Depreciation and its Impact on Asset Valuation: A Report

This report provides a comprehensive overview of depreciation, covering its definition, objectives, and various methods. It explores how depreciation, the reduction in asset value over time due to wear, tear, and obsolescence, impacts financial reporting and asset valuation. The report discusses the matching concept, non-depreciable assets, and different depreciation methods such as the straight-line and reducing balance methods. It also highlights the importance of aligning financial and non-financial depreciation rates for building assets, suggesting the adoption of a consistent depreciation approach like the linear method to reduce misalignment and determine the useful life of assets. The report emphasizes the practical application of depreciation principles to ensure accurate financial representation and effective asset management.

Running Head: DEPRECIATION
DEPRECIATION
NAME OF THE STUDENT
NAME OF THE UNIVERSITY
AUTHOR NOTE

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Table of Contents
Summary..........................................................................................................................................2
References........................................................................................................................................4

2Depreciation
Summary
Here, the discussion will be on the topic of Depreciation where and the summary of the
same will be given. The discussion will also include the various methods of depreciation and
how does it affect the valuation. Apart from that there will be a discussion related to the
alignment of the financial and non-financial depreciation rates related to the building assets.
Depreciation is nothing but the reduction value of the assets that happen over the span of
time due to wear and tear and technological obsolescence. After the useful life of the assets gets
over the residual value after calculating all the depreciation is known as the scrap value of the
assets. There is also a term called book value, over which the amount of depreciation gets
calculated. The major objective for calculating the depreciation is related with the matching
concept of accounting since, it has been mentioned that in order to get the actual profit one has to
match the expenses with the revenues and therefore the cost of the assets is to be spread
throughout the lifecycle of the assets (Gafurov et al 2019). Non- depreciable assets are freehold,
leasehold property and investment property where no construction took place. There are various
methods of depreciation like :-
 Straight line method where the depreciation gets calculated over the cost of the assets
subtracted by its scarp value and divided by its economic life. Here, economic life
indicates the time the owner are expecting to use the assets.
 Reducing balance method- It is simply the result after deducting the cost of the assets
with its residual value.
 Revaluation method
 Sum of digits method

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 Production output method
Straight line method is easiest method for calculation of depreciation however it is not
suitable for the assets with long economic lives and in the reducing balance method it is the right
method if someone wants to knock the revenues against the expenses, however the only problem
that it possess is that it charges hefty depreciation in the initial years thereby reducing the profit.
As per the journal which has stated that the economic performance of the constructed
building requires an understanding of the depreciation rates of such assets and also its useful
lives. Therefore each of the depreciation of financial and non-financial aspects of the building
which includes future maintenance activities or the capital renewal investment should also be
considered for the proper alignment of the depreciation and other expenses in order to
successfully match them against the revenue in order to gain the fair profit. The paper has
provided a suggestion of adopting the logical and consistent depreciation approach like the linear
method since in the long term it is the average of the other approaches and it also should be
followed for the purpose of determining the useful life of the assets. The paper has bridge the gap
between the theory and practice by actually suggesting measures to ensure reduction in mis-
alignment of depreciation for financial and non-financial activities of building assets which will
lead to take up the functional equivalent depreciation rates instead of the legal depreciation rates
(Salvado, Almeida and Azevedo 2019).

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References
Salvado, F., Almeida, N. and Vale e Azevedo, A., 2019. Aligning financial and functional
equivalent depreciations rates of building assets. Engineering, Construction and Architectural
Management, 27(2), pp.441-457.
Gafurov, I., Kulikova, L., Sokolov, A., Shaykhutdinova, K. and Negreeva, V., 2019.
Depreciation in the aspect of matching revenues and expenses of the company. In E3S Web of
Conferences (Vol. 110, p. 02046). EDP Sciences.