STEP10 Depreciation

According to the note of financial statement, the depreciation method for property, plant and equipment is historical cost less any accumulated depreciation and impairment losses. Depreciation on the same basis as other property assets for production, supply or administrative purposes or for an undetermined use is carried at cost less any recognised impairment losses. Depreciation is recognised so as to write off the cost or valuation of assets (other than freehold land and properties under construction) less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. Freehold land is not depreciated. The method of depreciation of a credit asset is to use the straight-line method to reduce the residual value during its useful life. The estimated useful lives, residual values and depreciation methods are reviewed at the end of each reporting period, and the estimated This concept can be understood as calculating the remaining time of the asset when calculating the remaining value of the asset, and combining the value of the depreciation with the remaining usage time. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.

The method of depreciation of assets and non-assets of enterprises is the straight-line method. All non-financial assets of the entity (except land) have limited useful lives and are depreciated/amortised using the straight-line method over their estimated useful lives to their estimated residual values. Assets are depreciated or amortised from the time an asset is ready for use. Depreciation and amortisation rates and methods and residual values are reviewed annually for appropriateness. When changes are made adjustments are reflected in current and future periods only. Depreciation and amortisation are expensed, except to the extent they are included in the carrying amount of another asset as an allocation of production overheads.

Depreciation/amortisation rates used for each class of asset are as follows:

	2018	2017	2016
Buildings	2.5%	2.5%	2.5%
Leasehold property and improvements	2%-25%	2%-25%	2%-25%
Plant and equipment	2.5% – 50%	2.5% – 50%	2.5% – 50%

	2018	2017	2016
Depreciation and amortisation	$6,336,000	$7,256,000	$9,305,000

As can be seen from Fleetwood’s balance sheet, from 2016 to 2018, the company’s depreciation and amortisation expenditures were $6336,000, $7256,000 and $9305,000, respectively. Fleetwood’s depreciation and amortisation expenses have decreased year by year. In Fleetwood’s note of financial statement, depreciation and amortisation are divided into four journal entries: building, leasehold improvement, plant and equipment, product development. Except that the expenditures of the four projects are different each year, the project itself has not been modified or replaced. At the same time, Fleetwood uses the straight-line depreciation method, which means that the annual depreciation rate is the same, so this is information related to each year. Specifically, in the depreciation of buildings, the expenditures for 2016 to 2018 are all $34,000, which means that the buildings owned by Fleetwood are depreciated every year according to normal wear and tear. Among the depreciation expenses of leasehold improvement, expenditures from 2016 to 2018 were $747,000, $748,000 and $1921,000, respectively. The value from 2016 to 2017 has not changed much, it is a normal depreciation expense. However, from 2017 to 2018, the sudden increase in depreciation expenses may mean that the loss of leasehold improvement in this year is relatively large, affecting its useful life and residual value. In the depreciation of plant and equipment, the three-year expenditure was $5504,000, $5761,000 and $6602,000. The trend of this project is an upward trend. As the sales volume of products continues to rise, Fleetwood needs to increase the number of plants and equipment. When the number of products produced increases, the loss of equipment will also increase. This is the a reason that increase in depreciation of plant and equipment. The last item is the depreciation expense of product development. The three-year data are respectively $748,000, $713,000 and $51,000. The gap between 2016 and 2017 is relatively large. I understand the depreciation of product development. When a new product is developed, the old product is eliminated and depreciated. From 2016 to 2017, the most likely reason for the increase in depreciation of product development is the large number of new products listed, resulting in the old products cannot be sold, only depreciation.

According to what I said above, Fleetwood’s depreciation method is the straight-line method. In my survey of 2016 to 2018, there was no change in the depreciation method. Because the depreciation rate of each project has not changed from 2016 to 2018. Please see the form for details. If the depreciation method is changed, it will directly affect the profit of the company.

Depreciation is a major expense for the company. From Fleetwood’s financial statement appendix, you can see that the cost of a building on a building is $1342,000, and the accumulated depreciation expense is $408,000, which is close to one-third of the cost. The cost of engineering and equipment is $8,4501,000, and the accumulated depreciation is $4,6522,000, which is one-half of the cost.

Depreciation journal of buildings
Cost	$1,342,000
Accumulated depreciation	($408,000)
	$934,000

Depreciation journal of plant and equipment
Cost	$85,451,000
Accumulated depreciation	($46,522,000)
	$38,929,000

Depreciation journal of leasehold property and improvements
Cost	$50,391,000
Accumulated depreciation	($40,623,000)
	$9,768,000

According to what I said above, Fleetwood subdivided depreciation and amortisation into three journal entries: building, leasehold improvement, plant and equipment. Because these three journal entries are separate accounts for depreciation and amortisation, their most direct impact on the company’s financial statement is the affect balance statement. When the depreciation amount recorded in the journal entries rises, the company’s expenses will also increase, and when the depreciation amount decreases, the company’s expenses will decrease. The purpose of setting up these journal entries is to let consumers and shareholders see Fleetwood’s depreciation details more directly. Depreciation items are affected by a variety of factors, such as the original price of depreciable assets, the useful life of the assets, the expected production capacity of the assets or the physical output, the expected tangible losses and intangible damage of the assets and the depreciation rate of each country.

Goodwill:

Goodwill is an intangible asset associated with the purchase of one company by another. Specifically, goodwill is recorded in a situation in which the purchase price is higher than the sum of the fair value of all identifiable tangible and intangible assets purchased in the acquisition and the liabilities assumed in the process. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent some examples of goodwill.

According to my search, Goodwill=P−(A+L)

Where:

P=Purchase price of the target company

A=Fair market value of assets

L=Fair market value of liabilities

The goodwill reduction illustrates two cases, the Purchase price of the target company decreases or the fair market value of assets + Fair market value of liabilities increases. In either case, the reduction of goodwill is a bad situation for the company. Goodwill, as an intangible asset, will also rise when the company’s operating conditions are good. Because the company’s total assets are at a loss in 2018, goodwill is also falling.