3. Wear and tear of fixed assets
Wear and tear is the gradual loss of the consuming cost of fixed funds . It is necessary to distinguish moral and physical wear and tear.
Physical wear and tear is the loss of the consuming cost of fixed funds as a result of the deterioration of details, the influence of natural factors and aggressive environments.
A number of indicators is used to characterize physical wear and tear.
The coefficient of physical wear and tear is calculated according to the formula:
K wt = (WT/ Cac) * 100 ,
where WT - the sum of wear and tear charged for the whole period of operation; Cac - acquisition cost of fixed funds.
The coefficient of physical wear and tear for objects the service term of which is less than it is fixed by the norm is calculated according to the formula:
K wt = ( Tact / Tnorm ) * 100 ,
where Tact - actual service life of the given object; Tnorm - normative service life of the given object.
For objects the service life of which has exceeded the normative, the coefficient of physical wear and tear is found according to the formula:
K wt = ( Tact / Tnorm + T res.ser. ) * 100 ,
where Tact - actual service life of the given object; Tnorm - normative service life of the given object; T res.ser - possible residual service life of the given object above actually achieved.
The obsolescence is the loss of cost because of decreasing the cost of reproduction of analogous objects of fixed funds which is caused by the perfection of technology and organization of production. There are two kinds of the obsolescence:
the obsolescence of the first kind means decreasing fixed funds cost because analogous fixed funds are made with smaller expenses and become cheaper;
the obsolescence of the second kind means that as a result of scientific and technical progress there appears more modern and more productive equipment.
The relative value of the obsolescence of the first kind can be calculated according to the formula:
K obs. = [(Cac – Cad.his.) / Cac] * 100 ,
where Cac - acquisition cost of means of labor; Cad.his - adjusted historical cost of means of labor.
The obsolescence of the second kind can be established when adjusted historical cost is defined according to the formula:
C outd. = (C mod. * P outd. ) / P mod. ,
where C outd., C mod. - adjusted historical cost of the outdated and modern machine;
P outd. , P mod. - productivity of the outdated and modern machine.
The essence of the obsolescence consists in the fact that means of labor lose their cost before the end of the term of their physical service.
The obsolescence is favorable to the society as a whole because it leads to the reduction of production costs, but not favorable to those people who invest their capital into fixed funds with the purpose of receiving profit from renting them.
4. Depreciation of fixed funds
The depreciation of fixed funds reflected in book keeping is accumulated during the whole term of their service in the form of depreciation charges on accounts for accounting the depreciation.
Depreciation is a systematic process of transferring the cost of means of labor in the process of their wear and tear onto a product which is made with their help. Depreciation is monetary expression of the physical wear and tear and obsolescence of fixed funds. The sum of the depreciation charged during fixed funds functioning should be equal to their acquisition (adjusted historical) cost.
Objects for charging depreciation are the objects of fixed funds which exist in the organization according to the property right, economic and operative management.
Depreciation is not charged from the following kinds of fixed funds:
- from objects of fixed funds received according to the contract of donation and free of charge in the process of privatization;
- from available housing (except for objects used for receiving profit);
- from objects of fixed funds consuming properties of which eventually do not change (soil areas and objects of wildlife management).
The depreciation policy is a component of economic policy of any state. Establishing the norm of depreciation or the term of paying usage, the order of charging and using depreciation charges, the state adjusts rates and character of the reproduction in industrial branches.
The term of paying usage is the average service life of objects of the given kind.
The norm of depreciation is the annual percent of the compensation of fixed funds cost established by the state.
The norm of depreciation for complete restoration is calculated according to the expression:
Nrest. =(Cac – L + D) / (Cac * Tpu ) ,
where Nrest - annual norm of depreciation for complete restoration; Cac - acquisition cost of fixed funds; L - liquidating cost of the fixed industrial funds; D – the cost of dismantling fixed funds which are being liquidated and other expenses connected to the liquidation; Tpu - term of paying usage.
Norms of depreciation charges are differentiated into groups and kinds of fixed funds. They depend also on conditions under which fixed funds are maintained.
Thus, for buildings they vary from 0.4 up to 11 %, for power and working machines and the equipment approximately from 3 up to 50 %, for heat-exchange devices in manufacturing plastics with the non-aggressive environment – 6.7 %, for the same devices used in manufacturing plastics with aggressive environment - 10 %.
The norm of depreciation is connected to the term of paying usage of an object of fixed funds. It is possible to consider that the term of paying usage is the inverse value to the norm of depreciation.
Charging depreciation from the cost of commissioned fixed funds begins from the first date of the month which follows the month of their commissioning. Charging depreciation from the cost of withdrawn fixed funds stops from the first date of the month which follows the month of their withdrawal.