A fully depreciated asset is a plant asset or fixed asset where the asset’s book value is equal to its estimated salvage value. In other words, all of the depreciation that was intended (cost minus estimated salvage value) has been recorded.
Definition of Fully Depreciated Assets
Fully depreciated assets can be defined as any long-term economic benefit generating resource, i.e. a plant, property, or any other equipment whose entire book value has been written off or charged as expense over its useful life as depreciation or impairment loss (multiple accounting periods) in accordance with the applicable Generally accepted accounting principles guidelines which may or may not have left with physical existence.
Accounting for a fully depreciated asset
The accounting for a fully depreciated asset is to continue reporting its cost and accumulated depreciation on the balance sheet. No additional depreciation is required for the asset. No further accounting is required until the asset is dispositioned, such as by selling or scrapping it. A fixed asset is fully depreciated when its original recorded cost, less any salvage value, matches its total accumulated depreciation.
A fixed asset can also be fully depreciated if an impairment charge is recorded against the original recorded cast, leaving no more than the salvage value of the asset. Thus, full depreciation can occur over time, or all at once through an impairment charge.
If the Asset has been Sold
Suppose the fully depreciated asset has been sold. In that case, the total accumulated depreciation will be written off against the asset, and no impact will be given in the p&l statement since the total depreciation has already been recorded. The gain arising on the sale will be credited to p&l a/c has gained on the sale of assets.
If the asset is still deployed, no more depreciation expense is recorded against it. The balance sheet will still reflect the original cost of the asset and the equivalent amount of accumulated depreciation.
However, all else equal, with the asset still in productive use, GAAP operating profits will increase because no more depreciation expense will be recorded. When the fully depreciated asset is eventually disposed of, the accumulated depreciation account is debited and the asset account is credited in the amount of its original cost.
The Removal of Depreciated Assets from the Accounting Records
It would be incorrect accounting treatment to remove a fixed asset cost and related accumulated depreciation from the accounting records as long as the underlying asset is still being used, for two reasons:
- Metrics. The presence of such a large amount of accumulated depreciation for an asset should be stated so that someone analyzing the financial statements can discern that the company tends to retain its fixed assets for a long period of time; this can be an indicator of multiple issues, such as good maintenance or the imminent need to spend cash for replacement assets.
- Asset recordation. If an asset is on the premises and in use, then it should be recorded. Its deletion would remove the asset from the fixed asset register, so that someone might conduct a fixed asset audit and observe the asset, but not see it in the company’s records.
When a fixed asset is eventually disposed of, the event should be recorded by debiting the accumulated depreciation account for the full amount depreciated, crediting the fixed asset account for its full recorded cost, and using a gain or loss account to record any remaining difference.
Let’s assume that a company purchased a building for $10,00,000. The company then depreciated the building at $200,000 per year for five years. The current market value of the building is $ 50,00,000.
The company will have to record $2,00,000 as a depreciation expense by debiting the p&l a/c and crediting the accumulated depreciation a/c for five years. At the end of the 5th year, the company’s current balance sheet will report the building at its cost of $1000,000 minus its accumulated depreciation of $10,00,000 (book value of $0) even if its current market value is $50,00,000.
- Such accounting is because the company continues to use the building for its business operations and would continue to generate benefits for the company in the long term. Unless the company capitalizes on any further cost, which will improve the structure, no further depreciation would be allowed to be charged to the asset and reported only at each balance sheet reporting date.
- If the company plans to sell out the building at the current market value, the total accumulated depreciation would be written off against the building & the gain on the sale of assets will be credited to profit & loss a/c as “gain on sale of assets” thus inflating the current years profit by the gain amount.
- The building will not be reflected in the balance sheet since the same has been sold to a 3rd party.