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Chapter 6

3.2 Depreciation

IAS 16 Property Plant and Equipment defines depreciation as ‘the systematic
allocation of the depreciable amount of an asset over its useful life' (IAS 16
para 6). In simple terms, depreciation spreads the cost or revalued amount of the
asset over the accounting periods in which it is expected to be used.

There are a number of methods that accountants use to calculate or estimate the
annual depreciation charge. The two most common methods are:

 the straight-line method, and

 the reducing-balance method.

3.3 Straight-line method

 This method charges the same amount each accounting period to the statement
of profit or loss over the expected useful life of the asset.

 Buildings are most commonly depreciated using this method because entities
will commonly obtain the same usage from a building each year.

 The amount to be charged to each accounting period is calculated as follows:

Original cost – estimated residual value
Depreciation per annum =
Estimated useful life

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