01-31-2011, 03:33 AM
The presumption that assets bring more revenues in initial years and it keeps on reducing with the passage of time, is bit logical but is rebuttable as well.
We see that when new plants/industries are established, these have lesser market share, lesser revenues, more advert costs, more financing costs etc; so in such cases larger amount of depreciation would not bring good picture of the affairs.
Further, using either straight line or reducing balance has nothing to do with any exemption from deferred taxation calculations. Two basis can alter the figures to be arrived at; but none of them outways the requirements to provide for deferred taxation. Whatever method you use, the taxable differences would always arise due to accelerated allowances given by tax laws against the accounting rates.
Reducing balance method is simple for record keeping of the individual assets while straight line is bit tougher and requires lot of discpline. In straight line method, if you don't have sophisticated systems (specially in larger business entities), or you don't entail huge cumbersome calculations/record keeping for individual assets, there would always be a threat of charging depreciation on the fully depreciated assets.
What I said about replacements or BMR has in fact nothing to do DIRECTLY with any depreciation method, yet when the entraprenure knows that the asset would be charged off fully in say 10 or 15 years (it may in fact not be ceasing after such time practically); they tend to have better planning for its replacements/BMRs and put more appropriate capex estimates in their business plans and financial models. In some cases, this proves to be a psychological impact only.
Practically speaking, reducing balance method is easier and results in lesser mistakes over the longer run, specially in large entities.
Regards,
We see that when new plants/industries are established, these have lesser market share, lesser revenues, more advert costs, more financing costs etc; so in such cases larger amount of depreciation would not bring good picture of the affairs.
Further, using either straight line or reducing balance has nothing to do with any exemption from deferred taxation calculations. Two basis can alter the figures to be arrived at; but none of them outways the requirements to provide for deferred taxation. Whatever method you use, the taxable differences would always arise due to accelerated allowances given by tax laws against the accounting rates.
Reducing balance method is simple for record keeping of the individual assets while straight line is bit tougher and requires lot of discpline. In straight line method, if you don't have sophisticated systems (specially in larger business entities), or you don't entail huge cumbersome calculations/record keeping for individual assets, there would always be a threat of charging depreciation on the fully depreciated assets.
What I said about replacements or BMR has in fact nothing to do DIRECTLY with any depreciation method, yet when the entraprenure knows that the asset would be charged off fully in say 10 or 15 years (it may in fact not be ceasing after such time practically); they tend to have better planning for its replacements/BMRs and put more appropriate capex estimates in their business plans and financial models. In some cases, this proves to be a psychological impact only.
Practically speaking, reducing balance method is easier and results in lesser mistakes over the longer run, specially in large entities.
Regards,
