Treatment Of Non-current Assets in Accrual Accounting

Applying the matching principle, it is necessary to estimate how much of the initial outlay should be assumed to have been revenue expenditure, i.e. used in achieving the revenue of the accounting period. The provisions of IAS 16 on depreciation assist by defining depreciation and stating the duty of allocation, as follows:
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value. The depreciation method used should reflect the pattern in which the asset’s economic benefits are consumed by the enterprise. This sounds a rather complex requirement. It is therefore surprising, when one looks at the financial statements of a multinational company such as in the 2005 Annual Report of BP plc, to find that depreciation on tangible assets other than mineral production is simply provided on a straight-line basis of an equal amount each year, calculated so as to write off the cost by equal installments. In the UK, this treatment is recognized in FRS 15 which states that where the pattern of consumption of an asset’s economic benefits is uncertain, a straight-line method of depreciation is usually adopted.18 The reason is that, in accrual
Accounting and reporting on an accrual accounting basis •  accounting, the depreciation charged to the income statement is a measure of the amount of the economic benefits that have been consumed, rather than a measure of the fall in realisable value. In estimating the amount of service potential expired, a business is following the going concern assumption.

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