What is Depreciable Value?

Depreciable value is the cost of acquiring an asset plus installation but excludes its scrape value. It is the value that needs to depreciate to expense over asset’s useful life. At the end of a fixed asset’s useful life, the depreciable value will be zero.

When company purchases the fixed asset, they will be recorded on the balance sheet in proper section. This asset will be depreciated over its lifetime as it is used. Depreciation simply means reclass the balance from asset to expense in the income statement. Depreciation expense will depend on depreciable value and useful life. For example, we purchase machinery cost 10,000 and expect to last 5 years. After 5 years, this machine will have zero value. So the depreciation expense will be $ 2,000 per year (10,000/5 years). At the end of 5th year, this asset value on balance sheet will decrease to zero.

Some assets still carry some value at the end of their useful life, it is called salvage value or scrap value. The company can receive some cashback by selling this asset after usage, so this amount should exclude from the depreciable value. Moreover, some assets require the company to pay additional installation costs to make them ready for use. This cost must include the depreciable value and depreciate over its lifetime.

Depreciable Value Formula

Depreciable Value = Purchase Price + Other Costs – Salvage Value

Purchase Price: is the amount bill by the supplier exclude VAT if any. VAT input is refundable, so it is not the cost for the company.

Other Cost: is the cost spend beside purchase price and it is necessary to bring the asset to be ready for use, they include:

  • Inbound freight and handling cost
  • Installment and assembly cost
  • Site preparation
  • Testing and demo
  • Professional fee
  • Import & Duty
  • And other nonrefundable tax

Salvage Value: is the estimated asset book value after depreciation is completed. It is the amount company expects to receive in exchange for selling at the end of the asset’s life. If the amount is very small, company may not consider and depreciate the full amount.

Depreciable Value Example

Company ABC purchases a Wedging machine that cost $ 100,000 from an overseas supplier, this amount includes a refundable VAT of $ 10,000. Besides the purchase price, ABC has to pay the following:

  • Import Duty $ 10,000 (not refundable).
  • Installation cost $ 5,000.
  • Technical team to install & test $ 15,000.

The technical team estimates that the machine will be able to work for 5 years, and the salvage would be $ 12,000.

Please calculate the depreciable value.

Depreciable Cost = 100,000 – 10,000 + 10,000 + 5,000 + 15,000 – 12,000 = $ 108,000

Depreciation Expense per Year = 108,000/5 = $ 21,600 per years

VAT is excluded because the company can claim back from the tax authority or net off with VAT output, so it is not the cost.  Import duty, installation, and the technical fee include because they are necessary to bring assets to be ready for use. Without such kind of cost, we will not get the asset to use.

Depreciable Value vs Book Value

Asset’s book value is the asset value base on initial recognition less accumulated depreciation, also known as carrying value or net book value. It is the net value which presents on balance sheet, we simply net off between cost and the accumulated depreciation.

Book Value Formula

Book Value = Initial Cost – Accumulated Depreciation

For example, on Jan 202X, company purchase an asset costs $ 50,000 and expects to use it for 5 years and the salvage value is $ 5,000.

Depreciable value = 50,000-5,000 = $ 45,000

Depreciation Expense = 45,000/5 = $9,000 per years

At the end of the second year, company has depreciated this asset for 2 years, so the accumulated depreciation equal to 18,000 ($ 9,000 x 2 years).

Asset Book value = 50,000 – 18,000 = $ 32,000

Asset book value will change from one accounting period to another as the accumulated depreciation keeps increasing due to depreciation expense.