According to some literature, depreciation can be defined as the cost distribution related to an asset, through a systematic way, based on its useful life. This distribution is measured for the purpose of matching the systematic allocation with the amount of revenue that is generated from this asset (Diewert and Fox 2016). For instances, equipment, plant and machinery, building and furniture can be taken into account as those assets have depreciation costs. On the contrary, deprecation cost is not applicable for land because the value of this asset appreciated over time.
The current reporting requirement related to depreciation is based on two chief accounting principles, which are, cost principle and matching principle. These two principles can be described as follows:
Cost Principle: Through this concept of accounting principle, it can be stated that the amount of depreciation, which is disclosed in the statement of income along with the amount of asset, which is disclosed in the statement of balance sheet are required to depend of the original cost of asset (Moisescu 2018).
Matching Principle: Based on the matching principle it can be stated that the cost related to an asset can be distributed to depreciation throughout its life. Consequently, along with some costs that are disclosed in the statements of income, the asset cost can be segregated in the statements that are issued at any point of asset life (Zicke and Kiy 2017). Within the asset cost, a part associated with each year, where those assets are used, can be matched through distributing a part of the asset cost to the income statement.
Two types of depreciation method, which are chiefly used in accounting, are the reducing balance method and the straight-line depreciation method.
Reducing balance method: According to this method, from the value of asset corresponding to each year, a certain amount of percentage is written off (Javili, Steinmann and Mosler 2017). Consequently, this phenomenon helps to reduce the value, which can be stated as the difference between asset costs with depreciation up to the date.
Straight-line depreciation method: This is the simplest method, which is used widely. This method can be calculated through considering the purchase price or acquisition of an asset and consequently, the salvage value can be deducted from it (Tseng 2017). This outcome is divided with the help of economic life of any asset.
The Qantas Airways Limited, an Australia based airline company, can be described as the biggest airline regarding their global flights, fleet size and global destinations. The company provides various services to their customers among which air transportation services for passenger and freight within Australia and all over the world, can be considered chiefly. Based on their statistical data, it can be stated that number of fleets has remained at 303 in 2016 while in the next year this number has increased by 6, on 30th June, 2017 (Investor.qantas.com 2018).
On the other side, the Virgin Australia Limited has played a significant role in the aviation industry of Australia. This company has expanded their airline business within the domestic market as well as in international one. Until 30th June 2017, this specified airline company has possessed various aircrafts, which can described with the help of following table (Virginaustralia.com 2018).
Table 1: Types of aircrafts of the Virgin Australia Limited 2017
(Source: Virginaustralia.com 2018)
Based on the notes related to financial statement, from page 69 of the “Annual Report of Qantas”, it can be observed that impairment and accumulated depreciation are recorded within the property, plant and equipment section (Sinclair and Keller 2017). To obtain the net book value, it is essential to deduct the above said values of impairment and accumulated impairment form the purchase price on the acquisition date. From the page 70 of the annual report of Virgin Australia Limited, it can be observed that the company has followed similar procedure for recording impairment and accumulated depreciation (Virginaustralia.com 2018). Moreover, both airline companies have used the similar depreciation methods, that is, the straight-line method, to obtain the book values related to their respective assets.
It can be seen that various classes, related to assets, have possessed various rates of depreciation. However, in this context, it can be mentioned that in the annual report of the Virgin Australia Limited, the company has not revealed their salvage values, while Qantas, other airline company, has successfully mentioned this value in their annual report. The straight-line method has possessed a uniform and stable minimization regarding values and revenues of assets for each accounting period based on the useful life of a specific asset (Bodenstein, Erceg and Guerrieri 2017). As, both airline companies are used the straight-line method related to depreciation, the depreciation expense, which is charged throughout the accounting years of the assets’ useful life, has provided the equal value.
This can be analyzed with some instances. For this, it can be assumed that the Qantas has bought spare parts of aircraft worth $ 50,000 based on the useful life of five years. On the other hand, the Virgin has purchased some assets related to aeronautics worth $63000, based on the useful life of seven years (Virginaustralia.com 2018). In this context, it can also be assumed that assets of these two companies do not have any residual values. For Qantas, the depreciation expense has remained at $10000 for the first year. However, for Virgin, this rate has remained at $7000 for the same period ( Investor.qantas.com 2018). Thus, the depreciation expense for both situations can be debited while for the accumulated depreciation, it can be credited. Within the income statement, this depreciation expense is recorded as minimization to revenues. At the same time, accumulated depreciation can be recorded as contra account of related assets. Thus, based on the book values, the asset costs have become minimize while the net has also reduced accordingly.
For Qantas and Virgin, the useful lives regarding various classes of assets can be represented in the following table.
Table 2: Estimated lives of various asset classes for Virgin Australia Limited
(Source: Virginaustralia.com 2018)
Table 3: Estimated lives and salvage regarding various asset classes for Qantas Airways Limited
(Source: Investor.qantas.com 2018)
Base on table 2 and 3, it can be stated that two companies have possessed different useful life of an asset. The basic reasons for this different value can be described follows:
Economical factors: Economic factors can greatly influence the machinery, equipment and maintenance parts related to aircraft. It sometimes has noticed that equipment can be obsolete before reaching its technical life and this in turn can influence the residual values (Rizlan, Purba and Sudiyono 2018). However, Virgin has not possessed any residual values while Qantas has estimated these values regarding all depreciable rates and consequently, it can act as the primary reason for different useful lives related to different entities.
Physical factors: The physical factors, on the other side, have huge importance for projecting the useful life related to buildings. Buildings have possessed various casualties, for instance, fire, wear and tear along with flood and decay as well. Those factors can greatly influence a house to take retirement (Papathoma-Köhle, Gems, Sturm and Fuchs 2017). Thus, to protect this consequence, proper maintenance is required. This in turn can help the building to extend or reducing the useful life of the building or an asset, in a boarder sense. Virgin and Qantas have measured their useful life of buildings from 30 years to 40 years.
It is essential for any organization to understand that whether it can use identical amount of assets for every year throughout their useful lives. Hence, under this situation, this organization needs some judgment for using the method of straight-line depreciation (Beck et al 2018). On the contrary, both Virgin and Qantas can chose their respective reducing balance method if it assigns higher amount of expanse regarding depreciation. This is based on initial years of lives related to their assets compare to the later years.
The useful lives of aircrafts can directly be influenced by some factors. These are described below:
The impairment of assets implies that an asset related to an organization can be said as impaired while this asset has a lower market value compare to the price that is listed on the balance sheet of this organization. Thus, the impairment can be recorded if recovering of estimated future cash flows has become impossible (Souissi 2017).
The current reporting requirements of Qantas Airways Ltd and Virgin Australia Ltd:
References:
” Investor.qantas.com.”. 2018. https://investor.qantas.com/annual-report-2017/.
“Virginaustralia.com.”. 2018. https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/2017-annual-report.pdf.
Beck, Thorsten, Hans Degryse, Ralph De Haas, and Neeltje Van Horen. “When arm’s length is too far: Relationship banking over the credit cycle.” Journal of Financial Economics127, no. 1 (2018): 174-196.
Bodenstein, Martin, Christopher J. Erceg, and Luca Guerrieri. “The effects of foreign shocks when interest rates are at zero.” Canadian Journal of Economics/Revue canadienne d’économique 50, no. 3 (2017): 660-684.
Diewert, W. Erwin, and Kevin J. Fox. “Sunk costs and the measurement of commercial property depreciation.” Canadian Journal of Economics/Revue canadienne d’économique 49, no. 4 (2016): 1340-1366.
Javili, Ali, Paul Steinmann, and Jörn Mosler. “Micro-to-macro transition accounting for general imperfect interfaces.” Computer Methods in Applied Mechanics and Engineering317 (2017): 274-317.
Moisescu, Florentina. “Issues Concerning the Relationship between Accounting and Taxation in Determining Financial Result.” European Journal of Sustainable Development 7, no. 1 (2018): 287-297.
Papathoma-Köhle, Maria, Bernhard Gems, Michael Sturm, and Sven Fuchs. “Matrices, curves and indicators: a review of approaches to assess physical vulnerability to debris flows.” Earth-Science Reviews 171 (2017): 272-288.
Rizlan, Wardah, Humiras Hardi Purba, and Sudiyono Sudiyono. “Performance Maintenance Analysis Using QFD Method: A Case Study in Fabrication Company in Indonesia.” ComTech: Computer, Mathematics and Engineering Applications 9, no. 1 (2018): 25-35.
Shaari, Hasnah, Tongyu Cao, and Ray Donnelly. “Reversals of impairment charges under IAS 36: evidence from Malaysia.” International Journal of Disclosure and Governance 14, no. 3 (2017): 224-240.
Sinclair, Roger, and Kevin Lane Keller. “Brand value, accounting standards, and mergers and acquisitions:“The Moribund Effect”.” Journal of Brand Management 24, no. 2 (2017): 178-192.
Tseng, Hao Hsi. “Development of a Value Evaluation Model of Highway Box-Girder Bridge.” World Academy of Science, Engineering and Technology, International Journal of Civil, Environmental, Structural, Construction and Architectural Engineering 11, no. 11 (2017): 1516-1519.
Zicke, Julia, and Florian Kiy. “The effects of accounting standards on the financial reporting properties of private firms: evidence from the German Accounting Law Modernization Act.” Business Research 10, no. 2 (2017): 215-248.
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