PPT for valuation of assets and calculation of Deprec 24.9

Division of Agricultural Economics ,IARI, New Delhi

Mr. Sanjay Babaji Sapkal
Roll 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.

3
Chapter Outline
• Valuation of Assets
• Depreciation
• Depreciation Method

4
Chapter Objectives
1. Need for valuation of assets
2. To outline the different methods that can be
used to value farm assets
3. To define depreciation and related terms
4. To illustrate the different methods of
computing depreciation

5
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 asset
Estimated useful life of asset
Wear and tear of the asset
Breakup value of asset
Chances of asset becoming obsolete

7
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

9
2.Valuation at Cost or Market Price
(Whichever is lower)
Valued at Cost or Market price whichever is lower
 Used for valuation of purchased farm supplies.

10
3.Valuation at Net selling price
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
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
r
Where, 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. Land
Limitations:
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

14
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
Purchase Price of Assets – Salvage Value
No. of years of Useful Life of the Asset
Annual Depreciation = (Cost – Salvage Value) x R
Where, R is found by dividing 100% by useful life
Annual depreciation will be the same for every year under this method.
Or

20
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/ year
Constraint: Not suitable for Assets used at varying rates
24000 – 4000
10

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3. Diminishing Balance Method
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.
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

24
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/-
Junk Value: 4000/-, Useful Life: 10 years
Putting values in formula we get,
10
Dep. 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)

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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