Question

There are some similarities between depreciation and depletion from an accounting perspective. Explain a scenario where the company may use depletion or deprecation and an impairment may come into play?

Answer 1

Depletion or depreciation?

I will try to explain the issue in simple words

Generally, company uses the method which gives more expense for ta x purpose

Depreciation is charged to tangible over the useful life of the asset
by this definition we are clear that depreciation is charged to the tangible assets where we can able to find the useful life of the asset relatively

Under depletion it is also a reduction of cost method, but it is based on the cost or percentage of sale where depletion is used mainly to the

Depletion allocates the extraction cost of natural resources like natural gas etc.

Depletion also lowers cost of asset gradually through cost to incomes as it won’t have any useful life
which can be found out

Either depreciation or depletion is expensed in the income statement and calculation principals are disclosed at the foot note to the financial statements

IMPAIRMENT

Basically, impairment is treated a loss to the asset

Concept of impairment is getting book value reduced to market value.
the decreased value of value is treated as an Impairment loss and immediately treated in income statement as an expense

Under US GAAP recover of asset value cannot reversed as an impairment gain

But under IFRS any gain of value can be recovered as an impairment gain

Hope I made my points clear how these three are different and its usage is different