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Introduction
Depreciation is a process to allocate fixed assets over their useful life. It will not show
the value of assets rather it shows the net book value of the assets over their useful life.
Depreciation Expense is recorded as an expense in the income statement account, but this
is a non-cash expense for which no cash transaction is needed. Therefore, it needs to be added
back in the cash flow statement. A contra asset account- Accumulated Depreciation is used to
allocate the use of the asset for a specific period of time. Accumulated depreciation is
subtracted from the net book value of the asset to get the new net book value after period
ends.

Depreciation is a tool to determine the usage of a particular asset for a period;
different ways can be used to calculate this amount of depreciation. All of the methods
although provide same final result. Different approaches are used so that different purposes of
different organizations can be served. Another reason for such choice is that, different asset
may have different sort of usage for which one method may not result in a perfect way but
other method may serve best.

Organizations which try to show more depreciation expense may use double declining
balance method, by using this approach organization can show less net income and therefore
they has to pay a less income tax for the period. Some organizations try to simplify the
calculation, therefore they uses straight-line method. Some organizations have to deal with
machineries to produce, they may use unit of output method.










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Literature Review

Depreciation: In accounting jargon, the term Depreciation is meant to refer to the allocation
of an asset's cost to the accounting periods benefited -- not an attempt to value the asset.
Thus, it is often said that depreciation is a process of "allocation" not "valuation."

Determining the service life of an asset is an essential first step in calculating the
amount of depreciation attributable to a specific period. Several factors must be considered:

Physical deterioration -- "Wear and tear" will eventually cause most assets to simply wear
out and become useless. Thus, physical deterioration serves to establish an outer limit on the
service life of an asset.

Obsolescence -- The shortening of service life due to technological advances that cause an
asset to become out of date and less desirable.

Inadequacy -- An economic determinant of service life which is relevant when an asset is no
longer fast enough or large enough to fill the competitive and productive needs of a company.

Factors such as the above must be considered in determining the service life of a
particular asset. In some cases, all three factors must be considered. In other cases, one factor
alone may control the determination of service life. Importantly, one should observe that
service life can be completely different from physical life.

Recognize that some assets have an indefinite (or permanent) life. One prominent
example is land. Accordingly, it is not considered to be a depreciable asset.


Different Depreciation Methodologies

After the cost and service life of an asset are determined, it is time to move on to the
choice of depreciation method. The depreciation method is simply the pattern by which the
cost is allocated to each of the periods involved in the service life. There are many methods
from which to choose. Four popular methods are:
i. Straight-line method,
ii. Units-of-output method,
iii. Double-declining-balance method, and
iv. Sum-of-the-years'-digits method.
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In any given scenario, ample professional judgment must be applied in selecting the
specific depreciation method to apply. It must be noted that the choice of depreciation
method can become highly subjective. Some research suggests that such choices are
unavoidably "arbitrary," despite the best of intentions. Having set the stage for consideration
of multiple depreciation methods, it is now time to dig into the mechanics of each approach.

Most companies elect to stay with one of the fairly basic techniques -- as they all produce
the same "final outcome" over the life of an asset, and that outcome is allocating the
depreciable cost of the asset to the asset's service life.


Some Important Terminology:

Cost: The dollar amount assigned to a particular asset; usually the ordinary and necessary
amount expended to get an asset in place and in condition for its intended use.
Service life: The useful life of an asset to an enterprise, usually relating to the anticipated
period of productive use of the item.
Salvage value: Also called residual value; is the amount expected to be realized at the end of
an asset's service life. The anticipated sales amount at the end of the service life is the salvage
or residual value.
Depreciable base: The cost minus the salvage value. Depreciable base is the amount of cost
that will be allocated to the service life.
Book value: Also called net book value; refers to the balance sheet amount at a point in time
that reveals the cost minus the amount of accumulated depreciation.

The Straight-Line Method: Under this simple and popular approach, the annual
depreciation is calculated by dividing the depreciable base by the service life. The applicable
depreciation expense would be included in each year's income statement and the appropriate
balance sheet presentation would appear also.

The Units-of-Output Method: This technique involves calculations that are quite similar to
the straight-line method, but it allocates the depreciable base over the units of output (e.g.,
machine hours) rather than years of use. It is logical to use this approach in those situations
where the life is best measured by identifiable units of machine "consumption"

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The Double-Declining-Balance Method (DDB): As one of several "accelerated
depreciation" methods, DDB results in relatively large amounts of depreciation in early years
of asset life and smaller amounts in later years. This method can be justified if the quality of
service produced by an asset declines over time, or if repair and maintenance costs will rise
over time to offset the declining depreciation amount. With this method, a fixed percentage
of the straight-line rate (i.e., 200% or "double") is multiplied times the remaining book value
of an asset to determine depreciation for a particular year. As time passes, book value and
annual depreciation decrease.

The Sum-of-The-Years'-Digits Method: Under this technique, depreciation for any given
year is determined by multiplying the depreciable base by a fraction; the numerator is a digit
relating to the year of use.

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Analysis and findings
Depreciation methods used by companies enlisted under different Industries of
Bangladesh and are shown in the table below:

Company Name Industry
Depreciation Method
Used
GQ Ball Pen Miscellaneous Diminishing balance
Berger Paints Miscellaneous Straight Line
Al-Arafah Islami Bank Bank Reducing balance method
Exim Bank Bank Straight line
Uttara Bank Bank Reducing balance method
United Commercial
Bank Bank Reducing balance method
Southeast Bank Bank Straight line
AB Bank Limited Bank Reducing balance method
Eastern Bank Bank
straight line & reducing
balance
Prime Bank Bank Reducing balance method
Rupali Bank Bank Diminishing balance
Social Islami Bank Bank Reducing balance method
Trust Bank Limited Bank Straight line
Standard Bank
Limited Bank Reducing balance method
Dutch-Bangla Bank Bank Straight line
The City Bank Bank Straight line
Niloy Cement Cement Diminishing balance
Aramit Cement Cement Straight line
Lafarge Cement Cement Straight line
Meghna Cement Cement Reducing Balance
Confidence Cement Cement Straight line
Standard Ceramic Ceramics Sector Reducing Balance
Fu-Wang Ceramic Ceramics Sector Diminishing balance
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National Tubes Engineering Reducing Balance
BD Lamps Engineering Straight line
Aziz Pipe Engineering Diminishing balance
BD Auto Engineering Reducing Balance
BOC Engineering Straight line
Aftab Automobiles Engineering Diminishing balance
Singer Bangladesh Engineering Reducing Balance
Eastern Cables Engineering Straight line
Atlas Bangladesh Engineering Reducing Balance
Navana CNG Engineering Diminishing balance
IDLC Finance Ltd Financial Institutions Straight line
Premier Leasing Financial Institutions Straight line
Uttara Finance Financial Institutions Straight line
United Leasing Financial Institutions Straight line
Peoples Leasing Financial Institutions Diminishing balance
Bionic Sea Food Food & Allied Reducing Balance
Dhaka Fisheries Food & Allied Reducing Balance
Beximco Fisheries Food & Allied Straight line
BAT BC Food & Allied Straight line
Rahima Food Food & Allied Reducing Balance
Fu-Wang Food Food & Allied Diminishing balance
Gemini Sea Food Food & Allied Diminishing balance
Bangas Food & Allied Written down value
AMCL (Pran) Food & Allied Reducing balance method
Summit Power Fuel & power Straight line
Padma Oil Fuel & power Straight line
DESCO Fuel & power Reducing balance method
Titas Gas Fuel & power Diminishing balance
BGIC Insurance Reducing balance method
Karnaphuli Insurance Insurance Diminishing balance
Phoenix Insurance Insurance Reducing balance method
National Life Insurance Reducing balance method
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Insurance
Pragati Insurance Insurance Straight line
Prime Insurance Insurance Straight line
Sonar Bangla
Insurance Insurance Reducing balance method
Green Delta
Insurance Insurance Straight line
Rupali Insurance Insurance Reducing balance method
Rupali Life Insurance Insurance Reducing balance method
Agrani Insurance Insurance Straight line
Central Insurance Insurance Diminishing balance
Dhaka Insurance
Limited Insurance Diminishing balance
Nitol Insurance Insurance Reducing balance method
BDCOM Online Ltd IT Diminishing balance
BOL IT Straight line
Beximco Pharma Pharmaceuticals & Chemicals Reducing Balance
Reckitt Benckiser Pharmaceuticals & Chemicals straight line
Square Pharma Pharmaceuticals & Chemicals Reducing Balance
Libra Infusion Pharmaceuticals & Chemicals Reducing Balance
Ambee Pharma Pharmaceuticals & Chemicals Reducing Balance
Renata Ltd. Pharmaceuticals & Chemicals Straight line
Orion Infusion Pharmaceuticals & Chemicals Straight line
Glaxo SmithKline Pharmaceuticals & Chemicals Straight line
The Ibn Sina Pharmaceuticals & Chemicals Reducing Balance
ACI Limited Pharmaceuticals & Chemicals Straight line
Kohinoor Chemical Pharmaceuticals & Chemicals Reducing Balance
Eastern Housing Services & Real Estate Diminishing balance
OCL Services & Real Estate Reducing balance method
Summit Alliance Services & Real Estate Reducing balance method
Bata Shoe Tannery Industries
Reducing balance and
Straight line
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Samata Leather Tannery Industries Reducing Balance
Apex Footwear Ltd Tannery Industries Reducing Balance
Apex Tannery Tannery Industries Reducing Balance
Saiham Textile Textile Reducing Balance
Apex Spining Textile Reducing Balance
Mithun Knitting Textile Reducing Balance
Prime textile Textile Diminishing balance
Bangladesh Dyeing Textile Reducing Balance
Desh Garmants Textile Diminishing balance
Monno Fabrics Textile Reducing Balance
Beximco Denims Textile Straight line
H.R.Textile Textile Straight line
Beximco Knitting Textile Straight line
Square Textile Textile Straight line
Tallu Spinning Textile Straight line
Rahim Textile Textile Reducing Balance
Al-Haj Textile Textile Diminishing balance
Quasem Silk Textile Reducing Balance
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In our survey of 101 companies of 14 industries, we found that about 44% of the companies
using Reducing balance method to calculate depreciation and it is the majority. Among these
companies, nearly 37% uses Straight line method to find out depreciation. While some of the
companies uses combination of these two methods to determine depreciation. Pie chart
shown above is presenting the depreciation method and their respective proportions in all
industries.

Notably, none of the companies neither uses units-of-output method nor the sum-of-the-
years'-digits method. Conversely, Bangas Foods from Food & Allied industry uses written
down value method to calculate its depreciation, which is a unique finding in our analysis.

Another important think we observed is that the majority of the companies of a particular
industry follow the same method used by other companies of the same industry. That is, the
companies have a tendency to go with the same method used by other companies of that
respective industry, although it is not true in every case.

While going through the annual reports of different companies, we found that all of the
companies stated which method they are using to determine depreciation. Depreciation
techniques used by these companies are mentioned in their Annual Report under the Note to
The Financial Statement part.
Depreci ati on Method Used by Companys
from Di fferent I ndustri es of Bangl adesh
19%
37%
44%
0.99%
Diminishing balance
Straight Line
Reducing balance
method
Written down value
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Recommendation
As we know that different methods of determining depreciation has the same final
result. So, company should use methods that best serve the companys purpose. Another
tendency that we observed during our survey which we mentioned earlier that all the
companies of same industry follow identical method but this is not essential to follow same
approach. Companies should not bother choosing approaches which most of the companies
following but they should consider their function and based on this they should decide which
method they should apply.

Conclusion
Depreciation is vital for an organization as it helps to realize the net book value of the
asset and it is a significant source of expenditure. So, companies should be very careful of
selecting methods to determine depreciation. They should regularly check which approach is
suitable to them and change estimates or method of depreciation if required. Those
companies which are engaged in different nature of business should not follow uniform
depreciation method; they should use different methods to allocate depreciation for different
assets.

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References

1) www.wikipedia.org
2) www.wbiconpro.com/111-Riyashad
3) business.wesrch.com
4) siteresources.worldbank.org/INTBANGLADESH
5) idl-bnc.idrc.ca/dspace/bitstream/10625/30215/1/118891