Depreciation Methods for Property, Plant, and Equipment (PPE)
The straight-line method associates the long-lived asset’s usefulness with its age.
Straight-Line Expense = (Cost – Salvage Value)/n
where n = number of years in asset’s useful life
Accelerated Methods of Depreciation
Accelerated methods of depreciation include:
- Sum-of-the-Years Digits (SYD) expensing.
- Double Declining Balance (DDB) expensing.
SYD method treats an asset as more useful in its early life by raising the depreciation expense for the early years.
SYD Example: If a company’s factory has a new conveyor belt with a useful life of 5 years, then SYD = 1+2+3+4+5 = 15. This conveyor belt cost $100,000 and has a salvage value = $0. The year two depreciation expense under the SYD method for the company will be calculated as follows:
($100,000 - $0) * (5 – 2 +1)/15 = $100,000*(4/15) = $26,667
SYD Depreciation Expense for Year “i” = (Cost – Salvage Value) * ((n – “# of the ith year” +1))/SYD
DDB method accelerates the depreciation rate of the straight line method.
DDB Expense = (Cost – Accumulated Depreciation) * (2/n)
Unlike the time based methods of straight line and accelerated depreciation, the Units-of-Production (U-O-P) depreciation method is activity based. A year’s depreciation expense on an annual income statement will include that year’s production as a fraction of total estimated lifetime production from the asset.
U-O-P Expense = ((Cost – Salvage Value)/# of Total Lifetime Units Estimated)* # of Units Produced in the Accounting Period.
Once a company has invested in a long-lived asset, it must:
- Choose a depreciation method;
- Estimate the useful life of the asset over which the depreciation will take place; and
- Determine if the asset will have a salvage value at the end of its depreciable life.
- CFA Level 2: Financial Reporting Part 1 - Introduction
- Financial Reporting: Important Definitions
- FIFO and LIFO Methods for Inventory Expensing
- Inventory Accounting and Financial Statements
- Inflation/Deflation and Inventory Accounting Analysis
- LIFO – Tax and Cash Flow Note
- LIFO Reserve and Converting LIFO Net Income to FIFO Net Income
- LIFO Liquidation
- Inventory at Net Realizable Value
- Impacts of LIFO and FIFO Inventory Methods on Selected Financial Ratios
- Accounting of Long-lived Assets - Expensing vs. Capitalizing
- Depreciation Methods for Property, Plant, and Equipment (PPE)
- Impact of Depreciation Method
- Depreciation - Important Points
- Impairment of Long-lived Assets
- Impact of Asset Impairment
- Revaluation of Property, Plant, & Equipment (PPE)
- Leasing versus Purchasing Assets
- Traditional Lessee Accounting in US GAAP
- Effects of Leases on Selected Financial Reporting Items for Lessees
- Lessor Accounting for Leases
- Lessors and Sales-Type Capital Leases
- Lessors and Direct Financing Capital Leases
- Effect of Leases on Financial Statements for Lessors
- Future of Lease Accounting
- CFA Level 2: Financial Reporting 1 - Recommendations