Depreciation Accounting

The standards, which have been set in bold type, should be read in the context of the background material and implementation guidance in this Standard, and in the context of the Foreword to Financial Reporting Standards. Financial Reporting Standards are not intended to apply to immaterial items.


Depreciable assets comprise a significant portion of the assets of many enterprises. Depreciation can, therefore, have a significant effect in determining and presenting the financial position and results of operations of those enterprises. The objective of this Standard is to prescribe the accounting treatment for depreciation.

The primary issue in accounting for depreciation is determining the depreciable amount of the depreciable asset and its useful life. This Standard identifies the factors to be considered in determining both the depreciable amount and the useful life of the depreciable asset.


  1. This Standard should be applied in accounting for depreciation.

  2. This Standard applies to all depreciable assets except:

    1. property, plant and equipment (see FRS 1162004, Property, Plant and Equipment);

    2. forests and similar regenerative natural resources;

    3. expenditures on the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources;

    4. expenditure on research and development (see FRS 1092004, Research and Development Costs); and

    5. goodwill (to be dealt in accordance with Financial Reporting Standard on goodwill).

  1. The provisions of this Standard are to be applied with due regard to and in conformity with, the relevant applicable provisions in FRS 1162004, Property, Plant and Equipment.


  1. The following terms are used in this Standard with the meanings specified:

    Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction.

    Depreciation is the allocation of the depreciable amount of an asset over its estimated useful life. Depreciation for the accounting period is charged to net profit or loss for the period either directly or indirectly.

    Depreciable assets are assets which:

  1. are expected to be used during more than one accounting period;

  2. have a limited useful life; and

  3. are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes.

    Useful life is either:

  1. the period over which a depreciable asset is expected to be used by the enterprise; or

  2. the number of production or similar units expected to be obtained from the asset by the enterprise.

    Depreciable amount of a depreciable asset is the historical cost or other amount substituted for historical cost in the financial statements, less the estimated residual value.

    Residual value is the net amount which the enterprise is expected to obtain for an asset at the end of its useful life after deducting the expected costs of disposal.


  1. The depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset.

  2. The view is sometimes expressed that if the value of an asset has increased over the amount at which it is carried in the financial statements, it is unnecessary to provide for depreciation. It is considered, however, that depreciation should be charged in each accounting period on the basis of the depreciable amount irrespective of an increase in the value of the asset.

Useful Life

  1. The useful life of a depreciable asset should be estimated after considering the following factors:

  1. expected physical wear and tear;

  2. obsolescence; and

  3. legal or other limits on the use of the asset.

  1. The useful lives of major depreciable assets or classes of depreciable assets should be reviewed periodically and depreciation rates adjusted for the current and future periods if expectations are significantly different from the previous estimates. The effect of the change should be disclosed in the accounting period in which the change takes place.

  2. Estimation of the useful life of a depreciable asset or a group of similar depreciable assets is a matter of judgement ordinarily based on experience with similar types of assets. For an asset using new technology or used in the production of a new product or in the provision of a new service with which there is little experience, estimation of the useful life is more difficult but is nevertheless required.

  3. The useful life of a depreciable asset for an enterprise may be shorter than its physical life. In addition to physical wear and tear, which depends on operational factors such as the number of shifts for which the asset is to be used and the repair and maintenance programme of the enterprise, other factors need to be taken into consideration. These include obsolescence arising from technological changes or improvements in production, obsolescence arising from a change in the market demand for the product or service output of the asset, and legal limits such as the expiry dates of related leases.

Residual Value

  1. The residual value of an asset is often insignificant and can be ignored in the calculation of the depreciable amount. If the residual value is likely to be significant, it is estimated at the date of acquisition, or the date of any subsequent revaluation of the asset, on the basis of the realisable value prevailing at the date for similar assets which have reached the end of their useful lives and have operated under conditions similar to those in which the asset will be used. The gross residual value in all cases is reduced by the expected costs of disposal at the end of the useful life of the asset.



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