Tuesday, December 23, 2014

Wrong application of Depreciation Policy in Nepal

What is Depreciation?
Depreciation is the systematic allocation of the depreciable amount of an assets over its useful life. The depreciable amount is determined after deducting its residual value. The following four factors are considered in determining the useful life of an assets:
  • Expected use of assets.
  • Expected physical wear and tear.
  • Technical or commercial obsolescence arising from changes or improvements in production or from a change in the market demand for the product or service output of the assets.
  • Legal or similar limit on the use of assets, such as the expiry dates of related leases.
To calculate the depreciation amount, we shall select correct depreciation method based on the nature of an organization. Expected future economic benefit of the assets used by entity should be reflected by the depreciation method used by the entity. Different depreciation methods can be used to allocate the depreciable amount of an assets on a systematic basis over its useful life. However, Nepal Accounting Standard (NAS) suggests three method to depreciate assets on systematic basis namely: Straight Line Method, Diminishing Balance Method and Units of Production Method. The entity shall select the method that most closely reflects, the expected pattern of consumption of the asset embodying economic benefit. [Source: Nepal Accounting Standard (NAS)]