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Depreciation Methods for Property, Plant, and Equipment (PPE)

Accounting, CFA® Exam, CFA® Exam Level 2

This lesson is part 12 of 26 in the course Financial Reporting Part 1

Straight-Line Method

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

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 Methods

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.

 

Previous Lesson

‹ Accounting of Long-lived Assets – Expensing vs. Capitalizing

Next Lesson

Impact of Depreciation Method ›

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In this Course

  • 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

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