Last reviewed: July 2026.
Fixed Asset Depreciation Fundamentals under IAS 16 explains the core principles behind the charge, while separate guides cover detailed journal entries and method comparisons.
Why depreciation is recognised
Depreciation allocates an asset’s depreciable amount systematically over the periods that consume its economic benefits. It is not a reserve of cash and is not intended to reproduce market value. The expense supports period-by-period performance measurement while accumulated depreciation reduces the asset’s carrying amount. Depreciation continues even when an asset’s market value rises, unless the asset is fully depreciated or classified in a way that changes the applicable measurement requirements.
Identify assets within IAS 16
IAS 16 applies to property, plant and equipment held for use in production, supply, rental or administration and expected to be used for more than one period, subject to scope exceptions. Recognition requires probable future economic benefits and reliably measurable cost. Establish the correct unit of account before depreciating. A complex asset may contain significant components with different useful lives, while minor items may be grouped when aggregation produces a faithful and practical accounting result.
Calculate depreciable amount
Depreciable amount is cost, or another amount substituted for cost, less residual value. Cost includes purchase price and directly attributable expenditure necessary to bring the asset to the location and condition required for operation, together with qualifying dismantling or restoration obligations. Exclude abnormal waste, general administration and costs incurred after the asset is capable of operating as intended. Revaluation changes the depreciable base prospectively after the revaluation accounting has been completed.
Estimate useful life
Useful life reflects expected utility to the entity, not simply the asset’s physical life. Consider expected production or usage, wear and tear, maintenance, technical or commercial obsolescence, legal limits, lease terms and dependency on other assets. Management plans and replacement cycles matter, but the estimate should be supported by operational evidence. Different entities can reasonably assign different useful lives to similar equipment because their usage, maintenance and economic environments differ.
Estimate residual value
Residual value is the estimated amount the entity would currently obtain from disposal, after disposal costs, if the asset were already of the age and condition expected at the end of its useful life. It is not automatically zero and should not be based on an inflated future selling price. Review it at least at each year end. If residual value equals or exceeds carrying amount, depreciation becomes zero until the relationship changes, without reversing prior charges merely for that reason.
Start and stop depreciation correctly
Depreciation begins when the asset is available for use: in the location and condition necessary for it to operate as intended. It does not wait for maximum production, formal opening or first revenue. Depreciation ceases when the asset is derecognised or classified as held for sale under the applicable standard, whichever is earlier. Temporary idleness normally does not stop depreciation under usage-independent methods because time, obsolescence and readiness continue to consume service potential.
Use component accounting
Significant parts of an asset with different useful lives or consumption patterns are depreciated separately. An aircraft body and engines, a building structure and major plant, or a furnace lining and shell may require separate components. When a component is replaced, derecognise the carrying amount of the old component and recognise the new cost if the criteria are met. Component registers improve accuracy, maintenance planning and disposal accounting, but components should remain reconciled to the main asset record.
Select a method based on consumption
The method should reflect how economic benefits are expected to be consumed. Straight-line produces a constant charge; diminishing balance produces higher earlier charges; units of production links the charge to output or usage. Revenue-based depreciation is generally inappropriate because revenue reflects factors beyond asset consumption. Use operational evidence rather than selecting the method to manage profit. Apply the method consistently unless a changed consumption pattern justifies a prospective change in estimate.
Review estimates annually
Useful life, residual value and depreciation method are reviewed at least at each financial year end. Changes are accounting estimates applied prospectively under IAS 8, not errors requiring automatic restatement. Update the fixed-asset register and future depreciation schedule from the change date. A major maintenance programme, new technology, lower utilisation, legal restrictions or a revised disposal strategy may trigger change. Keep approvals and engineering or market evidence supporting the revised estimate.
Connect depreciation and impairment
Depreciation is systematic allocation; impairment addresses a decline in recoverable amount. Indicators such as physical damage, technological change, poor performance or adverse market conditions may require an IAS 36 test. If carrying amount exceeds recoverable amount, recognise an impairment loss and calculate future depreciation using the revised carrying amount, residual value and remaining useful life. An impairment test does not replace annual depreciation, and normal depreciation does not eliminate the need to assess impairment indicators.
Reconcile and disclose
Maintain a fixed-asset register with asset identifiers, location, class, cost, component, useful life, residual value, method, accumulated depreciation, impairment and disposal data. Reconcile register totals to the general ledger and investigate additions, transfers, fully depreciated assets and negative values. IAS 16 disclosures include measurement bases, methods, useful lives or rates, opening and closing carrying amounts and a movement reconciliation. Clear schedules support audit evidence and prevent depreciation from becoming an unexplained spreadsheet total.
Related Accounting Guides
- Depreciation Accounting Entries: IAS 16 Worked Guide
- Depreciation Methods Compared: IAS 16 Practical Guide
- Tangible Fixed Assets under IAS 16: Recognition Guide
Authoritative References
- IAS 16 Property, Plant and Equipment — Official recognition, measurement, depreciation and revaluation principles for property, plant and equipment.
- IAS 36 Impairment of Assets — Official impairment principles requiring assets not to exceed recoverable amount.