What is depreciation?

• Depreciation is an allowance or provision made in the financial records of a business or association for "wear and tear" and "technical obsolescence "on plant and equipment. The idea of depreciation is to spread the cost of that capital asset over the period of its "useful life to the entity" that currently owns it. If the full cost of the asset were to be borne in the year that it was purchased, then that year's expenditure would be unfairly penalised whilst expenditure during the remaining years, which were still receiving the benefit from the asset, would not be affected.

What does it apply to and for how long?

• Depreciation relates to capital assets shown on a Balance Sheet as Non-Current Assets. These assets are purchased to be used by the association and are generally not for resale. e.g. a filing cabinet, a photocopier, a microfiche reader, a computer, office chairs, tables. Most of these would come under the heading of Office Furniture and Equipment.
• However each item of furniture and equipment may not last as long as another. It may wear out, prove inadequate or become technically obsolete.
• Therefore when considering the question of depreciation, the "useful life" to the association of each depreciable asset should be estimated and the "depreciable amount" ( i. the historical cost less the net amount expected to be recovered on the disposal of that asset at the end of its useful life based on today's values and not some time in the future) should be calculated.
• A computer may last six to ten years but it is highly probable that the maximum "useful life" for depreciation purposes might be regarded as three to five years due to the incredible advance in computer technology rendering it "out-of -date" (obsolescent) - to be relegated to some minor use, sold, part exchanged or just 'dumped' due to it being too costly to repair/maintain. As an example: if the computer cost $3000, was expected to be replaced after four years with a greater capacity machine with additional features and could be expected to sell for $400 at the end of the four years - the useful life would be four years and the depreciable amount would be "$3000 less the residual value $400=$2600"

What is included in the Depreciable/Historical cost?

• This cost may include:
  • Original purchase price, cost of construction or estimated value "at the date it is first put into use or held ready for use"
  • Cost of freight, cost of installation, other taxes, duties such as sales tax, customs duty (or goods and services tax!) if applicable.

Small or Minor Assets

• Some assets being used in an association may be relatively inexpensive and it is advisable to set maximum limits below which an item will not be capitalised and therefore written off in the year of purchase- say $300 or where the estimated effective life of the item is less than 3 years. Again this limit must be taken in the context of the association as a whole. If the total assets of the association are only $1000, then an item of $300 would be a "material" amount and should be shown as an asset on the Balance Sheet. Items such as a pencil sharpener, even if this is a very expensive one costing say $50, should be regarded as revenue expenditure - in this instance "Stationery" - part of the annual expenditure of the association. It does no harm to keep a perpetual up-dated inventory of small but useful minor assets so that these are not missed!

What method of Depreciation should be use and what is involved

• There are two main methods of calculating depreciation:
  • "Prime cost," straight line or fixed instalment method.
  • "Diminishing value or" reducing balance method.
• It is a matter of choice which of the two methods is selected. "Prime cost" gives a constant charge from year to year, whilst "Diminishing Value" decreases from year to year so that the earlier years bear a larger allocation of the asset's cost. The latter method is equal to one and-a-half times the prime cost depreciation rate. Once a method has been chosen, it should not be varied but rates should be subject to an annual review to reflect useful life, usage, obsolescence and net amount anticipated on disposal.
• In either case an agreed percentage (see below) is deducted from the value of the asset each year. The difference between the two methods is the figure upon which the calculation is made. "For example:" For most general items of plant and equipment.

How is Depreciation shown in the Accounts of a Society?

• In the Income and Expenditure Account for the year ended, the amount of Depreciation charged should be shown as a separate item and also the figure for the previous year should be included amongst the comparative figures for that year.
• In the Balance Sheet as at the end of the year, Fixed Assets are usually shown under Non-Current Assets at the Net (written down) Value and the reader is usually referred to accompanying notes which show (including comparative figures for previous year):

Fixed Assets at cost or at an independent or Committee valuation $xxxxx Less accumulated Depreciation $yyyyy Net (written down) value $zzzzz

Records

• Adequate records must, of course, be kept by the association for the life of each of the various assets for accounting and audit purposes:
  • depreciated value of each asset at the start of the financial year
  • cost and date first used or held ready for use of each additional asset acquired during the income year
  • rate and amount of depreciation written off for each asset
  • depreciated value of each asset at the end of the financial year
  • cost and sale price, dates of acquisition and disposal and the depreciation value of any asset disposed of during the income year.

Note: This information leaflet is not intended to cover the entries where an asset is retired or disposed of nor the question of revaluation of depreciable assets and calculation of depreciation of buildings; for these more complex entries, an accountant should be consulted.

• Library books tend to appreciate in value although some of these may need to be "weeded" as they become out-of-date and supply misleading information. Individual microfiche, as opposed to sets of indexes, may, for convenience, be written off in the year of purchase.

References

• "Recommendations and General Guidance Notes For Family History Societies" FFHS, 1993
• "Guide to Depreciation", Australian Taxation Office,1997, ISBN 0 644 382546
• "A Tax Guide for New Small Businesses", Australian Taxation Office, 1995, ISBN 0 644 43158
• "Model Financial Accounts - An XYZ Presentation", Centre For Professional Development, 1997, ISBN 1 86 33 9080 4
• Depreciation of Non-Current Assets, Australian Accounting Standard, AAS 4 (issued 6.96), prepared by the Public Sector Accounting Standards Board of the Australian Accounting Research Foundation and by the Australian Accounting Standards Board.

These notes are prepared for the assistance of family history and member societies of the Federation. They do not purport to provide a full account of depreciation or provide detailed accounting advice. Societies should refer to an accountant for any advice where required.