jingmorenhai
Feb 23, 2012, 01:46 AM
Hi, can anyone help to answer my question regarding fair value model and depreciation? When asset's useful life extended and meanwhile changed to fair value model from cost model, the total depreciation cost for the whole period might be more than the asset value.
An example is a building's purchase value is $10M, being depreciated under useful life of 10 yrs and with 0 residual value. So accumulated depreciation by end of yr 6 is US$6M. At beginning of yr 7, building's useful life being extended from 10 yrs to 20 yrs, and buidling being revalued at fair value at $15M, so the annual depreciation since yr 7 is $15/14yrs=$1.07, then the total depreciation cost for the 20 yrs would be $6m $1.07 *14yr=$21M, which is more than the purchase price/fair value.
How to understand this situation? Is it against matching principle?
Thank you!
An example is a building's purchase value is $10M, being depreciated under useful life of 10 yrs and with 0 residual value. So accumulated depreciation by end of yr 6 is US$6M. At beginning of yr 7, building's useful life being extended from 10 yrs to 20 yrs, and buidling being revalued at fair value at $15M, so the annual depreciation since yr 7 is $15/14yrs=$1.07, then the total depreciation cost for the 20 yrs would be $6m $1.07 *14yr=$21M, which is more than the purchase price/fair value.
How to understand this situation? Is it against matching principle?
Thank you!