Depreciation Intangible Assets

Introduction to Depreciating intangible assets

Where an intangible asset has a limited life, the approach taken for the depreciation (or amortisation as it is generally called with intangibles) is generally the same like that for property, plant and equipment (tangible non-current assets). The asset is amortised (depreciated) over its useful life and the amortisation method employed should reflect the pattern of advantages provided. Though, some variations arise due to the valuation problems surrounding these assets. Intangible assets are reported primarily at cost but can, theoretically, is re valued to fair value. Though, this rarely takes place as there is generally no active market from which to establish fair values. For identical reasons, the residual value of an intangible asset is generally assumed to be zero.

Depreciation and asset replacement

In the minds of some people there seems to be a misunderstanding that the aim of depreciation is to give the funds for the replacement of a non-current asset while it reaches the end of its useful life. Though, this is not the aim of depreciation as conventionally defined. It was described before that depreciation presents an attempt to allocate the cost or fair value (less any residual value) of a non-current asset over its supposed useful life. The resultant depreciation charge in each accounting period presents an expense that is then employed in the computation of profit for the period. 

So, calculating the depreciation charge for a period is essential for the correct measurement of financial performance. This has to be done whether or not the business intends to replace the asset in the future.

If there is a purpose to replace the asset, the depreciation charge in the income statement will not make sure that liquid funds are set aside through the business particularly for this purpose. Even though the influence of a depreciation charge is to decrease profit, and so to decrease the amount available for withdrawal through the owners, the amounts retained in the business as a result might be invested in ways which are not related to the replacement of the specific asset.

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