A “Wasting Asset” refers to an asset that diminishes in value over time due to its finite useful life. This term applies to both fixed assets and natural resources, which undergo depreciation and depletion, respectively.
Types of Wasting Assets
Fixed Assets
Fixed assets, excluding land, that have limited useful lives are designated as wasting assets. They are subject to depreciation, which allocates the cost of the asset over its useful life.
Examples:
- Machinery: Used in manufacturing that gradually wears out and needs replacement.
- Vehicles: Such as company cars and trucks.
- Office Equipment: Such as computers and printers.
Natural Resources
Natural resources that diminish as they are extracted or harvested fall under this category. The reduction in value due to utilization is known as depletion.
Examples:
- Oil Wells: The value decreases as oil is extracted.
- Mineral Deposits: Such as coal, iron ore, and gold.
- Forests: When timber is harvested.
Special Considerations
Depreciation
Depreciation is the process of allocating the cost of a fixed asset over its useful life. It reduces the book value of the asset incrementally.
Formula:
Depletion
Depletion refers to allocating the expense related to the extraction of natural resources. It is similar in concept to depreciation but is specific to natural resources.
Formula:
Historical Context
The concept of wasting assets has been recognized along with the development of accounting practices. Industrialization and the extensive use of natural resources brought about the need for more structured methods of accounting for the diminishing value of such assets.
Applicability
Wasting assets are relevant in various industries:
- Manufacturing: Uses machinery and equipment.
- Energy Sector: Deals with the extraction of oil and gas.
- Mining: Extraction of minerals.
- Forestry: Harvesting timber.
Comparisons
| Aspect | Depreciation | Depletion |
|---|---|---|
| Applies To | Fixed Assets | Natural Resources |
| Method | Straight-line, Declining Balance, Units of Production | Units of Production |
| Purpose | Allocate cost over useful life | Allocate cost over extraction life |
Related Terms
- Depreciation: Reduction in the value of an asset over time.
- Depletion: Reduction in the value of a natural resource due to extraction.
- Amortization: Similar allocation of cost used for intangible assets.
FAQs
Q: Why is land not considered a wasting asset? Land is not a wasting asset because it does not typically depreciate or diminish in value over time.
Q: Can a wasting asset ever appreciate in value? Although it’s uncommon, certain wasting assets may appreciate due to factors like increased demand or improvements in the asset’s condition.
Q: How do companies account for a wasting asset? Companies account for wasting assets through depreciation or depletion methods suited to the asset type.
References
- “Intermediate Accounting” by Kieso, Weygandt, and Warfield.
- Financial Accounting Standards Board (FASB) Statements.
- International Financial Reporting Standards (IFRS).
Summary
A wasting asset is crucial in fields requiring the extraction, use, or prolonged functionality of assets. Understanding their depreciation and depletion helps in accurate financial reporting and planning for asset replacement or resource management.
Ensuring proper accounting treatments for wasting assets guarantees accurate representation of a company’s financial health, thereby supporting strategic decision-making.
