IFRS depreciation methods, such as straight-line, declining balance, and units of production, require annual evaluation of estimates of useful life and residual value. Failure to report these figures accurately can lead to exaggerations in a company’s balance sheet. The straight-line method is the simplest and most widely used, while the declining balance and units of production methods are reserved for specific assets.
Depreciation is a method by which a business shows the use of fixed assets on the income statements. IFRS depreciation methods include the most popular with all national accounting standards, namely straight-line, declining balance, and units of production, to name a few. Some of the most important differences from IFRS depreciation methods are estimates of useful life and residual value. Under IFRS standards, these two estimates need evaluation each year when a company prepares and publishes its annual report. These two factors can greatly affect the amount of depreciation remaining for a fixed asset.
Accountants must take into account various data with any type of depreciation method. Two especially important pieces of information are the asset’s useful life and residual value, which represent the number of years a business keeps the asset in operation and the dollar value of the asset at the end of its useful life. IFRS depreciation methods require adjustments to these parts annually to present the best financial information to interested parties. Fixed assets can represent a large part of a company’s balance sheet. Failure to properly report these figures can lead to exaggerations in the company’s balance sheet.
The straight line is perhaps the simplest and most widely used IFRS depreciation method. Companies using this method take the historical cost of the asset less the residual value and divide this figure by the number of useful years of the asset. The final figure in this formula is an amount of annual depreciation that the business can account for in its ledgers. In most cases, accountants convert the annual figure to the monthly and publish it accordingly. This method, and others, can be applied to almost all of a company’s fixed assets.
Declining balance depreciation methods anticipate depreciation expenses related to certain fixed assets. With this IFRS depreciation method, a company multiplies the depreciable cost of the asset by a predetermined percentage. The result is the amount of depreciation for the first year, which can be converted to a monthly figure. For subsequent years, the prior year’s depreciation is subtracted from the remaining depreciable cost and multiplied by another percentage. This continues until the asset is fully depreciated.
The units of production method is quite complex and is reserved for specific assets. This IFRS override method requires a company to determine how many units a machine will make over its useful life. Dividing the depreciable cost by this figure results in a depreciation amount per unit. Accountants can multiply this predetermined figure by the number of units produced in a given time period. The result is a monthly depreciation method for this type of fixed asset.
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