Depreciable value:
Concerning a tangible asset, depreciable value is the amount of fixed asset (acquisition cost or valuation) less salvage/residual value from the cost of a fixed asset. In other words, it is the amount that subjects to be depreciated during the assets’ useful life. Depreciable value can be represented in the formula as below:
Depreciable Value = Cost (Acquisition or fair value) – Salvages value
Historical /Acquisition Cost:
It includes all ordering costs, purchase costs, taxes, commission, registration, license duties, levies, transportation, installation, and all other costs/expenses directly associated (to the asset to enable it into such condition as intended by management) minus all trade discounts, subsidies, and adjustable taxes.
Let’s have an illustration of this concept. XYZ Ltd. purchased a vehicle at $50,000 and paid taxes $2,000, registration fee of $500, duties $200, delivery charges from port to factory $750, adjustable VAT @ 3% of the purchase price, and trade discount of 1% of the purchase price as well. The cost of assets may be calculated as below:
| Description | Amount $ |
| Purchase consideration | 50,000 |
| Add: | |
| Taxes | 2,000 |
| Registration fee | 500 |
| Duties | 200 |
| Delivery charges | 750 |
| Less: | |
| Adjustable VAT (3% of 50,000) | -1500 |
| Trade discount of (1% of 50,000) | -500 |
| Acquisition Cost | 51,450 |
Fair valuation:
Now let’s have an idea about the valuation of a given asset after its acquisition. The asset is recorded at a historical cost that becomes outdated over time as the asset changes the market value. The asset loses its value due to wear and tear, usage, and/or obsolescence.
To address this issue, management performs valuation of the asset and any difference that may be positive, i.e., fair value is higher than book value, or negative, i.e., fair value is lower than book value.
This difference is adjusted accordingly, and book value is replaced with a revalued amount either may addition or reduction, as the case may be.
Let’s have an illustration. The cost of assets on Jan 01, 2019, is $ 40,000 and accumulated depreciation on the date is $ 8,000. Management valued the asset as the fair value of the asset at
$ 35,000. The adjustment is calculated as follow:
Description: USD
Cost 40,000
Less: Accumulated depreciation (8,000)
Netbook value on Jan 01, 2019, 32,000
Fair Value on Jan 01, 2019, 35,000
Revaluation surplus 3,000
Salvage/Residual Value:
The proceeds are expected to be recovered when the asset is disposed of at the end of useful life minus the cost to make the disposal. It is suggested to use the present estimated salvage value by using a discount rate.
Useful life:
This is the period over which economic benefits are expected to flow to the entity. This may be either in terms of no—years or percentage or no. of units produced. Useful life is an estimate, and it may also be reassessed during the asset’s useful life.
Example:
POQ Limited purchased furniture at $ 60,000 and other direct costs of $ 15,000 incurred. The salvage value is $ 5,000, and the expected useful life is 7 years. Depreciable value can be calculated for the year1 as below:
Depreciable value = ((60,000 + 15,000) – 5000) = $70,000
In the 2nd year, the POQ Limited, reassessed the salvage value as $ 10,000, the depreciable value can be calculated for the year1 as below:
Depreciable value = ((60,000 + 15,000) – 10,000) = $ 65,000