The Top 5 Assets That Cannot Be Depreciated

Depreciation is an accounting method used to allocate the cost of assets over their useful life. Assets like buildings, equipment, and vehicles wear and tear over time, and depreciation is used as a method of accounting to track this process. There are, however, some assets that cannot be depreciated. We will discuss the assets that cannot be depreciated in this article.

Introduction to Depreciation

Let’s first understand depreciation before diving into assets that cannot be depreciated. An asset’s depreciation is the systematic allocation of its cost over its useful life. It reduces the value of an asset over time as a non-cash expense. Depreciation is calculated based on the asset’s estimated useful life and its salvage value.

In simpler words, Assets are objects that provide value to their owners when purchased. However, they also present the risk of depreciation – meaning they can lose value over time. For instance, a computer may need to be replaced after three years to remain productive, while a building may require extensive renovations after 50 years. Understanding depreciation is crucial when investing. The top five Assets That Cannot Be Depreciated

1. Land

As the global population continues to grow, residential and commercial land demand has increased, increasing land prices. The land is a non-depreciable asset. This is because land does not wear out or become obsolete. It is a fixed asset that has an unlimited useful life. The cost of land is recorded separately from any buildings or improvements on the land.

2. Fine Arts 

Antiques, paintings, sculptures, and other fine art are not depreciated. The reason for this is that their value is subjective and often increases over time. Capital gains tax applies to fine art when sold as a capital asset.

1. “Salvator Mundi” by Leonardo da Vinci: Sold for $450.3 million in 2017, this painting of Jesus Christ is considered the most expensive artwork ever sold at auction.
2. “Interchange” by Willem de Kooning: Sold for $300 million in 2015, this abstract painting is considered the most expensive artwork ever sold by a living artist.
3. “The Card Players” by Paul Cézanne: Sold for $250 million in 2011, this series of paintings is considered the most expensive artwork sold privately.

3. Natural Resources: 

Natural resources are assets that hold value because of their intrinsic value and limited availability. Industries rely on them immensely, but their quantity is often finite. There is a direct correlation between the amount, quality, and market demand for these resources. Therefore, they need to be managed sustainably to ensure their long-term availability while maximizing their economic potential.

4. Intangible Assets

Intangible assets are those assets that can’t be touched by humans such as patents, trademarks, and copyrights that cannot be depreciated. Assets such as these have an indefinite useful life and their value is determined by their ability to generate future cash flow income. Intangible assets are subject to amortization, which is similar to depreciation but is calculated over the useful life of the asset or a legal agreement.

5. Goodwill

Goodwill is the difference between a business’s purchase price and fair market value. Goodwill cannot be depreciated because it represents the reputation and brand value of a company. It is an intangible asset with an indefinite useful life and is subject to impairment testing. For example, when Microsoft bought Nokia back in 2013, they not only bought the technological infrastructure they bought Nokia’s reputation which they later used as a launchpad for their mobile phone series Nokia Lumia.

Conclusion

In conclusion, not all assets can be depreciated. Land, fine art, investments, intangible assets, and goodwill are assets that cannot be depreciated. However, even these assets are subject to changes in market demand or shifts in the overall economy and they also come in more than more traditional investable options such as bonds and stocks. Understanding the assets that cannot be depreciated is important for accurate accounting and financial reporting.