Depreciation
Depreciation is charged systematically over the
useful life of the asset, using a method that reflects
the pattern of benefit consumption, to its residual
value. Different depreciation methods are acceptable
(including straight-line, diminishing balance and units
of production), but not a method that is based on the
revenue the asset generates.
Components of an asset with differing patterns of
benefits are depreciated separately.
The residual value is the amount the entity would
receive currently if the asset were already of the
age and condition expected at the end of its useful
life. Useful life and the residual value are reviewed
annually.
[IFRS in Your Pocket 2019]
Opinions expressed by foreign researchers are that depreciation/ amortization expense is informative about company’s depreciation policy and depreciation/ amortization methods have significant influence over investment decisions taken by company’s management and shareholders. Usually selection of particular depreciation method is based on the company’s financial policy and available amount of financial resources to be invested. Depreciation policies allow to modulate company’s self-financing flows among years. The linear depreciation method is the one used most often by companies (Ilincuta 2013).
There are various methods of depreciation/ amortization calculation. In situation when different depreciation/ amortization methods for the same long-lived non-financial assets are applied also the result per financial period can differ quite substantially. Therefore, the policy defining how company’s long-lived assets should be depreciated/ amortized has significant impact also on the calculated income. These expenses similar as impairment losses are accounted as noncash expenses. The company’s management before selecting new or evaluating existing depreciation/ amortization method of long-lived non-financial assets should consider various important issues. It is responsible to ensure that accounting process of these long-lived assets is correct, transparent and in accordance with respective accounting and reporting regulations.
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