Initial Measurement

A non-current asset is initially measured at cost. Cost includes:

• Purchase price paid
• Costs directly attributable to bringing the asset to its location and condition for intended use (transport, installation, legal fees)
• Initial estimate of costs for dismantling and removing the item and restoring the site

Costs NOT included in asset cost:

• Administration and general overhead costs
• Costs of launching new products or services
• Expenses of opening new business facilities
• Costs of relocating
• Initial losses before the asset reaches intended use
• Errors in bringing asset to required location

Subsequent Measurement Models

After initial recognition, an entity must choose ONE measurement model for an entire class of PPE:

Cost Model The asset is carried at cost less accumulated depreciation and any accumulated impairment losses. This is the simpler method.

Revaluation Model The asset is carried at revalued amount (fair value at date of revaluation less subsequent accumulated depreciation and impairment). Revaluation requires reliable fair value measurement, typically from professional valuers.

When an asset is revalued upward, the increase is recognised in other comprehensive income and accumulated in equity as revaluation surplus. When revalued downward, the decrease is recognised in profit or loss to the extent of any credit balance in revaluation surplus.

Depreciation is the systematic allocation of the depreciable amount of a tangible non-current asset over its useful life. It is a non-cash expense that reflects the reduction in an asset's value due to wear and tear, obsolescence, or deterioration.

Depreciation Concepts

• Depreciable Amount: Cost of asset (or revalued amount) less residual value
• Residual Value: Estimated amount obtainable from disposal of the asset at the end of its useful life, less disposal costs
• Useful Life: Period over which an asset is expected to be available for use, or number of production units expected from it
• Carrying Amount: Original cost less accumulated depreciation and impairment

Objectives of Charging Depreciation

1. To accurately depict the gradual decrease in an asset's value
2. To match the asset's cost with the revenue it helps generate (matching principle)
3. To comply with accounting and tax regulations
4. To present a realistic financial position of the business

Causes of Depreciation

• Physical Deterioration: Wear and tear, rust, decay, erosion
• Economic Factors: Obsolescence (outdated technology) and inadequacy (insufficient capacity)
• Time Passage: Legal or contractual limits on usage
• Depletion: Extraction of natural resources

When Depreciation is Charged

Depreciation begins when the asset is available for use and continues as long as the asset is in use—even if idle—unless fully depreciated. Depreciation continues even when fair value exceeds carrying amount, provided residual value does not exceed carrying value.

Straight-Line Method

Provides constant depreciation expense each year. Suitable for assets with consistent efficiency over their useful life.

$\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$

Example: TANAPA Company Ltd bought machinery for TZS 260,000,000 plus transportation and installation of TZS 20,000,000. Useful life is 6 years with residual value of TZS 10,000,000.

• Total cost = TZS 280,000,000
• Depreciable amount = TZS 280,000,000 − TZS 10,000,000 = TZS 270,000,000
• Annual depreciation = TZS 270,000,000 ÷ 6 = TZS 45,000,000 per year

Carrying values: Year 1: TZS 235M, Year 2: TZS 190M, Year 3: TZS 145M, Year 4: TZS 100M, Year 5: TZS 55M, Year 6: TZS 10M (equals residual value).

Reducing Balance Method (Diminishing Balance)

Charges higher depreciation in early years, decreasing over time. Suitable for assets more efficient in early years.

$\text{Depreciation} = (\text{Cost} - \text{Accumulated Depreciation}) \times \text{Rate}$

Example: Sunflower Ltd purchased machinery for TZS 100,000,000, useful life 4 years, residual value TZS 12,960,000, depreciation rate 40%.

Units of Production Method

Depreciation based on actual usage or output rather than time. Suitable when benefits are related to production volume.

$\text{Depreciation Rate per Unit} = \frac{\text{Cost} - \text{Residual Value}}{\text{Total Estimated Units}}$

Example: Chapakazi Ltd bought a machine for TZS 100,000,000, residual value TZS 20,000,000, estimated output 800,000 units over 5 years.

• Depreciation rate = TZS 80,000,000 ÷ 800,000 = TZS 100 per unit
• If Year 1 production = 150,000 units, depreciation = 150,000 × TZS 100 = TZS 15,000,000

Sum of Years' Digits Method

Accelerated method charging higher depreciation in early years. Suitable when assets lose value quickly initially.

$\text{Depreciation} = \frac{\text{Remaining Life}}{\text{Sum of Years Digits}} \times \text{Depreciable Amount}$

For 5-year life: Sum = 1+2+3+4+5 = 15 (or n(n+1)/2 = 15)

Example: Kibaba Ltd purchased asset for TZS 30,000,000, useful life 5 years, no residual value.

Depreciation is recorded using two main accounts:

1. Depreciation Expense Account (debited) – shown in Statement of Profit or Loss
2. Accumulated Depreciation Account (credited) – shown on Statement of Financial Position as a deduction from asset cost

Journal Entry for Annual Depreciation:

Key Points:

• Depreciation continues even when asset is idle (unless fully depreciated)
• Residual value and useful life should be reviewed annually
• Change in depreciation method is a change in accounting estimate requiring disclosure

Disposal (derecognition) occurs when a non-current asset is removed from the books. This can happen through:

• Sale for cash
• Part exchange for another asset
• Discarding (scrapping)
• Theft or loss

Accounting for Disposal

When disposing of PPE, the following steps are required:

1. Remove the asset cost from the books (credit PPE account, debit Asset Disposal account)
2. Remove accumulated depreciation (debit Accumulated Depreciation, credit Asset Disposal account)
3. Record proceeds received (debit Cash, credit Asset Disposal account)
4. Balance the disposal account to determine profit or loss:
   • Debit side higher = Loss on disposal (transfer to P&L)
   • Credit side higher = Gain on disposal (transfer to P&L)

Example: Disposal at End of Useful Life

Wananchi Company sold a motor vehicle for TZS 3,000,000. Original cost TZS 15,000,000, accumulated depreciation TZS 12,500,000.

• Carrying value = TZS 15,000,000 − TZS 12,500,000 = TZS 2,500,000
• Proceeds = TZS 3,000,000
• Gain on disposal = TZS 3,000,000 − TZS 2,500,000 = TZS 500,000

Disposal Before End of Useful Life

When disposing before full depreciation, ensure depreciation is provided up to the date of disposal first.

Example: Jitegemee Company sold a machine on 1st April 2022 for TZS 5,500,000. Bought 4th July 2019 for TZS 15,000,000, 5-year life, no residual value. Straight-line depreciation.

Depreciation charged: 2019 (half year): TZS 1,500,000; 2020: TZS 3,000,000; 2021: TZS 3,000,000; 2022 (3 months): TZS 750,000. Total accumulated: TZS 8,250,000.

Carrying value at disposal: TZS 15,000,000 − TZS 8,250,000 = TZS 6,750,000 Proceeds: TZS 5,500,000 Loss on disposal: TZS 1,250,000

A small business owner in Dar es Salaam running a transport company with two minibuses would apply these concepts when preparing annual financial statements. Each year, they would calculate and record depreciation on the vehicles using a method appropriate to their usage pattern—for example, straight-line if the vehicles are used consistently, or reducing balance if they anticipate higher efficiency in early years. When eventually selling or trading in a minibus, they would use the disposal accounting procedures to determine whether they made a gain or loss, which affects their actual profit from the business. This knowledge helps business owners in Tanzania make informed decisions about asset replacement and understand the true profitability of their operations.