PPT for valuation of assets and calculation of Deprec 24.9

Division of Agricultural Economics ,IARI, New Delhi

Mr. Sanjay Babaji SapkalRoll No. 10565

Presentation on

1. Methods of evaluating Farm Assets, Output & Inputs 2. Methods of working out Depreciation

Division of Agril. Economics,IARI, New Delhi.


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Chapter Outline

• Valuation of Assets• Depreciation• Depreciation Method


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Chapter Objectives

1. Need for valuation of assets2. To outline the different methods that can be

used to value farm assets3. To define depreciation and related terms4. To illustrate the different methods of

computing depreciation


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Need of Valuation of Asset

• To confirm all the asset shown in balance sheet are with their book value

• Inappropriate valuation can lead to unsound business decision.

• To check the net worth of the business• To check current liquidity status of farm


farm management chapter 4 6

Points to be consider before Valuation of Asset

Original cost of assetEstimated useful life of assetWear and tear of the assetBreakup value of assetChances of asset becoming obsolete


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Methods of Valuation

• Cost minus Depreciation• Cost or Market price whichever is lower• Net selling price• Replacement cost minus depreciation• Income Capitalization

Valuation depends on Purpose of valuation Nature of assets being valuated


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1. Valuation at Cost Minus Depreciation

Valuation of asset = Value at the beginning of year - Depreciation ( For 1 st year purchase price = approx. of the value of asset)

Used for valuation of working asset e.g. Machinery and breeding livestock


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2.Valuation at Cost or Market Price (Whichever is lower)

Valuation of asset = Valued at Cost or Market price whichever is lower

Used for valuation of purchased farm supplies.


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3.Valuation at Net selling price

Valuation of asset = Value at Net Selling Price i.e. at the market price

(less the selling cost)

Used for valuation of crops or livestock produced. Reasonably accurate measure of the current value of the asset.


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4.Valuation by replacement cost minus depreciation

Valuation of asset = Valued the assets at what it would cost to

reproduce them at present prices and under present methods of production - Depreciation

Used for valuation of long-lived asset e.g. Building, machinery, equipments


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5.Valuation by Income Capitalisation method

Valuation of asset (V) = R rWhere, V= Value in Rs., R= Constant income over infinite number of years in future r = Rate of interest Used for valuation of long lived farm assets contributed in farm business

income e.g. LandLimitations: o Neither annual income nor the interest rate in future is known with accuracy.o Methods generally used in combination with other method like Market price


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Depreciation

• Defined as the annual loss in value of durable assets due to use, wear, tear, age, and obsolescence

• A business expense that reduces annual profit• A reduction in the value of an asset


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Assets that May Be Depreciated

• A useful life of more than one year• A determinable useful life but not an

unlimited life• A use in business

Examples: vehicles, machinery, equipment, building, fences, purchased breeding livestock, wells. Land is not depreciable, but some improvements to land (e.g. drains) are depreciable.


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Asset classes• 3-year: breeding hogs• 5-year: cars, pickups, breeding cattle and

sheep, dairy cattle, computers, trucks• 7-year: most farm machinery and equipment,

fences, grain bins, silos, office furniture• 10-year: single purpose ag/hort structures• 15-year: wells, paved lots, drainage tiles• 20-year: general purpose buildings


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Depreciation Terms

• Cost: The price paid for the asset• Useful life: Number of years the asset is

expected to be used in business• Salvage value: Expected market value of the

asset at the end of its useful life• Book value: The asset’s original cost less

accumulated depreciation


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Depreciation Methods

• Annual revaluation• Straight Line method• Declining Balance• Sum-of-the-Year’s Digits (SOYD)• Compound Interest Method

On the basis of assumptions Assets are used on a constant rate year after year or Assets are used at varying rates year after year


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1. Annual Revaluation

Annual Depreciation = Market Value of Asset in the beginning - Market Value of Asset at the end of Inventory year

Limitations in Use:• Estimation of annual values is not possible • Mere changes in prices • Useful in Livestock in the early years of life

(Appreciation Phase)


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2. Straight Line Method

Annual Depreciation = Purchase Price of Assets – Salvage Value

No. of years of Useful Life of the Asset

Annual Depreciation = (Cost – Salvage Value) x RWhere, R is found by dividing 100% by useful lifeAnnual depreciation will be the same for every year under this method.

Or


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Contd…

Example: Suppose a tractor costs Rs.24000 when new and expected to last 10 years. The Junk Value of Tractor after 10 years would be Rs.4000/-

Ans.: Given, Purchase Value: 24000/- Junk Value: 4000/-, Useful Life: 10 years Putting values in formula we get,

Depreciation = = Rs. 2000/ yearConstraint: Not suitable for Assets used at varying rates

24000 – 400010


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3. Diminishing Balance Method

Annual Depreciation = Fixed rate of Depreciation for every year Applied to value of asset at beginning of year• Fixed rate applied until reach to salvage value• Higher depreciation charges earlier than later years


Contd…Example: Suppose annual depreciation is calculated by this method at the rate of 20 % for a tractor costing Rs. 24000. Ans.: Given, Purchase Value: 24000/- Depreciation rate: 10 % Annual Depreciation by DBM

Value at the beginning of year (Rs)

Annual Depreciation ( at 20 % / year) (Rs)

Remaining Balance(Rs)

1 st yr 24000 24000 X 0.20 = 4800 24000 – 4800 = 19200

2 nd yr 19200 19200 X 0.20 = 3840 19200 – 3840 = 15360

3 rd yr 15360 15360 X 0.20 = 3072 15360 – 3072 = 12288

4 th yr 12288 12288 X 0.20 = 2457.60 12288 – 24257.60 = 9830.40

5 th yr 9830.40 9830.40 X 0.20 = 1966.08 9830.40 – 1966.08 = 7864.32

6 th yr 7864.32 7864.32 X 0.20 = 1572.86 7864.32 - 1572.86 = 6291.46

7 th yr 6291.46 6291.46 X 0.20 = 1258.29 6291.46 - 1258.29 = 5033.17


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4. Sum-of-the-Year’s Digits Method(Reducing Fraction Method)

Annual Depreciation = (Purchase Cost – Salvage Value) x

Where, RL = Remaining useful Life years at the beginning of accounting period SOYD = The sum of the years of life of the asset e.g. For 5 year life, SOYD = 1+2+3+4+5 = 15

RL

SOYD


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Contd…

Example: Suppose a tractor costs Rs.24000 when new and expected to last 10 years. The Junk Value of Tractor after 10 years would be Rs.4000/- Ans.: Given, Purchase Value: 24000/- Junk Value: 4000/-, Useful Life: 10 years Putting values in formula we get, 10Dep. 1st yr = (24000 – 4000) X 1+2+3+4+5+6+7+8+9+10 = Rs. 3636.66/- for 1st year

(Just change the remaining life of asset and calculate depreciation over the period of useful life of asset) Division of Agricultural Economics ,IARI, New Delhi

Impact of depreciation method on annual depreciation expense

Annual depreciation expense

Time

Straight-line

Diminishing balance


Impact of depreciation method on book value of asset

Original book value

Book value

Straight-line versus Diminishing balance

Time


Problems in computation of Depreciation

• Life of machines often longer than the normal expectations.

• Minor repair, use of oil and lubrications, etc., normally no extra depreciation charged.

• Small tools of 1 year useful life• Second hand machines• Livestock assets depreciation.


References

• Book on “Fundamentals of farm Business Management” by S.S. Johl and T.R.Kapoor

• UG notes on Farm Business Management• Book on “ Agricultural economics” by S. Subba

Reddy, P. Raghu Ram, T.V.Nilakanta Sastry and I. Bhavani Devi.

• Internet


PPT for valuation of assets and calculation of Deprec 24.9

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