Definition
ASC 360-10-35 treats depreciation as a system that spreads an asset's cost over its estimated useful life in a systematic and rational manner. Straight-line is the most common method. Accelerated and units-of-production methods are acceptable where they better match the pattern of use. Land is not depreciated. Depreciation begins when an asset is ready for its intended use, and tax depreciation such as MACRS often differs from book depreciation.
Why it matters in an audit or review
Depreciation is recomputed from the fixed asset register, and the auditor tests additions, disposals, useful lives and residual values. A change in useful life or residual value is a change in estimate applied going forward. A switch in method is permitted only when the new method is preferable and is treated as a change in estimate effected by a change in principle under ASC 250-10.
Example
Illustrative: equipment costs $120,000 with a residual value of $12,000 and a nine-year life. Annual straight-line depreciation is ($120,000 - $12,000) / 9 = $12,000. After three years accumulated depreciation is $36,000 and carrying value is $84,000.
Common mistakes
- Continuing to depreciate fully depreciated or disposed assets.
- Setting book lives to match tax lives without assessing actual use.
Sources
- FASB ASC 360-10-35, Property, Plant, and Equipment, Overall, Subsequent Measurement
- PwC, Guide: Property, plant, equipment and other assets, chapter 4, Depreciation (viewpoint.pwc.com)
- FASB ASC 250-10-45, Accounting Changes and Error Corrections
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error