Question

Discussion Topic 1 (Note: Briefly in your own words 1 paragraph minimum.)

Depreciation:

1. What impact do you think depreciation has on a construction company from a financial standpoint?  

2. Why do you think we need to depreciate some assets but not others?

Answer 1

Answer part 1:

• Depreciation is a non-cash expense, charged on tangible fixed assets such as construction equipment, buildings, machines, computers, vehicles, etc.
• The depreciation has a direct impact on the net profits of a construction company, but doesn't impact the cash flows being a non-cash expense.
• The depreciation has a direct impact on company's tax position. The larger the depreciation expense, the lesser the profits, and so the lesser the taxes payable.
• The depreciation will not be charged on the assets constructed by them as these would be the part of inventory for them and not their fixed assets. If it is a case of construction contracts, then the construction company (contractor) can not treat that asset in their books of account as a fixed asset and depreciation can not be charged on said asset.

Answer part 2:

• There are two types of assets - Current assets and non current assets.
  • Current assets are those assets that can be converted in cash within one year (short term). So, no depreciation is to be charged.
  • Non current assets include either fixed assets (tangible and intangible assets) or other non current assets.
    • Depreciation is charged only on tangible fixed assets [with exceptions of land, and other precious items (as their values appreciate over time)]. Depreciation on Intangible assets is technically called as amortization.
    • Other non-current assets are not depreciated as their value do not decrease over time. To cite an example- long term loans/advances and deferred tax assets.

Inference: Only (long term) tangible fixed assets are depreciated with exceptions of land and precious items.