This means that the asset’s depreciation expenses have all been paid for and will not be further incurred. Suppose a company acquires a new car so that its salespeople can go around selling the company’s products. This car has an initial value of $50,000 and a useful life of ten years.

• If the equipment is junked there will be a loss equal to its book value.
• Suppose a company acquires a new car so that its salespeople can go around selling the company’s products.
• It was estimated to have a useful life of 10 years and a salvage value of $1,000.
• Theoretically, this provides a more accurate estimate of the true expenses of maintaining the company’s operations each year.
• This requires a journal entry to remove everything in the accounting records relating to the asset.
• When assets are purchased, the cost is reflected in the Balance Sheet.

In other words, the asset’s accumulated depreciation is equal to the asset’s cost (or to its estimated salvage value). A fully depreciated asset is a plant asset or fixed asset where the asset’s book value is equal to its estimated salvage value. In other words, all of the depreciation that was intended (cost minus estimated salvage value) has been recorded.

Accounting for a fully depreciated asset

The financial accounts will affect whether an asset is still being used or sold. The balance sheet will continue to show the asset as fully depreciated even though it is still being used for business purposes. At the end of the 20-year depreciation period, the asset’s carrying amount in the books will be zero.

By comparing an asset’s book value (cost less accumulated depreciation) with its selling price (or net amount realized if there are selling expenses), the company may show either a gain or loss. If the sales price is greater than the asset’s book value, the company shows a gain. If the sales price is less than the asset’s book value, the company shows a loss. Of course, when the sales price equals the asset’s book value, no gain or loss occurs. The depreciable cost and accumulated depreciation relating to the asset must both be removed, or reversed. There might also be incidental costs relating to disposing of the asset.

Amendments under consideration by the IASB

It was estimated to have a useful life of 10 years and a salvage value of $1,000. The most recent balance sheet reported the machine at its cost of $100,000 minus its accumulated depreciation of $99,000. Hence, the machine’s book value is $1,000 (which is equal to the estimated salvage value). This means that there is no depreciation expense in the current year, and the balance sheet will continue to report the machine’s cost of $100,000 and its accumulated depreciation of $99,000. However, at this time, the asset’s value and total depreciation will be equal. The income statement will no longer include depreciation expense, increasing operating profit.

If the asset is still used in the company’s operations, the asset’s account and accumulated depreciation will still be reported on the company’s balance sheet. The reported asset’s value and accumulated depreciation will be equal, but no entry will be required until the asset is disposed of. On the income statement, the operating profit is likely to increase because the depreciation expense will no longer be recorded on the income statement.

Accounting for Fully Depreciated Assets

The equipment will be recorded on the balance sheet with a book value of zero, suggesting that its value has been entirely allocated during its useful life through depreciation. As a result, the equipment will have a balance-sheet book value of $0 while still representing its $100,000 initial cost and $100,000 accrued depreciation. As a result, the corporation cannot change the completely depreciated automobiles’ book values to reflect their actual market worth.

Occasionally, a company continues to use a plant asset after it has been fully depreciated. In such a case, the firm should not remove the asset’s cost and accumulated depreciation from the accounts until the asset is sold, traded, or retired from service. Of course, the company cannot record more depreciation on a fully depreciated asset because total depreciation expense taken on an asset may not exceed its cost.

History of IAS 16

It may so happen that an asset, after fully depreciated, may still be in active use. An entity should wisely observe and apply depreciation accounting policy as policies may provide general criteria for charging depreciation, but situations may differ for each company. This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.

Example of Fully Depreciated Assets

A fully depreciated asset that continues to be used is reported at its cost in the Property, Plant and Equipment section of the balance sheet. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is common size financial statement for general information purposes only, and should not be used as a substitute for consultation with professional advisors. This usually happens when an item, like inventory or stock in trade, is thought to be held mainly for sale to clients in the regular course of business.

IFRIC 12 — Service Concession Arrangements

Remove the asset’s initial purchase price and any accrued depreciation from the balance sheet, bringing the asset’s value to zero. Fully depreciated assets are no longer required to be recorded by the business. The depreciation cost is no longer recorded, resulting in cost savings.

Whenever an asset is capitalized, its cost is depreciated over several years according to a depreciation schedule. Theoretically, this provides a more accurate estimate of the true expenses of maintaining the company’s operations each year. The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them.