THE EFFECT OF DEPRECIATION ON INCOME STATEMENT REPORTING (A STUDY OF UNITED BANK FOR AFRICA, UBA PLC ENUGU BRANCH)

CHAPTER ONE: INTRODUCTION

1.1      Background of the Study

Okadigbo (2004:12) defines deprecation accounting as a system of accounting which aims to distribute the cost of other basic value of tangible capital assets less salvage (if any) over the estimate useful life of the unit (which may be a group of asset) in a systematic and rational manner. It is a process of allocation, not of valuation; depreciation for the years is the portion of the total charge under such as system that is allocated to the year.

According to Oloh (2008:79) depreciation is an allocation of the entire cost of depreciable asset to the operating expenses of series of fiscal period. Depreciation is the exhaustion of the effective life of a fixed asset owing to use or obsolesces (Uguru, 2006:9).

It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. Depreciation for income tax purposes is defined by the U.S treasuring Department Bureau of internal Revenue (Bulletin “f”) as a reason allowance for exhaustion wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

Companies can use depreciation to manipulate earnings. A company can extend the use of its assets by claiming a longer useful life. When looking at depreciation, it is useful to compare depreciation practices of a company along with its peers. A company's assets may be outdated or in need of repair if it is depreciating assets too slowly. All things being equal, lower depreciation expense means higher net income therefore invalidating annual reports.

Mark-to-market in accounting refers to the valuation of assets based on current market prices rather than book value. A major distortion occurs in depreciation based on an assets book value versus the actual market value of an asset. For example, a company may have fully depreciated its land and buildings even though these assets have significant market values. This is a common occurrence with intangible assets such as logos and trademarks. For accounting purposes, these intangible assets have a finite life; however, in reality these assets can be extremely valuable having an impact on the performance of organizations.

1.2      Statement of the Problem

The depreciation of assets such as equipment, buildings, furnishing, trucks, etc. causes a corporation's asset amounts, net income, and stockholders' equity to decrease. This occurs through an accounting adjusting entry in which the account Depreciation Expense is debited and the contra asset account Accumulated Depreciation is credited.
The amount of the annual depreciation that is reported on the financial statements is an estimate based on the asset's 1) cost, 2) estimated salvage value, and 3) useful life. Depreciation should be thought of as an allocation of the asset's cost to expense (and not as a valuation technique). In other words, the accountant is matching the cost of the asset to the periods in which revenues are generated from the asset.
The amount of the annual depreciation reported on the Nigerian income tax return is based on the tax regulations. Since depreciation is a deductible expense for income tax purposes, the corporation's taxable income (and associated tax payments) will be reduced by its tax depreciation expense. (In any one year, the depreciation expense for taxes will likely be different from the amount reported on the financial statements.)

It should be noted that depreciation is viewed as a noncash expense. That is, the corporation's cash balance is not changed by the annual depreciation entry. (Often the corporation's cash is reduced for the asset's entire cost at the time the asset is acquired).

1. Objectives of the Study

The broad objective of this project work is to examine the effect of depreciation on the income statement of with particular reference to United bank for Africa (UBA) Plc. The specific objectives of this research work includes the following;

1. To examine the effect of depreciation on net income of United bank for Africa (UBA) Plc.
2. To ascertain the correlation between depreciation and total asset of United bank for Africa (UBA) Plc.
3. To evaluate the effect of depreciation on the profitability of United bank for Africa (UBA) Plc.
4. To ascertain the relationship between depreciation and return on asset of United bank for Africa (UBA) Plc.

1.4 Research Question

Based on the objectives above, the researcher developed the following questions;

1. To what extent does depreciation affect net income of United bank for Africa (UBA) Plc?
2. What are the correlations between depreciation and total asset of United bank for Africa (UBA) Plc?
3. To what extent does depreciation affect the profitability of United bank for Africa (UBA) Plc.
4. Is there any relationship between depreciation and return on asset of United bank for Africa (UBA) Plc?

1. Statement of Hypotheses 

Ho: Depreciation does not have any effect on net income of United bank for Africa (UBA) Plc.

H1: Depreciation has significant effect on net income of United bank for Africa (UBA) Plc.

Ho: There is no correlation between depreciation and total asset of United bank for Africa (UBA) Plc.

H1: There is significant correlation between depreciation and total asset of United bank for Africa (UBA) Plc.

Ho: Depreciation does not have any effect on the profitability of United bank for Africa (UBA) Plc.

H1: Depreciation has significant effect on the profitability of United bank for Africa (UBA) Plc.

Ho: There is no relationship between depreciation and return on asset of United bank for Africa (UBA) Plc.

Ho: There is significant relationship between depreciation and return on asset of United bank for Africa (UBA) Plc.

1.4      Significance of the Study

This project work will be of immense significance to the following groups of people:

The management and staff of both UBA, Enugu. It will go to a great extent in enlightening them on the concept of depreciation and how it affects income statement reporting of UBA, Enugu.

The recommendations from this project work will suggest for other organizations on the best approach to assets depreciation.

Finally students and other researchers will widen their scope from the information contained in this project work.

1.5      Scope of the Study

This project study on the effect of depreciation on income statement reporting is focused on a study of UBA, Enugu.

1.8   Limitations of the Study

These limitations were encountered by the researcher in this research project.

FINANCE LIMITATIONS: The researcher lacked enough funds to carry out this research project, thereby leading to a slight delay in the successful completion of this research work.

TIME LIMITATIONS: There was not enough time on the part of the researcher regarding the time needed to attend lectures, do various assignments, prepare for degree examinations and also carryout this research project.

DIFFICULTY IN GATHERING MATERIALS: The researcher had difficulty in gathering the materials which made the process of carrying out this research project a bit difficult.

ATTITUDE OF THE RESPONDENTS: The respondents were not really cooperative to the researcher due to fear of leaking their secret to competitors.