CHAPTER 30
DEFINITION
IAS 16.50 Indicates that the depreciable amount of an asset should be allocated on a
systematic basis over its useful life. This description captures one of the key elements of
depreciation concept: it is an allocation of the asset’s cost.
Many people often associate the idea of depreciation with a decline in value of the asset.
Although it is possible that the depreciation calculated approximates the loss in value of the asset
as it is used, there is no guarantee that this will be true. It is important to appreciate that the
purpose of accounting depreciation is to match the initial cost of the PPE asset to the periods that
benefit from its use. Depreciation does not provide an estimate of the change in an asset’s fair
value. Rather, it simply provides a way to allocate asset costs to the correct accounting periods.
The description above also identifies three key concepts:
• The depreciable amount
• The useful life of the asset
• The basis (method) used to calculate depreciation.
DEPRECIATION CALCULATIONS
Depreciable Amount
The first element that needs to be determined for a depreciation calculation
is the depreciable amount. It represents the cost that will be allocated to future
periods through the depreciation process. This amount is determined by taking the
asset’s cost and deducting the residual value. However, many assets will have a
residual value of zero or close to zero, and this amount will thus be ignored in the
calculation.
Useful Life
The useful life of an asset is determined by its utility to the company. This
means that estimates need to be made about how long the company plans to use
the asset. For certain types of assets, companies may have a policy of timed
replacement, even if the asset is still functioning.
Determining useful life
Assets’ expected capacity or physical output
Expected physical wear and tear, which depends on operational
factors, such as the number of shifts
