Depreciation is an accounting method used to allocate the cost of an asset over its useful life. Over time, assets such as buildings, equipment, and vehicles go through wear and tear. To track this process, depreciation is fixed as an accounting method.s. In this article, we will discuss the top 5 assets that cannot be depreciated in this article. So, let’s dive into the world of asset depreciation and discover the assets that will hold their value in the coming year.
Introduction to Depreciation
Let’s first understand depreciation before diving into non-depreciable assets. Depreciation of assets 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 salvage value.
An example of a Depreciable asset is when you buy a nice new car and it starts to lose value and get worn down the longer you own it. Depreciable assets include stuff like vehicles, machinery, computers, etc.
Depreciation method
There are four depreciation methods available, which are straight-line, declining balance, sum-of-the-years’ digits, and units of production. Among these depreciation methods, the straight-line method is the most popular and easiest to apply. To use this method, a company must determine the asset’s useful life and its salvage value at the end of its life.
Top Assets that cannot be depreciated
While most tangible assets are depreciable, some assets are not subject to depreciation. Non-depreciable assets include Land, Fine arts, Natural resources, Intangible assets, and Goodwill. Let’s now explore the top 5 assets that fall into this category and understand their significance for businesses in 2023.
1. Land
As the global population grows, 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 ground.
Land, being a tangible asset with an indefinite useful life, is not subject to depreciation. The value of land is often influenced by factors such as location, demand, and market conditions, which can lead to appreciation rather than depreciation. Accounting principles recognize land as a non-depreciable property due to its unique characteristics.
Examples
- The Ranch in Jackson, Wyoming was listed for an astonishing $175 million. It’s hard to imagine having that much money to spend on a single property.
- Similarly, the Spelling Manor in Los Angeles sold for an incredible $120 million. The mind boggles at the sheer scale of these transactions.
- It’s interesting to consider the historical context of such large sums of money. For example, Alaska was purchased by the United States from Russia for a mere $7.2 million in 1867. It’s difficult to compare the value of money then and now, but it’s clear that these recent property sales represent an enormous amount of wealth.
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.
Examples
- “Salvator Mundi” by Leonardo da Vinci: Sold for $450.3 million in 2017, this painting is considered the most expensive artwork ever sold at auction.
- “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.
- “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 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 must be managed sustainably to ensure long-term availability while maximizing their economic potential.
Examples
- Diamonds: These beautiful and rare stones are formed deep within the Earth’s mantle under extreme pressure and temperature conditions. They are highly valued for their durability and are used in jewelry and industrial applications such as cutting and polishing tools.
- Timber: Trees are a valuable natural resource that provides lumber and wood products for construction and furniture, as well as pulp for paper and cardboard production. Sustainable forestry practices help ensure the long-term availability of this resource.
- Fish: Fish is a natural resource that provides food, employment, and recreational opportunities for millions of people worldwide. It is essential to manage this resource responsibly to prevent overfishing and unsustainable practices that can deplete fish populations and harm the environment.
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. These assets are subject to amortization, which is similar to depreciation but is calculated over the useful life of the asset or a legal agreement.
Examples
- Coca-Cola’s brand value is estimated to be around $80 billion, which has remained relatively stable over the years. It’s fascinating how the intangible asset of the brand continues to hold significant value in the eyes of consumers, despite the passage of time.
- When companies create new medicines, they have to spend a lot of money to develop them and protect them with patents. Patents give the companies the right to be the only ones making and selling the medicine for a certain amount of time, usually 20 years. This makes the treatment very valuable and helps the company make a lot of money.
- Software companies like Microsoft, Adobe, and Oracle make a lot of money by selling licenses for their software products. When someone buys a license, they can use the software for a certain amount of time and get updates and help if they need it. These licenses keep their value over time, which shows that software is a valuable asset even if you can’t touch it.
5. Goodwill
Goodwill is the difference between a business’s purchase price and fair market value. Goodwill cannot be depreciated because it represents a company’s reputation and brand value. It has an indefinite useful life and is subject to impairment testing. For example, when Microsoft repurchased Nokia 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.
Examples
- The Giving Pledge by Bill and Melinda Gates: Launched in 2010, this philanthropic initiative encourages billionaires to donate their wealth to charitable causes. Mark Zuckerberg and Warren Buffett are notable signatories of The Giving Pledge, which is a symbol of generosity and goodwill.
- Apple’s Customer Loyalty: Apple Inc. is known for its loyal customer base. The company has built a strong reputation for its innovative products, quality, and user experience. Apple’s brand value is largely driven by its goodwill with its customers. This goodwill is non-depreciable because it represents intangible assets such as customer loyalty, brand recognition, and reputation that Apple enjoys, and these factors contribute to the company’s long-term success
Conclusion
In conclusion, land, fine arts, natural resources, intangible assets, and goodwill are assets that cannot be depreciated as they do not lose their value over time. It is crucial to understand the assets that lose their value over time for accurate accounting and financial reporting.
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FAQ’S
Assets such as land, fine arts, and natural resources cannot be depreciated
Land almost always goes up in value rather than wearing out! Unless you buy in a terrible location, property values and land keep appreciating in the long run.
Depreciation is used for tangible assets, while amortization is used for intangible assets.
