Last reviewed: July 2026.
Depreciation allocates the depreciable amount of an item of property, plant and equipment over its useful life. Under IAS 16, the selected method should reflect the pattern in which the asset’s future economic benefits are expected to be consumed.
Consistency is important for comparability, but it does not mean using the same method forever. The method, useful life and residual value must be reviewed and changed prospectively when expectations change.
Depreciable amount and useful life
Depreciable amount is generally cost, or another amount substituted for cost, less residual value. Useful life reflects the period or production units over which the asset is expected to be available for use by the entity. It may be shorter than physical life because of obsolescence, maintenance strategy, usage limits or legal restrictions.
Common depreciation methods
| Method | Pattern | Simple formula |
|---|---|---|
| Straight-line | Equal depreciation when benefits are consumed evenly. | (Cost − residual value) ÷ useful life. |
| Reducing balance | Higher charge in earlier periods when benefits decline over time. | Opening carrying amount × rate. |
| Units of production | Charge follows output, hours or other usage. | Depreciable amount × actual units ÷ expected total units. |
The IFRS Foundation’s IAS 16 overview establishes the recognition, measurement and depreciation principles for property, plant and equipment. ACCA’s depreciation article explains straight-line and reducing-balance methods.
Choose a method from consumption, not profit targets
A method should reflect how benefits are consumed. Straight-line may suit an office building used evenly. Reducing balance may suit equipment that is more productive or loses service potential faster in early years. Units of production may suit machinery whose consumption is closely linked to output.
Do not change method merely to increase or decrease profit. Revenue-based depreciation is generally inappropriate because revenue reflects pricing, inflation and selling factors as well as asset consumption.
Worked straight-line example
An asset costs 120,000 CU, has estimated residual value of 20,000 CU and useful life of five years:
Annual depreciation = (120,000 − 20,000) ÷ 5 = 20,000 CU
After two full years, accumulated depreciation is 40,000 CU and carrying amount is 80,000 CU, assuming no impairment or revaluation.
Worked reducing-balance example
An asset costs 100,000 CU and is depreciated at 30% reducing balance:
- Year 1: 100,000 × 30% = 30,000 CU
- Closing carrying amount: 70,000 CU
- Year 2: 70,000 × 30% = 21,000 CU
- Closing carrying amount: 49,000 CU
Ensure the asset is not depreciated below its residual value.
When depreciation begins and ends
Depreciation begins when the asset is available for use—when it is in the location and condition necessary to operate as intended. It does not necessarily begin when the asset is first used or when cash is paid. Depreciation generally stops on derecognition or when classified as held for sale under the applicable requirements, not simply because the asset is temporarily idle.
Review estimates and method
At each reporting date, review residual value, useful life and depreciation method. If expectations differ, account for the change as a change in accounting estimate under IAS 8, normally prospectively.
Suppose an asset’s carrying amount at the start of year 4 is 60,000 CU, residual value is revised to 6,000 CU and remaining useful life to three years. New annual depreciation is:
(60,000 − 6,000) ÷ 3 = 18,000 CU
Prior-year charges are not restated merely because the estimate changes.
Change in method versus error correction
A change from straight-line to units of production is a change in estimate when new information shows a different consumption pattern. Failing to depreciate an available-for-use asset because of an oversight may be an error, not a new estimate. The facts determine whether IAS 8 estimate-change or prior-period-error requirements apply.
Read the accounting policies and estimates guide for the distinction.
Component depreciation
Significant parts of an asset with different useful lives or consumption patterns are depreciated separately. An aircraft body and engines, or a building structure and major equipment, may require separate components. Replacement of a component can lead to derecognition of the old component and recognition of the new cost.
Revaluation and impairment
After revaluation, depreciation is based on the revalued amount and remaining useful life. Impairment is separate from depreciation: impairment addresses a reduction in recoverable amount, while depreciation systematically allocates depreciable amount.
Consistency and comparability
Use the selected method consistently from period to period while it remains appropriate. Consistency helps users compare performance, but a justified change improves faithful representation. Disclose methods, useful lives or rates, carrying amounts and significant changes in estimates as required.
Retain a method while it reflects consumption. Change it when reliable new information shows that the pattern has changed, document the evidence and apply the revised estimate prospectively.
Controls over depreciation
- maintain a complete fixed-asset register;
- record acquisition and available-for-use dates;
- identify significant components;
- approve useful lives, residual values and methods;
- reconcile the asset register to the general ledger;
- review disposals, idle assets and impairment indicators;
- protect formulas and system configurations;
- document annual estimate reviews.
Common mistakes
- depreciating land with an indefinite useful life;
- using cash payment date rather than available-for-use date;
- ignoring residual value;
- continuing below residual value;
- changing method to manage profit;
- failing to separate major components;
- treating an estimate change as a retrospective correction;
- stopping depreciation because an asset is temporarily idle.
Related guides
See IAS 8 accounting policies and estimates, the statement of financial position, trial-balance preparation and accounting-software controls.
Key takeaway
Apply a depreciation method consistently only while it reflects the asset’s consumption pattern. Review the method, life and residual value regularly; change estimates prospectively when justified; and maintain a controlled asset register that supports every charge.