NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Property, plant and equipment Impairment of property, plant and equipment 42 AKITA DRILLING LTD.  ANNUAL REPORT An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable  amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and value in use,  being the present value of the expected future cash flows of the relevant assets or cash generating units. For  the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separate  identifiable cash flows (Cash Generating Units). The Cash Generating Units for the Company’s drilling rigs are  conventional singles, conventional doubles, conventional triples and pad rigs.  Assets that are subject to depreciation are tested for impairment when events or changes in circumstances  indicate that the carrying amount may not be recoverable. Assets that have an indefinite useful life are not  subject to amortization and are tested for impairment annually. The estimated useful lives, residual values and depreciation methods are reviewed at the end of each annual  reporting period. Buildings, furniture, fixtures and equipment are depreciated using the declining balance method at rates  varying from 4% to 25% per annum. Replacement drill pipe and other ancillary drilling equipment are depreciated using a straight-line basis at  rates varying from 6% to 12.5% per annum. Major inspection and overhaul expenditures are depreciated on a straight-line basis over 3 years.  Drilling rigs are depreciated using the unit of production method. Depreciation is calculated for each of the  rig’s major components resulting in an average useful life of 3,600 operating days per rig. Major renovations  are depreciated over the remaining useful life of the related asset or to the date of the next major renovation,  whichever is sooner. Drilling rigs are subject to certain minimum annual depreciation. Depreciation is provided on property, plant and equipment and leasehold improvements excluding land.  Depreciation methods and rates have been selected so as to amortize the net cost of each asset over its  expected useful life to its estimated residual value. Cost includes expenditures directly attributable to the acquisition of the item. The cost of assets constructed  by the Company includes the cost of all materials and services used in the construction and direct labour  on the project. Costs cease to be capitalized as soon as the asset is ready for productive use. Subsequent  costs associated with equipment upgrades that result in increased capabilities or performance enhancements  of property, plant and equipment are capitalized. Costs incurred to repair or maintain property, plant and  equipment are charged to expense as incurred. The carrying amount of a replaced asset is derecognized when  replaced. Property, plant and equipment are stated at cost less accumulated depreciation and impairment, if any. 