Fully Depreciated Asset: Definition, How It Happens, and Example


Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48]. The sum-of-the-years’ digits (SYD) method also allows for accelerated depreciation. Accumulated depreciation is a contra-asset account, meaning its natural balance is a credit that reduces its overall asset value. Accumulated depreciation on any given asset is its cumulative depreciation up to a single point in its life.

There are factors, the complexities of tax regulations, and making informed decisions regarding the disposal of fully depreciated assets. The asset’s value falls as it is used and ages until it reaches its salvage value, which is the asset’s estimated value at the end of its useful life. Considering this example, the salvage value is $50,000, which is the residual value at the end of the PP&E. The expenses related to purchasing and maintaining tangible assets utilized in company operations are referred to as PP&E (Property, Plant, and Equipment) expenses. Fully depreciated asset is when the asset book value has been depreciated for the useful period after accumulating all years’ depreciation.

For this reason, there are different methods to estimate the depreciation expense. The double-declining balance (DDB) method is an even more accelerated depreciation method. It doubles the (1/Useful Life) multiplier, making it essentially twice as fast as the declining balance method. There are a number of methods that accountants can use to depreciate capital assets. They include straight-line, declining balance, double-declining balance, sum-of-the-years’ digits, and unit of production. We’ve highlighted some of the basic principles of each method below, along with examples to show how they’re calculated.

Occasionally, a company continues to use a plant asset after it has been fully depreciated. In such a case, the firm should not remove the asset’s cost and accumulated depreciation from the accounts until the asset is sold, traded, or retired from service. Of course, the company cannot record more depreciation on a fully depreciated asset because total depreciation expense taken on an asset may not exceed its depreciable cost (historical cost − salvage value). Of course, the company cannot record more depreciation on a fully depreciated asset because total depreciation expense taken on an asset may not exceed its cost. By comparing an asset’s book value (cost less accumulated depreciation) with its selling price (or net amount realized if there are selling expenses), the company may show either a gain or loss. If the sales price is greater than the asset’s book value, the company shows a gain.

An asset’s reduced carrying value is shown on the balance sheet once it has been fully depreciated, but it may continue to be recorded together with accumulated depreciation up until disposal. Fully depreciated assets (FDA) greatly impacts the balance sheet and the income statement. The entire depreciation of an asset has an impact on the balance sheet items property, plant, and equipment (PP&E) and accumulated depreciation. Depreciation can be computed using a straight-line or an accelerated technique, such as double-declining-balance or sum-of-the-years’-digits method. On the company’s records, an asset is said to be fully depreciated when the total depreciation equals the asset’s original cost. If the asset’s accumulated depreciation is equivalent to the asset’s original cost, then it is classified as fully depreciated.

The balance sheet will continue to show the asset as fully depreciated even though it is still being used for business purposes. The accounting treatment for the disposal of a completely depreciated asset is a debit to the account for the accumulated depreciation and a credit for the asset account. Suppose a company acquires a new car so that its salespeople can go around selling the company’s products. To calculate yearly depreciation for accounting purposes, the owner needs the car’s residual value, or what it is worth at the end of the ten years. Assume this value is $5,000, and the company uses the straight-line method of depreciation.

Why Are Assets Depreciated Over Time?

If an impairment charge equal to the asset’s cost is incurred, then the asset is immediately fully depreciated. Only assets used in normal business operations are classified as property, plant, and equipment. Most companies use historical what you need to know about tax season 2020 cost as the basis for valuing property, plant, and equipment. Historical cost measures the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use.

  • As a result, the equipment will have a balance-sheet book value of $0 while still representing its $100,000 initial cost and $100,000 accrued depreciation.
  • This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred.
  • Once a fixed asset has been fully depreciated, the key point is to ensure that no additional depreciation is recorded against the asset.
  • The process of disposing of assets requires deleting them from the accounting records, which essentially deletes them from the balance sheet.

Depreciation costs, therefore, act as a systematic allocation of how much an asset is depleted annually. Conservative accounting methods advise utilizing a quicker depreciation schedule when unclear to err on the side of prudence. Revalued assets are depreciated in the same way as under the cost model (see below). New assets are typically more valuable than older ones for a number of reasons.

IAS 16 — Stripping costs in the production phase of a mine

IAS 16 Property, Plant and Equipment outlines the accounting treatment for most types of property, plant and equipment. Depreciation allows businesses to spread the cost of physical assets over a period of time, which can have advantages from both an accounting and tax perspective. Businesses also have a variety of depreciation methods to choose from, allowing them to pick the one that works best for their purposes. This method, which is often used in manufacturing, requires an estimate of the total units an asset will produce over its useful life. Depreciation expense is then calculated per year based on the number of units produced that year. This method also calculates depreciation expenses using the depreciable base (purchase price minus salvage value).

IFRIC 20 — Stripping Costs in the Production Phase of a Surface Mine

Fully depreciated assets are those whose book value has been reduced for the entire useful life of the asset, adding up all depreciation from all years. But the accounting policy represents some rules and standards setting how you will report certain transactions in the financial statements – not only now, but also in the future. If you reviewed the useful lives in the past regularly and during the current reporting period you find out that you’d like to use the assets even longer, then there’s not much to do. Just leave these assets as they are and make sure you avoid this situation in the future.

IAS 16 — Proceeds before intended use

In reality, it is difficult to predict the useful life of an asset, so depreciation expenses represent only a rough estimate of the true amount of an asset used up each year. Conservative accounting practices dictate that when in doubt, it is more prudent to use a faster depreciation schedule so that expenses are recognized earlier. In that way, if the asset does not live out the expected life, the company does not incur an unexpected accounting loss. Depreciation is an accounting practice used to spread the cost of a tangible or physical asset over its useful life. Depreciation represents how much of the asset’s value has been used up in any given time period. Companies depreciate assets for both tax and accounting purposes and have several different methods to choose from.

Recoverability of the carrying amount

However, if you really forgot to revise the useful lives in the previous reporting period, this failure to apply IAS 16 results in the accounting error. None, of course – because the carrying amount of your property, plant and equipment cannot decrease below zero. The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset’s useful life [IAS 16.50]. The asset would also be removed from the fixed asset list (subsidiary ledger) since it no longer physically exists (except maybe as a rusting piece of junk in the junkyard).

Understanding Fully Depreciated Assets

A fully depreciated asset is a property, plant or piece of equipment (PP&E) which, for accounting purposes, is worth only its salvage value. Whenever an asset is capitalized, its cost is depreciated over several years according to a depreciation schedule. Theoretically, this provides a more accurate estimate of the true expenses of maintaining the company’s operations each year. Debit the accumulated depreciation account to remove the accumulated depreciation from the books. Salvage value is based on what a company expects to receive in exchange for the asset at the end of its useful life. A fully depreciated asset is a depreciable asset for which no additional depreciation expense will be recorded.