Depreciation
Depreciation is the reduction in the value of an asset due to usage, passage of time, environmental factors, wear and tear, obsolescence, depletion or inadequacy.
Alternate Definitions
The International Infrastructure Management Manual defines depreciation as "The wearing out, consumption or other loss of value of an asset whether arising from use, passing of time,or obsolescence through technological and market changes. It is accounted for by the allocation of the cost (or revalued amount) of the asset less its residual value over its useful life."
AASB 116 defines depreciation as "the systematic allocation of the depreciable amount of an asset over its useful life."
Depreciation Methods
AASB 116 states that;
- The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.
- The depreciation method applied to an asset shall be reviewed at least at the end of each annual reporting period and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method shall be changed to reflect the changed pattern. Such a change shall be accounted for as a change in an accounting estimate in accordance with AASB 108.
- A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method and the units of production method. Straight-line depreciation results in a constant charge over the useful life if the asset’s residual value does not change. The diminishing balance method results in a decreasing charge over the useful life. The units of production method results in a charge based on the expected use or output. The entity selects the method that most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. That method is applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits.
Additional Notes
AASB 116 states that:
- Depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as long as the asset’s residual value does not exceed its carrying amount. Repair and maintenance of an asset do not negate the need to depreciate it.
