Capital Assets The basic capital asset standards reside in Statement No. 34, Bas

Question

Capital Assets

The basic capital asset standards reside in Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, paragraphs 18–29, as amended (though capital assets are addressed in multiple other pronouncements as well). In general, governments are required to report capital assets at the historical cost and to depreciate that historical cost in a systematic and rational manner over the estimated useful lives of the assets. Capital assets are reported at their historical cost net of accumulated depreciation in financial statements using the economic resources measurement focus and the accrual basis of accounting. The primary exceptions to the depreciation requirement are land (which is considered inexhaustible), construction in progress, and infrastructure assets reported using the modified approach. The modified approach is an optional reporting method available to governments that meet certain criteria demonstrating that the qualifying infrastructure assets are being maintained over time at a consistent physical condition level determined in advance by the government. Instead of depreciation, governments employing the modified approach report annual expenses for the cost of maintaining and preserving the assets at the predetermined condition level. Those governments are required to present required supplementary information related to physical condition of and maintenance/preservation spending on the infrastructure.

QuestionHow does the reduction in net book value over time and the estimated useful lives of capital assets compare with the actual diminution of service capacity and their actual useful lives, respectively?

Explanation / Answer

Capital Assets

Capital Assets are those assets used by the company to make profit more than one revenue-generating cycle. These assets are fixed in nature and used in company's production process more than on year. Machinery and equipment, furniture building etc are examples of Capital assets or non-current assets of the company.

Depreciation. '

The term Depreciation Is having Two meaning. one is meaning as per technical aspect and Second is as per Financial Aspect.

Technical Aspect of Depreciation.

Technically depreciation is the gradual depletion in the value of an asset due to wear and tare obsolescence etc. so how much value of an asset loosed in a particular financial year by using it in the process is a loss for you and it has to treated as an expense for that year and recognized in income statement over the useful life of the asset.

Financial Aspect of Depreciation.

For purchasing an asset the company is making a huge cash outflow at the time of purchase of the asset. But the company can’t treat it as its expenses for that particular year because they are not making such cash outflow for that year only, that’s why we treat that outflow in form of fixed asset in company balance sheet. but when time goes they will use that asset to produce the product and thereby earn revenue. Up to what amount company used the asset to make revenue for a particular year that is a loss of value for your asset and company should treat it as their expense for that year and recognize that as an expense in your income statement to find out your actual profit.and thereby charge total value of asset against revenue over the useful asset of the capital asset.

Opinion on replacement of depreciation by a new Method.

it is possible to preserve the asset to a predetermined condition level by making certain maintenance cost but actually, the cost that arises due to the intial purchase of asset still have to be matched with the revenue as per matching principle so depreciation must be charged as per technical aspect and financial aspects. the actual service capacity may be replaced by making such maintenance costs but there will be a reduction in the net book value of the asset over its useful life as per the matching principle.

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