Specification and Valuation
Specification and Valuation
Specification and Valuation
VALUATION
WHAT IS ASSET AND NET BOOK
VALUE?!
FIXED ASSETS
Net book value (NBV) refers to a company’s assets or how the assets are
recorded by the accountant. NBV is calculated using the asset’s original cost –
how much it cost to acquire the asset – with the depreciation, depletion, or
amortization of the asset being subtracted from the asset’s original cost.
1) This is the physical loss in the 1) The loss in the value of the
value of the property due to property is due to change of
wear & tear, decay ect. design, fashion, in structure of
2) Depreciation depends on its the other, change of utility,
original condition, quality of demand.
maintenance and mode of use. 2) obsolescence depends on
3) this is variable according to normal progress in the arts,
the age of the property. More the inadequacy to present or
age, more will be the amount for growing needs etc.
the depreciation. 3) this is not dependent on age
4) there are different methods by of the building. A new building
witch the amount of depreciation may suffer in its usual rent due to
can be calculated. obsolescence.
4) At present there is no
method of calculation of
obsolescence.
METHODS OF CALCULATING
DEPRECIATION
Disadvantages
Depreciation is not related to the usage factor
It ignores the fact that in the later years of the life of
the asset, efficiency of the asset declines.
Loss of interest on investment in the asset is not
accounted for
REDUCING BALANCE METHOD
r = 1 – (S/C)1/n
Where:
• r = Rate of depreciation
• n = Estimated useful life of asset
• S = Residual value after the expiry of useful life
• C = Original cost of asset
An asset’s useful life is determined to be three years
Cost of the asset is £2,000.
Residual Value is £500.
Rate of depreciation is 50%.
How will you calculate the Depreciation expense for these three years?
RATE OF DEPRECIATION:
r = 1 – (64,000/1,000,000)1/3
= 1 – 40/100
= 60/100
= 60%
• Advantage
- Overall expenses ( including repairs and
maintenance) charged for the use of a fixed
asset would be fairly constant.
• Disadvantages
- Difficult to calculate.
- Assets are always left with a small value at
the end of useful life.
DIFFERENCES BETWEEN STRAIGHT LINE METHOD
As the asset ages, the cost of its repair goes As the asset ages, the cost of its repair goes
up. But as mentioned in point number one, the up, but so does the depreciation amount.
depreciation amount remains unchanged. This These two balance each other and hence there
diminishes annual profit. is little or no effect on annual profit/loss