Amortization (Depriciation + Depletion) and Impairment

What is amortization?
A systematic method of allocating the costs of a capital asset over its estimated period of usefulness.

The calculation and reporting of depreciation is based upon two accounting principles.

1. Cost Principles
2. Matching Principles

Are any assets not amortized?

1. Land
2. Goodwill – but there is an impairment test. (Its Depend on country accounting policy)
3. Intangible Capital Assets with Indefinite Life

Methods of Amortization

1. Straight line
   Formula: (Accounting cost - Residual value OR Salvage Value) / Estimated useful life in years
   Accounting Cost: Purchasing cost of Capital asset plus shipping cost plus installation etc which bring to useage.
   Salvage Value: An asset's fair value at the end of its life; often zero
   Residual Value: The estimated net recoverable amount from disposal at the end of estimated useful life.
   Estimated useful life: Entity decision based on use
   FYI. This method commonly used world wide


2. Variable Charge (input-output)
   a) Service hours
   Formula: (Accounting cost - Residual value OR Salvage Value) / Service hours
   Service Hour: Entity decided useful of service hour of a Equipment or Machine
   b) Productive Output
   Formula: (Accounting cost - Residual value OR Salvage Value) / Productivity in units
   Productivity: Productivity of an asset over a period of life
   
3. Accelerated Methods or Decreasing Charges
   a) Declining Balance (DB)
   Formula: (Accounting cost - Accumulated Amortization) X Decline method rate
   Note 1:
   For DB calculation residual values or salvage value are not subtracted from Cost when computing amortization.
   But calculation of amortization stops when the Net Book Value of the asset is equal to residual value
   Note 2:
   If DB rate is not provided then you have to find out the rate first using straight line only for first year thereafter you can use same rate for rest of the life.
   
   b) Sum-of-the-Years Digits (SYD)
   Formula: (Accounting cost - Residual value OR Salvage Value) /SYD Fraction
   SYD Fraction is calculated using following method
   Example 5 year life
   Year 1 = [(Acc cost -Resi or Sal) / (5+4+3+2+1)] x 5
   Year 2 = [(Acc cost -Resi or Sal) / (5+4+3+2+1)] x 4
   
4. Sinking fund (increasing charges)
   Formula: [(Accounting cost - Residual value OR Salvage Value) /(F/A, interest rate,# of periods)] + Annual Compound interest to date
   
   A method of allocating cost in which amortization expenses is lower in an asset's early years but increases over time.

What is the group amortization
The amortization of a set of similar assets on a average rate designed to be statistically valid for the groups as whole

What is the composite amortization
The amortization of a set of related but similar assets using one composite rate

Accounting policy CONVENTION APPROACH

1. Half year convention Under this approach if any assets acquired or disposed during the year against that particular assets amortization to be calculate only for half year
2. Full first-year convention Under this approach amortization is charged all the assets exist at the END OF YEAR, including those acquired during the year.
3. Final year convention Under this approach amortization is charged all the assets exist at the BEGINNING OF YEAR.

IMPAIRMENT of CAPITAL ASSETS AND GOODWILL
The loss of a portion of the asset`s utility or value; a permanent reduction in value necessitating loss recognition.

As i dont have much knowledge about impairment if anyone can help me to update on this please mail me to anda4tamil"gmail.com