfairly get a profit or loss relative to the true value of the business' assets. Undervaluing it also leaves a firm open to hostile takeovers for "asset stripping".

    It is perfectly acceptable to hold assets at nil value, many companies do especially those using straight line dep'n. It can be indicative of poor planning or accounting awareness if lots of assets have been depreciated to nil and are still in use. However consider that dep'n is simply an accounting adjustment and when partners join or leave they will do so on the basis of the relative value of the business and the tax value of assets in the business.

    Asset stripping is unrelated as most assets would be expected to be sold at market value. Asset stripping relates to acquiring businesses on the cheap that are performing badly with big losses, ceasing trade and selling the assets at market value. In addition most acquisitions of a business would have to be done at market value per accounting standards.

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