Last reviewed: July 2026.
Depreciation Methods Compared: IAS 16 Practical Guide compares common methods and explains how IAS 16 links method selection to the expected pattern in which an asset’s economic benefits are consumed.
Depreciable amount and useful life
Depreciation allocates cost or revalued amount less residual value over useful life. It is not intended to measure market-value decline or create a replacement fund. Useful life reflects expected use by the entity, considering capacity, wear, maintenance, obsolescence and legal or contractual limits.
Straight-line method
Straight-line depreciation charges an equal amount each period when consumption is expected to be even. Annual depreciation equals depreciable amount divided by useful life. It is simple and appropriate for many buildings, office equipment and assets providing relatively stable service potential.
Diminishing-balance method
Diminishing balance applies a fixed percentage to the opening carrying amount, producing higher charges in earlier years and lower charges later. It may reflect assets that deliver more benefits or suffer greater obsolescence early in life. The selected rate should be supported rather than chosen merely to accelerate tax deductions.
Units-of-production method
Units of production bases depreciation on actual output, machine hours, distance or another physical measure of use. Depreciation per unit equals depreciable amount divided by expected total units. It can be appropriate for mining, manufacturing and transport assets when output can be measured reliably and reflects consumption.
Selecting the method
Choose the method that most faithfully represents expected consumption. Consider operating plans, maintenance, capacity, technology and historical usage. If consumption cannot be determined reliably, straight line is often used. The method should not be selected to achieve a desired profit pattern.
Component depreciation
Significant components of one asset may require different methods or useful lives. A building shell may use straight line, while specialised equipment inside it may have a shorter life or usage-based method. Component records prevent material parts from being depreciated over an inappropriate combined life.
Residual values and annual review
Residual value, useful life and method are reviewed at least at each financial year-end. A change based on new information is generally treated prospectively as a change in accounting estimate. Prior depreciation is not automatically restated simply because expected use has changed.
Revenue-based methods
Revenue usually reflects pricing, inflation, sales effort and other factors beyond consumption of the asset. The IASB clarified that revenue-based depreciation is not appropriate for property, plant and equipment. A physical or time-based pattern should be used when it better represents consumption.
Partial periods and availability for use
Depreciation begins when the asset is available for use, not necessarily when it first generates revenue. Entities may calculate partial-year charges by days or months if the method remains systematic and material. Depreciation continues during temporary idle periods unless the asset is fully depreciated or classified under another applicable standard.
Impairment, revaluation and disposal
Impairment or revaluation changes the carrying amount and therefore future depreciation. On disposal, depreciation is recorded to the disposal date under the entity’s policy, then cost and accumulated depreciation are removed. The disposal gain or loss is based on carrying amount, not original cost.
Choosing rates and production estimates
Rates should be derived from useful life, residual value and the selected method rather than copied from tax schedules. For units of production, expected total output should reflect technical capacity, maintenance and economic limits. Estimates must be reviewed when usage patterns, technology, operating plans or residual markets change.
Tax depreciation versus accounting depreciation
Tax allowances and accounting depreciation serve different purposes and often use different rates or methods. The accounting charge follows the expected consumption of economic benefits under IAS 16, while tax deductions follow legislation. Differences create deferred-tax considerations but do not justify replacing the accounting estimate with the tax rate.
Controls over depreciation calculations
Lock approved methods and useful lives in the asset register, restrict manual overrides and reconcile the monthly depreciation run to the general ledger. Review assets with zero depreciation, negative carrying amounts, missing locations or useful lives outside policy ranges. Changes should retain approval evidence and an effective date.
Practical review checklist
- Calculate depreciable amount after considering residual value.
- Match the method to expected consumption rather than profit targets.
- Depreciate significant components separately.
- Review method, useful life and residual value every year.
- Update future charges after impairment, revaluation or estimate changes.
Worked example
A machine costs 120,000, has a residual value of 20,000 and an expected life of five years or 50,000 units. Straight-line depreciation is 20,000 per year. Under units of production, the rate is 2 per unit, so 12,000 units in year one produce depreciation of 24,000. If a diminishing-balance method better reflects early consumption, the chosen rate is applied to opening carrying amount, with final charges managed so carrying amount does not fall below residual value.
Related Accounting Support guides
Continue with the depreciation accounting entries guide, accumulated depreciation guide, and the fixed-asset valuation guide.
Authoritative references
Authoritative references: IAS 16 Property, Plant and Equipment and Clarification of Acceptable Methods of Depreciation and Amortisation.
Key takeaway
No depreciation method is universally best. The correct method is the one that reflects consumption, is applied consistently, is reviewed when expectations change and is supported by asset-level evidence rather than chosen to manage reported profit.