The Valuation of Assets Difficulties in valuing assets Fixed Assets: These fall in value as they wear-out. The speed they do this with is often unpredictable, and made even more difficult by ‘Land & buildings’ which can rise in value. Current Assets: In general, easier to value. Some can still be problematic (e.g. stocks nearing sell-by-date, or a debtor having difficulty paying). Depreciation Fixed assets depreciate over time, hence it is sensible to spread their cost on the profit and loss account over the period of their ‘useful’ life, thus ‘WRITING DOWN’ the NET BOOK VALUE (N.B.V.) of the asset through time. In the accounts: a)Profit and loss account:- any depreciation is charged as an expense, and is charged over the assets lifetime to avoid excessive cost in any 1 year (therefore meeting the requirements of the accruals [matching] convention). b)Balance sheet:- It’s shown as a reduction in an asset’s value. If it generates profit after its ‘normal’ life-span it will be a bonus for the company. This ensures a true and fair valuation in the accounts.

Why do assets depreciate? USE:wear & tear and/or poor maintenance TIME OBSOLESCENCE: out of date / technological changes. The straight-line method of calculating depreciation To calculate this we require: a) original value/cost of the fixed asset. b) expected ‘useful’ life. c) expected residual/scrap value. The total cost to be written-off is divided by the expected useful life of the asset, and this amount is put down each year as the depreciation. Thus, the N.P.V falls in equal amounts annually. Annual depreciation=Purchase Cost – Residual Value Expected Useful Life

Question A piece of equipment cost £50,000. Its expected life is 4 years, after which it will be sold for £6,480. a) Calculate the annual provision for depreciation. b) Fill in the table: c) Illustrate the above table graphically. YrInitial book valueAnnual depreciationNPV (initial value – depreciation)