What Are the Different IFRS Depreciation Methods?
Depreciation is a method by which a company displays the use of fixed assets on income statements. IFRS depreciation methods include those most popular with all national accounting standards, namely straight line, declining balance, and units of production to name a few. A few of the more important differences with IFRS depreciation methods are the estimates of useful life and residual value. Under IFRS rules, these two estimates need evaluation each year when a company prepares and releases its annual report. These two factors can greatly affect the remaining depreciation amount for a fixed asset.
Accountants must take several pieces of information into consideration with any type of depreciation method. Two especially important pieces of information are the useful life and asset residual value, which represent the number of years a company keeps the asset in operation and the dollar value of the asset at the end of useful life. IFRS depreciation methods require adjustments to these pieces annually in order to present the best financial information to stakeholders. Fixed assets can represent a large portion of a company’s balance sheet. Failure to properly report these figures can result in overstatements on the company’s balance sheet.
Straight line is perhaps the simplest and most used IFRS depreciation method. Companies using this method take the asset’s historical cost less residual value and divide this figure by the asset’s number of useful years. The final figure from this formula is an annual depreciation amount the company can post into its accounting books. In most cases, accountants convert the annual figure into a monthly one and post it accordingly. This method — and others — can apply to nearly all a company’s fixed assets.
Declining balance depreciation methods advance depreciation expenses related to certain fixed assets. With this IFRS depreciation method, a company multiplies the asset’s depreciable cost by a predetermined percentage. The result is the first year’s depreciation amount, which may be converted to a monthly figure. For subsequent years, the previous year's depreciation gets subtracted from the remaining depreciable cost and multiplied by another percentage. This continues until the asset is fully depreciated.
The units of production method is quite complex and reserved for specific assets. This IFRS deprecation method requires a company to determine how many units a machine will manufacture during its lifetime. Dividing the depreciable cost by this figure results in a per-unit depreciation amount. Accountants can then multiply this predetermined figure by the number of units produced in a given time period. The result is a monthly depreciation method for this fixed asset type.
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