06-28-2007, 09:03 PM
Dear,
I dont wish to feel suspecious about the non-updated books used by the students. However, teachers should suggest good latest books to students and if no such book is available, students should be guided to use orginal IFRSs, Laws etc to get hold of the correct knowledge.
Previous to latest changes in IASs (applicable from 2005), residual value concept was present in IAS 16 and it was required to be determined and deducted from the cost to calculate the depreciable value.
I, before going to further discussion on residual values, want to make it very very very much clear that residual values have to be determined and deducted from the costs to arrive at the depreciable amount/value either the entity is using Straight-line method or Diminishing balance method. This has to be done in similar way irrespective of whatever depreciation method is to be used. The selection of one of above depreciation methods is to reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity. (Paragraph 60 of IAS 16). It has nothing to do with determination of depreciable amount.
Now coming back to residual values, it must be noted that since the recent change in IAS 16, entities are now required to assess the residual values constantly (at least on each financial year-end)for any change in their estimate and adjustments should be made in depreciable amount, if the subsequent estimate of residual values would be different from the previous residual value estimate. (Paragraph 51 of IAS 16). Such change in estimate will be accounted for as suggested by IAS 8.
However, I also want to place on record that residual values in practical terms might be very much insignificant and need not to be deducted from cost to determine depreciable amount. IASs are not intended to be applied on immaterial issues. I refer paragraph 53 of IAS 16 which states that
"the depreciable amount of an asset is determined after deducting its residual value. In practice, the residual value of an asset is often insignificant and therefore immaterial in the calculation of the depreciable amount."
This paragraph no where exempted any particular depreciation method from the residual value provisions. However, it also provided for the immateriality of residual values which are insiginificant and may not be given any effect while calculating depreciable amount.
It is very much crucial to understand that why residual values have to be determined so fairly/accurately and why these have to be deducted from cost for calculation of depreciation.
What I understand is, IAS 1 has also recently required that PROFIT FROM OPERATING ACTIVITIES/OPERATIONS has not to be disclosed seprately from other activities. (paragraph IN 13 of Introduction section of IAS 1). [We do this becoz Fourth Scedule of Companies ordinance 1984 requires it and CO84 overrides IFRSs]. Further, profit from ordinary activities has not to be disclosed seprately from profit from extra ordinary activities/items. (IAS 1, paragraph 85).
It appears that everything has to be taken to and depicted by operations and there has been eliminated the concept of non-operating income/revenue. If residual values of fixed assets would be accurately determined and adjusted for charging depreciation, the carrying values of such assets would almost almost depict their fair value as at least the residual values have been assessed on fair value basis approximately. (this is just my estimation and apprehension).
This way the Other Income portion of a profit and loss account will considerably be reduced on account of sale of such fixed assets, if any, thus keeping the operational profit as a meterail figure.
This also correlates to the endeavor made by stipulating the determination of residual values in order to keep the depreciation charge a correct figure that should either not be overstated or understated. If depreciation charge would be accurate, any gain/loss on disposal of any item of fixed asset would not enormous, unless in some extra ordinary circustances.
At the end, replying to ur query once again, yes, residual values have to be dedcuted even if entity is using diminishing balance method. Your teacher is correct and book may be wrong. However, the book might have ignored residual values on account of immateriality. You have to look at the figures of residual values to assess.
Best regards,
Kamran.
I dont wish to feel suspecious about the non-updated books used by the students. However, teachers should suggest good latest books to students and if no such book is available, students should be guided to use orginal IFRSs, Laws etc to get hold of the correct knowledge.
Previous to latest changes in IASs (applicable from 2005), residual value concept was present in IAS 16 and it was required to be determined and deducted from the cost to calculate the depreciable value.
I, before going to further discussion on residual values, want to make it very very very much clear that residual values have to be determined and deducted from the costs to arrive at the depreciable amount/value either the entity is using Straight-line method or Diminishing balance method. This has to be done in similar way irrespective of whatever depreciation method is to be used. The selection of one of above depreciation methods is to reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity. (Paragraph 60 of IAS 16). It has nothing to do with determination of depreciable amount.
Now coming back to residual values, it must be noted that since the recent change in IAS 16, entities are now required to assess the residual values constantly (at least on each financial year-end)for any change in their estimate and adjustments should be made in depreciable amount, if the subsequent estimate of residual values would be different from the previous residual value estimate. (Paragraph 51 of IAS 16). Such change in estimate will be accounted for as suggested by IAS 8.
However, I also want to place on record that residual values in practical terms might be very much insignificant and need not to be deducted from cost to determine depreciable amount. IASs are not intended to be applied on immaterial issues. I refer paragraph 53 of IAS 16 which states that
"the depreciable amount of an asset is determined after deducting its residual value. In practice, the residual value of an asset is often insignificant and therefore immaterial in the calculation of the depreciable amount."
This paragraph no where exempted any particular depreciation method from the residual value provisions. However, it also provided for the immateriality of residual values which are insiginificant and may not be given any effect while calculating depreciable amount.
It is very much crucial to understand that why residual values have to be determined so fairly/accurately and why these have to be deducted from cost for calculation of depreciation.
What I understand is, IAS 1 has also recently required that PROFIT FROM OPERATING ACTIVITIES/OPERATIONS has not to be disclosed seprately from other activities. (paragraph IN 13 of Introduction section of IAS 1). [We do this becoz Fourth Scedule of Companies ordinance 1984 requires it and CO84 overrides IFRSs]. Further, profit from ordinary activities has not to be disclosed seprately from profit from extra ordinary activities/items. (IAS 1, paragraph 85).
It appears that everything has to be taken to and depicted by operations and there has been eliminated the concept of non-operating income/revenue. If residual values of fixed assets would be accurately determined and adjusted for charging depreciation, the carrying values of such assets would almost almost depict their fair value as at least the residual values have been assessed on fair value basis approximately. (this is just my estimation and apprehension).
This way the Other Income portion of a profit and loss account will considerably be reduced on account of sale of such fixed assets, if any, thus keeping the operational profit as a meterail figure.
This also correlates to the endeavor made by stipulating the determination of residual values in order to keep the depreciation charge a correct figure that should either not be overstated or understated. If depreciation charge would be accurate, any gain/loss on disposal of any item of fixed asset would not enormous, unless in some extra ordinary circustances.
At the end, replying to ur query once again, yes, residual values have to be dedcuted even if entity is using diminishing balance method. Your teacher is correct and book may be wrong. However, the book might have ignored residual values on account of immateriality. You have to look at the figures of residual values to assess.
Best regards,
Kamran.
