Usher Agro Ltd

Excellent discussion on issue of depreciation.

 

I would say that it's subjective. I'd look into depreciation only if it's an asset heavy business - industrials for example - cement, sugar, textile, refineries, etc. These businesses require massive CapEx to build capacities. That's why you see "replacement cost" quoted in context of such companies. How much ₹₹₹ would it take to setup a similar capacity and then there's the time factor too.

For modern, services economy businesses, the depreciation figure will be meaningless because their primary assets are human resource, IP, etc. Examples - IT (software), BFSI, e-commerce, etc.

Even if the figures are cooked up and the auditors have signed it, RoC has accepted it, how would we know what the management has done. But no harm in doing that. Like I was going thru Lux's Annual Report and they had a write back of ~ ₹4.5 crore depreciation due to change in method from reducing balance to straight line. Which is significant given the small equity base. But honestly, I've never looked at depreciation before buying a stock

Yep, we shouldn't worry much about the other dynamics.

Please consider my replies like work of fiction, I'm not even a postgrad. Just that I like finance, economics and analysis.

I wonder if there are experts in the forum reading this and thinking how stupid we both are

 

Yet another clear detailed reply. Really learnt a lot from you abt Depreciation.

Yes, there is a strong chance that some wise men are laughing at my stupidity. If so, it is something, I can really take pride in, as it has made a few wise men happy.

Once again, I profusely thank you for sharing your knowledge, as much as you can.

 

I'm glad if that was of any help. And make that 2 of us

 

In accounting there is one fundamental principle of 'matching'.... Matching of costs and revenues in an accounting period. What this ensures is (i) costs are booked in the period in which they are incurred and not necessarily paid (ii) Costs relate to revenues/economic benefits recognised in the said period.

This principle results in for eg (i) accrued expenses (ii) deferred costs ( expenses which will be taken to pnl in subsequent accounting periods (iii) depreciation

A generic definition of an 'asset' in the accounting world is ' a resource with economic value which an individual, corporation etc owns with an expectation that it will provide future benefits ie benefits over more than one accounting period

An expense in accounting Is the MONEY SPENT ( cash outflow) or cost incurred In an entity's effort to generate revenues.

So : (1)when a company purchases plant, equipment, builds factories etc it has in its possession a resource which will generate future economic benefits (generate sales). These are thus 'assets' in a balance sheet. (2) to purchase or build these, monies are spent. This is expense therefore ( see above definition).

Now since economic benefits from these assets are expected to flow over multiple accounting periods, the matching principle prescribes that the expense incurred on these assets (monies spent ) must also be recognised over multiple years. This recognition over multiple years is called 'depreciation'. The number of years over which this is spread over is dependent upon the estimated useful life of the asset as determined by the management ( subject to some floor rates which enactments provide)

Accumalated depreciation ( which is reduced from the gross block) is the contra-asset that is being referred to.

Funding of the asset needs to be arranged upfront and if the funding source is loans taken, then the future economic benefits from these assets are expected to meet and repay the principal loan and interest thereon. Surplus of economic benefits generated over loans and interest thereon is accretion to cash balance and reserves.

 

@darth

Thanks a lot. Guidance like this is of immense help to newbies, like me, trying to understand the balance sheet and make the the right inferences.

 

You're welcome...

Depreciation was an easy one.