Depreciation Methods: A Comparative Analysis of Qantas and Virgin Ltd

This report provides a detailed analysis of depreciation methods and impairment reporting as practiced by Qantas Airways Limited and Virgin Australia Limited. It begins by defining depreciation and outlining current reporting requirements based on accounting standards, including the cost and matching principles. The report then describes two common depreciation methods: straight-line and reducing balance, and analyzes the 2017 annual reports of Qantas and Virgin Australia to illustrate how depreciation and impairment are recorded. It comments on the effect of differing depreciation rates on the profits of both companies and suggests reasons for the variations in the useful lives of assets across the entities. The report also debates the discretion entities have in choosing depreciation methods and useful lives, identifies factors affecting the useful lives of assets like aircraft, and defines asset impairment, outlining the current reporting requirements in the context of Qantas and Virgin Australia. This comprehensive analysis offers valuable insights into the financial accounting practices of major airline companies.

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Accounting for Managers
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Table of Contents
Part (A):...........................................................................................................................................2
1. Concept of depreciation:..........................................................................................................2
2. Outlining the current reporting requirements:.........................................................................2
Part (B): Two common depreciation methods commonly used:.....................................................2
Part (C):...........................................................................................................................................3
1. Brief overview of Qantas Airways Limited and Virgin Australia Limited:............................3
2. Areas and ways of recording depreciation and impairment in their annual reports:...............4
Part (D): Effect of the differing depreciation rates on the profit of Virgin Ltd and Qantas Airways
Ltd:...................................................................................................................................................4
Part (E): Reasons that the choice of useful lives differ across the organisations:...........................5
Part (F): Discretion to choose the depreciation method and useful lives applicable to various
asset classes for the organisations:..................................................................................................6
Part (G): Factors affecting the useful lives of assets like aircrafts:.................................................6
Part (H): Impairment of assets and current reporting requirements in the context of the two
chosen organisations:.......................................................................................................................7
References:......................................................................................................................................8

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Part (A):
1. Concept of depreciation:
As commented by Bragg (2017), depreciation could be defined as the systematic
distribution of the cost of an asset over its useful life in order to match the systematic allocation
with the revenue generated from the asset. Few examples include building, equipment, furniture
along with plant and machinery, as these are depreciable assets. However, the only exception is
land, since its value appreciates with the passage of time.
2. Outlining the current reporting requirements:
The current reporting of depreciation is dependent on two principles of accounting, which
are described briefly as follows:
Cost principle:
According to this principle, the amount of depreciation disclosed in the income statement
and the amount of asset disclosed in the balance sheet statement needs to be dependent on the
original asset cost.
Matching principle:
According to this principle, the cost of an asset could be distributed to depreciation over
the asset life. As a result, the asset cost is segregated with some cost disclosed in the income
statements issued at the time of asset life. By distributing a part of the cost of the asset to the
income statement, a part of the asset cost with each year where the asset is used is matched
(Cooper 2017).
Part (B): Two common depreciation methods commonly used:
The two prevalent depreciation methods used in accounting mainly comprise of the
following:
Straight-line depreciation method:

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This is the most widely used and simplest method, which is computed by taking the
acquisition or purchase price of an asset from which the salvage value is deducted. The result is
divided by the economic life of the asset for which the years could be expected reasonably in
order to benefit the organisation.
Reducing balance method:
In case of the above-stated method, a certain percentage is written off from the asset
value every year. As a result, it leads to reduced value, which is the result of the asset cost less
depreciation until date (DiTommaso, Warren and Richard 2017).
Part (C):
1. Brief overview of Qantas Airways Limited and Virgin Australia Limited:
Qantas Airways Limited is an Australian flag carrier and it is the biggest airline in terms
of fleet size, global flights and global destinations. The main services of the airline include
passenger and freight air transportation services in Australia and global nations. As of 30 June
2017, the number of fleets has increased to 309, which was 303 in 2016 (Investor.qantas.com
2018).
Virgin Australia Limited is a major player in the Australian aviation industry involved in
the operations of domestic and global airline business. As of 30th June 2017, the fleet of Virgin
Australia Limited comprises of the following aircraft:
Table 1: Virgin Australia Limited fleet in 2017

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(Source: Virginaustralia.com 2018)
2. Areas and ways of recording depreciation and impairment in their annual reports:
It has been observed from “Page 69 of the Annual Report of Qantas” under the notes to
financial statements; accumulated depreciation and impairment are recorded in the section of
property, plant and equipment. These values are deducted from the purchase price at the date of
acquisition to arrive at the net book value (Dvořák and Lukáš 2017). Virgin Australia Limited
follows the similar procedure in recording its accumulated depreciation and impairment, as
evident from its “Page 70 of the Annual Report”. In addition, both the organisations use the
straight-line method of depreciation for arriving at the book values of their assets.
Part (D): Effect of the differing depreciation rates on the profit of Virgin Ltd and Qantas
Airways Ltd:
It has been identified that the different classes of assets have different rates of
depreciation; however, Virgin Australia Limited has not disclosed the salvage values in its
annual report that Qantas has disclosed in its annual report. The impact of the straight-line
method is a stable and uniform minimisation in revenues and values of assets in each accounting
period of the useful life of the asset (Fekiri and Ezzeddine 2018). Since both the organisations
are involved in using the straight-line method of depreciation, the same depreciation expense is
charged in all the accounting years across the useful life of the assets.
For instance, it is assumed that Qantas has purchased aircraft spare parts worth $50,000
with a useful life of five years, while Virgin has bought aeronautic-related asset worth $63,000
having a useful life of seven years. It is further assumed that both the assets have no residual
values. The depreciation expense for the first year in case of Qantas is $10,000; while in case of
Virgin, it would be $7,000. In both situations, depreciation expense would be debited and
accumulated depreciation would be credited. The depreciation expense is recorded in the income
statement in the form of minimisation to revenues, while accumulated depreciation is recorded in
the form of contra account to the related assets. Hence, the asset costs are minimised to their
book values, while the net income is reduced as well.

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Part (E): Reasons that the choice of useful lives differ across the organisations:
The useful lives of Qantas and Virgin for various classes of assets are depicted as
follows:
Table 2: Estimated lives and salvage values of different classes of assets for Qantas Airways
Limited
(Source: Investor.qantas.com 2018)
Table 3: Estimated lives of different classes of assets for Virgin Australia Limited
(Source: Virginaustralia.com 2018)
As observed from the above two tables, it could be stated that the useful life of an asset is
different in Qantas in contrast to Virgin. The primary reasons behind such variation are described
briefly as follows:
Physical factors:
The physical factors are significant especially to project the useful life of buildings,
which include decay, casualty like flood and fire along with wear and tear (Karwowski 2016).

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These factors would lead to retirement of the building. Thus, maintenance plays a significant role
in extending or shortening the useful life of an asset. In case of both Virgin and Qantas, the
useful life of buildings is estimated between 30 years and 40 years.
Economic factors:
These factors would have impact on equipment, machinery and aircraft maintenance
parts. Equipment could be obsolete even before its technical life (Maffei 2016). In addition, such
factors have effect on the residual values as well. In case of Virgin, there are no residual values
for assets, while for Qantas; residual values are estimated for all depreciable rates. Thus, this
factor could be a primary reason behind the different useful lives for different entities.
Part (F): Discretion to choose the depreciation method and useful lives applicable to
various asset classes for the organisations:
It is necessary for the organisations to take into account whether they would use assets
with identical amounts every year across their useful lives. In such situation, the organisations
need to have the discretion of using the straight-line depreciation method. On the other hand,
Qantas Airways Limited and Virgin Australia Limited could select the reducing balance method,
if it apportions higher amount of depreciation expense to the initial years of lives of their assets
rather than the later years.
Part (G): Factors affecting the useful lives of assets like aircrafts:
The factors that would have direct impact on the useful lives of assets like aircrafts
comprise of the following:
 The estimated asset usage and whether any other management team could manage
aircrafts in an effective fashion, which could have adverse repercussions on the overall
lives of the assets
 Technological, technical and other kinds of obsolescence for ascertaining the rates of
depreciation and impairment to be realised, if any (Shaari, Tongyu and Ray 2017)
 If the rivals come up with better aircrafts having greater performance, the life of the
existing tangible asset might decline

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 If aircrafts are not maintained adequately, there would be drastic minimisation in the
useful lives of the aircrafts and sometimes maintenance needs considerable amount of
resources
Part (H): Impairment of assets and current reporting requirements in the context of the
two chosen organisations:
An asset of an organisation is said to be impaired, which has a market value lower than
the price listed on the balance sheet statement of the organisation. Hence, the recording of
impairment is to be made, if the estimated future cash flows could not be recovered (Small,
Lucinda and Achmad 2017). For both Qantas and Virgin, the reporting requirements of asset
impairment are discussed as follows:
 In case, there is indication of impairment, the recoverable amount related to the asset
needs to be ascertained.
 The asset is said to be impaired, if it’s recoverable amount is lower in contrast to the
carrying value.
 Extensive revelation is needed for the impairment test and any realisation of impairment
loss (Souissi 2017).
 Impairment loss realised in previous periods for an asset needs to be reversed, if there is
variation in estimates used in ascertaining the recoverable amount of the asset.

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References:
" Investor.qantas.com.". 2018. http://investor.qantas.com/annual-report-2017/.
“Virginaustralia.com.”. 2018.
https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/
2017-annual-report.pdf.
Bragg, Steven M. Fixed Asset Accounting. AccountingTools LLC, 2017.
Cooper, Steve. "Taking a measured approach." Investor perspectives (2015): 1-7.
DiTommaso, Marie, Warren Ruppel, and Richard F. Larkin. "LONG‐LIVED ASSETS,
DEPRECIATION, AND IMPAIRMENT." Wiley Not
‐for
‐Profit GAAP 2017: Interpretation and
Application of Generally Accepted Accounting Principles (2017): 335-346.
Dvořák, Martin, and Lukáš Poutník. "The Comparative Analysis of CAS and IPSAS
Requirements on Tangible Fixed Assets." In New Trends in Finance and Accounting, pp. 497-
510. Springer, Cham, 2017.
Fekiri, Kamel, and Ezzeddine Abaoub. "Relationship between Specific Accruals and Disclosed
Accounting results of companies in financial failure." Global Journal of Management And
Business Research (2018).
Karwowski, Mariusz. "The risk in using financial reports in the study of airline business
models." Journal of Air Transport Management 55 (2016): 185-192.
Maffei, Marco. "Amortization and Depreciation." Global Encyclopedia of Public Administration,
Public Policy, and Governance (2016): 1-7.
Shaari, Hasnah, Tongyu Cao, and Ray Donnelly. "Reversals of impairment charges under IAS
36: evidence from Malaysia." International Journal of Disclosure and Governance 14, no. 3
(2017): 224-240.
Small, Rashied, Lucinda Smidt, and Achmad Joseph. "Impairment of assets-does it actually
matter?." Professional Accountant 2017, no. 30 (2017): 20-21.

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Souissi, Mohsen. "Fair Value or Cost Method: Analytical Hierarchy Process to Multiple Criteria
Problem." (2017).