Depreciation methods

Depreciation allocates an asset's depreciable amount — cost less residual value — over its useful life (IAS 16.50). It is not an attempt to track market value: it spreads a cost already paid across the periods that benefit, so that each year's profit carries its share.

Choosing a method. IAS 16.60–62 requires the method to reflect the pattern in which the asset's benefits are consumed: - Straight-line — (cost − residual) ÷ useful life, the same every year. Suits assets used evenly: buildings, office furniture, most IT. - Reducing (diminishing) balance — a fixed rate × the carrying amount at the start of the year. Charges are highest early and fall each year. Suits assets that lose most of their usefulness early or need more repairs later. The rate is applied to carrying amount, not to cost less residual; residual value instead acts as a floor — once the carrying amount reaches it, depreciation stops. - Units of production — (cost − residual) × units this period ÷ total expected units. Suits assets whose wear follows output or use: presses, mining trucks, aircraft engines. - A method based on the revenue an asset generates is not permitted (IAS 16.62A): revenue reflects prices and sales volumes, not how the asset is consumed.

When it starts and stops. Depreciation starts when the asset is available for use — not when it's bought or first fully used — and stops when it's derecognised. When an asset is bought part-way through a year, time-based methods charge only the months it was available.

Estimates change. Useful life, residual value and method are reviewed at least each year end (IAS 16.51, 16.61). A revision is a change in accounting estimate (IAS 8): spread the remaining carrying amount over the remaining life from now on. Past years are never restated.

The entry. Debit Depreciation expense; credit Accumulated depreciation, a contra-asset, so the asset's cost stays visible. Carrying amount = cost − accumulated depreciation.