Straight Line Method Is Allocated Equally Over The Lease Term Accounting Essay


Ans(D):- In the first case IAS 17 is used.It is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures to apply in relation to Finance and operating leases. The Straight-line depreciation is a method of accounting where the number of years the item is going to be used and the re-sale value of the item are determined. Using these predetermined amounts, straight-line depreciation uses the following formula: (price of the item - re-sale value of the item)/number of years the item is used. There are some drawbacks to using this method of depreciation, but there are also benefits.

Consistency and Control

The straight-line depreciation formula does not have any variables that are outside of your company's control.MACRS (modified accelerated cost recovery system), the IRS has a say in the recovery period of your company's specific property.

Under IRS guidelines, cars are assigned a five-year recovery period, and office furniture is assigned a seven-year recovery period. Unlike the standard mileage rate for an automobile, which changes each year, straight-line depreciation is one of the few methods of depreciation your company can use where all of the factors in the formula are consistent and in your control.


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Straight-line depreciation is a relatively easy formula to understand, and it is also easy to account for in your books. The depreciation value is the same each year; you do not have to figure a new rate as you do when the IRS publishes changes to the stay. The only time you may have to alter your numbers is if you exceed the IRS maximum allowable depreciation for a given year.

Salvage (Re-sale) Value

Straight-line depreciation predetermines re-sale value. After an asset is used for five years, it is usually still worth something. Straight-line depreciation accounts for that and provides a more accurate depiction of the asset's true worth. This is especially true for cars, which usually have a salvage value. If the asset does not have a salvage value, a 0 can be entered in the formula in place of the re-sale value, and the straight-line method can still be used.

The disadvantages of Straight Line Depreciation are:-

When additions are made to asset calculation are required for each asset having a different here it assumes the asset will estimated life time.

It does not take into account the cost by way of interest on the money invested.

Actual depreciation wear and tear of the machine downtime in the later years is likely to be more than the earlier years which is not recognized by this method.

Sum of Digits method is an accelerated depreciation method,where it assumes the asset will lose the majority of its value in the first few years of its useful life.It is based on purchase price,salvage value and years of usefulness. To calculate depreciation with this method, find the depreciation fraction, which is the asset's total years of life still left divided by the sum of all the years. For example, if the asset's life is 5 years, divide the years still left by the following sum: 1+2+3+4+5. The general formula for the sum of the year is 1+2+3+4+...+n, where n is the asset's total life. Once you have the value of the fraction for each year, multiply it by the difference between the cost of the asset and its salvage value. The result you get each year is the depreciation for that year.

Disadvantages of using Sum of Year Digits Method:

Sum-of-years’ digits depreciation method is rarely used in practice. Its use is predominantly in the financial and regulated industries. It is most commonly applied to intangible assets, specifically to customer relationships .

Write off in assets are more because the depreciation value reduces nearly the double every year due to which the assets are written off at an early stage.

Advantages of using Sum Of Year Digit Method:-

Sum-of-years’ digits is an acceptable depreciation method a in financial reporting under U.S. generally accepted accounting principles (GAAP).

It shows reports both across companies and within given companies. It means its useful for holding companies and subsidiaries. It show that the primary application is to specific intangible asset categories in the financial and regulated industries.

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It is most easily applied if the company has a policy of allocating depreciation on assets acquired during the period on a whole-year basis.

The Acturial method allocates interest to each period.It maintains the constant rate on the outstanding amount.It uses the interest rate implicit in the lease.It is done in financial lease.

Advantages of actuarial method :-

The cost approach calculates total final benefits based on several assumptions, including the rate of wage increases and when employees will retire.

The amount of funding that will be needed to meet those future benefits is then determined. The benefit approach finds the present value of future benefits by discounting them.

In Physical completion the construction and project finance, are the method for calculating profits and losses in which revenue is recognized as it is received, provided that it is prorated according to the percentage of the project that is complete. This differs from the completed-contract method, which only recognizes revenues after the physical completion of the contract.

Surveyor method is where the completion of the work and the certification of the work is done by the surveyor.In this the percentage of certification is done.The location of the contract is also certified.

It is beneficial as the amount of contract revenue is determined from surveyors method.

The stage of completion is also determined through this.

The method is used to determine the contract revenue recognised in the period.

They can also advise clients on the best way to profit from a finished project, any future costs from maintenance that may occur, and help clients begin new construction projects

The disadvantages of the contractor can determine the revenue or loss in the contract beforehand.

Cost-plus contracts is a problematic method of cost-plus pricing in contract terms. This may mean either a percentage mark-up or a fixed addition to costs. The key problem with this is an agency one.

The contractor either (with a amount of markup) has no incentive to reduce costs, or (with a percentage mark-up) an incentive to increase prices.

Some contracts attempt to address this through incentive payments for efficiency or good performance, but this is tricky to get right. This is why the use of cost-plus contracts by governments is often controversial other than beneficial.

In the third one IAS 10 is followed as the main goal of this is to adjust its financial statements for the events after the balance cheet and that an entity should give about the date when the financial statements were authorized for issue and about events after the balance sheet .Some events are favourable and the other are infavourable.

Adjust financial statements for adjusting events: events after the balance sheet date that provide further evidence of conditions that existed at the balance sheet, including events that indicate that the going concern assumption in relation to the whole or part of the enterprise is not appropriate. They dont adjust for non adjusting events or events where the conditions arose after the balance sheet date.

If an entity declares dividends after the balance sheet is made, the entity shall not recognise those dividends as a liability to the balance sheet date.

IAS 37 is to ensure that steps and criteria measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount. The principle is to establish the Standard that a provision should be recognised only when there is a liability which is present in the obligation resulting from past events. The Standard thus ensures that only correct cases are dealt with in the financial .In this the chances of the incidence should be taken into consideration.There should not be any kind of purposefuuly making up a scene. An entity must consider the provision if

The present obligation (legal or constructive) has arisen as a result of a past event

payment is probable (

the amount can be estimated reliably.

An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity having no realistic alternative but to settle the obligation.

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A constructive obligation arises if past practice creates a valid expectation on the part of a third party, for example, a retail store that has a long-standing policy of allowing customers to return merchandise within, say, a 30-day period.

A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not required if payment is remote.

In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In those cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the balance sheet date. A provision should be recognised for that present obligation if the other recognition criteria described above are met. If it is more likely than not that no present obligation exists, the entity should disclose a contingent liability, unless the possibility of an outflow of resources is remote.

The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date, that is, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party.This means:

Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are measured at the most likely amount.

Provisions for large populations of events (warranties, customer refunds) are measured at a probability-weighted expected value.

Both measurements are at discounted present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the liability.

In reaching its best estimate, the entity should take into account the risks and uncertainties that surround the underlying events.

If some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be recognised as a separate asset, and not as a reduction of the required provision, when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The amount recognised should not exceed the amount of the provision.

In measuring a provision consider future events as follows:

forecast reasonable changes in applying existing technology

ignore possible gains on sale of assets

consider changes in legislation only if virtually certain to be enacted