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Chapter 5

3.2 Depreciation

IAS 16 Property, Plant and Equipment, defines depreciation as ‘the measure of the
cost or revalued amount of the economic benefits of the tangible non-current
asset that has been consumed during the period’ (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:

 straight-line method

 reducing-balance method.

IAS 16 Property, Plant and Equipment says that 'the depreciation method applied
to an asset should reflect the pattern in which the assets future economic
benefit are expected to be consumed' (IAS 16 para 60).

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