In relation to a tangible asset, depreciable value is costs (acquisition cost or valuation) less salvage/residual value from cost of fixed asset.
In other words, it is the amount that subject to be depreciated during the assets’ useful life. Depreciable value can be represented in 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 on this concept. XYZ Ltd. purchased a vehicle at price of $ 50, 000, and paid taxes $ 2,000, registration fee $ 500, duties $ 200, delivery charges from port to factory $ 750, adjustable VAT @ 3% of purchase price and trade discount of 1% of purchase price as well. The cost of asset may be calculated as below:
Purchase consideration 50,000
Registration fee 500
Delivery charges 750
Adjustable VAT (3% of 50,000) (1500)
Trade discount of (1% of 50,000) (500)
Acquisition Cost 51,450
Now let’s have an idea about valuation of a given asset after its acquisition. Asset are recorded at historical cost which becomes outdated with the passage of time as the market value of asset changes and also the asset loses its value due to wear and tear, usage and/or obsolescence.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 revalued amount either may addition or reduction, as the case may be.
Let’s have an illustration. The cost of asset on Jan 01, 2019 is $ 40,000 and accumulated depreciation on the date is $ 8,000. Management valued the asset as fair value of the asset at
$ 35,000. The adjustment be calculated as follow:
Less: Accumulated depreciation (8,0000)
Net book value on Jan 01, 2019 32,0000
Fair Value on Jan 01, 2019 35,0000
Revaluation surplus 3,0000
It is the proceeds expected to be recovered when the asset is disposed at the end of useful life minus cost to make the disposal. It is suggested to use present of estimated salvage value by using discount rate.
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 useful life of the asset.
POQ Limited purchased furniture at a price of $ 60,000 and other directly costs $ 15,000 incurred. Salvage value is $ 5,000 and 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