How can one identify when the depreciation of an asset will finish from the Annual report ? I mean lets say that - Company A has made an investment of 10 Cr in an asset & company is making good profits at EBITDA level. But due to high depreciation charges,they could only report nominal PAT and after few years once the asset has been fully depreciated we know that the PAT will increase since the depreciation cost wont be there after X number of years.
Now coming to my question how can some one identify which year,these depreciation costs will end from the annual report or from any other source.
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The depreciation never finishes because assets that are getting depreciated have to be replaced.
@diffsoft not necessarily. Lets assume company A buys a new truck for 5 lakh Rs & depreciates it for 5 years in straight line with 1 lakh Rs per year.So after 5 years asset value might be 0 lakhs on books due to depreciation but that doesn’t mean that the truck is unusable after 5 years.
Now lets assume that the truck was generating 1.5 lakhs of cash profits from year 1; so after depreciation company could show only .5 lakhs for last 5 years.But after 5 years since there wont be a depreciation cost anymore,you suddenly see that PAT has grown from .5 to 1.5 lakhs (since no depreciation exists this year).
Now coming to back my question how can some one identify which year,these depreciation costs will end from the annual report or from any other source.
Surely not unusable, so for that specific income earning asset, you are theoretically correct (although Cos Act 2013 onwards, you need to make some estimate of the value of such assets as well, which was adjusted in Reserves).
So in theory it is possible. Practically it is not, which is why you never see a company with has no depreciation in its books. Let’s see why, in this specific example of a one truck business funded only from equity. Here while book depreciation may run down on the original value, there may (generally will) be addition to the truck assets, like for instance engine overhauling, which would get added to the asset to the extent it is supposed to extend its life, replacement of truck body or some parts, which again extends the life. So there are asset additions even in a truck and they will get depreciated based on estimates to extended life. Thus depreciation will not become zero even in a one truck business.
Annual report gives you depreciation asset class wise not item wise, and an company will have a composite set of assets, so it is unlikely that you will find one. Further you may know there are two methods of depreciation, straight line and written down value. In case the company follows the latter ( atleast for Income Tax computation, they have to), depreciation will never be zero, mathematically speaking.
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A company has hundreds of assets, each with a different life span and being depreciated at different rates. From the Annual Report, we can get a high level grouping of assets, the depreciation policy, rates and the amount of depreciation charged on them. The point is valid that in general, if assets are well depreciated and still retain their earning power, the return on assets will be higher.
To answer your specific question as to when they will become zero, dividing Net Fixed Assets by the annual depreciation amount will give the approximate number of years in which the assets will be written down to zero (if the method is SLM). If the depreciation method is WDV, (Depreciation / NFA X 100) will give you the rate of depreciation and you can calculate the number of years easily.
In reality, you will never see zero on the Fixed Assets schedule since much before that date, the company will replace them with new assets and start charging depreciation afresh. But perhaps, the information can be used to make a rough estimate of upcoming capex – older the assets, higher will be the anticipated future capex.
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