IAS 16

Depreciation
Calculator

Calculate depreciation using all four IAS 16 methods. Full depreciation schedule, journal entries, method comparison, and CSV export — straight into your working papers.

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€500.000

€50.000

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IAS 16 Depreciation Audit Working Paper Template — free PDF

Practical audit guide covering all four depreciation methods with worked examples, component depreciation checklist, change-in-estimate documentation template, and useful life benchmarks by asset class.

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IAS 16 Depreciation — Complete Methodology Guide

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life (IAS 16.6). The depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. IAS 16 Property, Plant and Equipment governs the recognition, measurement, and depreciation of tangible fixed assets — from office furniture to power stations, from delivery trucks to hospital MRI scanners.

The standard requires that the depreciation method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity (IAS 16.60). This is not a theoretical exercise — it directly affects reported profit, asset values on the balance sheet, and key financial ratios that stakeholders, lenders, and regulators rely on.

The Four Depreciation Methods

1. Straight-Line (IAS 16.62) — The most common method. Annual depreciation equals (Cost − Residual Value) ÷ Useful Life. This produces a constant charge over the useful life and is appropriate when economic benefits are consumed evenly. Used for the majority of assets worldwide including buildings, office equipment, and general machinery.

2. Reducing Balance / Diminishing Balance (IAS 16.62) — Produces a declining charge over the useful life by applying a fixed rate to the opening net book value each year. The double declining rate equals 2 ÷ Useful Life. This method allocates higher depreciation in early years, reflecting the reality that many assets (particularly vehicles and technology) lose value more rapidly when new. A critical implementation detail: when the straight-line charge on the remaining depreciable amount exceeds the reducing balance charge, switch to straight-line for the remainder to ensure the asset reaches its residual value.

3. Units of Production (IAS 16.62) — Depreciation per unit equals (Cost − Residual Value) ÷ Total Estimated Lifetime Units. Annual depreciation is calculated by multiplying the per-unit rate by actual units produced. This method is appropriate when the consumption of economic benefits is directly proportional to usage — stamping dies, mining equipment, certain manufacturing machinery. It produces zero depreciation in idle periods.

4. Sum-of-Years-Digits — An accelerated method where annual depreciation equals (Cost − Residual Value) × (Remaining Life ÷ SYD), where SYD = n(n+1)/2. For a 10-year asset, SYD = 55. Year 1 charges 10/55 of the depreciable amount, year 2 charges 9/55, and so on. This produces a steadily declining charge without the geometric decline of reducing balance. Used less frequently than the other three methods but accepted under IAS 16 as it reflects a systematic consumption pattern.

Key IAS 16 Requirements

IAS 16.50 — The depreciable amount of an asset shall be allocated on a systematic basis over its useful life. Depreciation is recognised even if the fair value of the asset exceeds its carrying amount.

IAS 16.51 — The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change shall be accounted for as a change in accounting estimate in accordance with IAS 8.

IAS 16.43 — Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. Component depreciation is mandatory, not optional.

IAS 16.55 — Depreciation begins when the asset is available for use and ceases at the earlier of held-for-sale classification (IFRS 5) or derecognition. Depreciation does NOT cease when the asset becomes idle.

IAS 16.58 — Land has an unlimited useful life and therefore is not depreciated. Land and buildings are separable assets and are accounted for separately, even when acquired together.

IAS 16.62A — A depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. Revenue-based methods are explicitly prohibited.

Component Depreciation (IAS 16.43)

Component depreciation is one of the most important — and most frequently overlooked — requirements of IAS 16. When a part of an item of PP&E has a cost that is significant relative to the total cost and a useful life that differs significantly from other parts, it must be depreciated separately. The classic example is an aircraft: the airframe (15–25 years), engines (5–10 years between overhauls), and interior cabin (6–12 years) are separate components with different useful lives. A building should separate the structure from the roof, HVAC, elevators, and electrical systems.

This calculator supports full component depreciation with up to 10 components. Each component gets its own cost allocation, useful life, depreciation method, and residual value. The schedule shows per-component breakdown and aggregated totals, ensuring that total depreciation equals the sum of component depreciation charges.

Change in Estimate (IAS 8 Interaction)

When management revises its estimate of useful life, residual value, or depreciation method, the change is applied prospectively from the date of the change — no retrospective adjustment or restatement is required (IAS 16.51, IAS 8.36). The remaining carrying amount (less the updated residual value) is depreciated over the new remaining useful life. This calculator includes a dedicated "Change in Estimate" mode that recalculates the schedule from the specified year forward, keeping all prior periods unchanged.

Worked Example — Manufacturing Equipment

Entity A acquires manufacturing equipment on 1 July 2025 for €500,000. Estimated residual value: €50,000. Useful life: 10 years. December year-end. Using straight-line depreciation with the full-month pro-rata convention:

Depreciable amount: €500,000 − €50,000 = €450,000

Annual depreciation: €450,000 ÷ 10 = €45,000

Year 1 (2025): €45,000 × 6/12 = €22,500 (pro-rata — July to December)

Years 2–10: €45,000 per year

Year 11 (2035): €22,500 (remaining pro-rata for the final period)

Comparing the same asset using double declining balance: Year 1 rate = 20% (2/10). Year 1 charge = €500,000 × 20% × 6/12 = €50,000. Year 2 charge = €450,000 × 20% = €90,000. The DB charge declines each year until around year 6–7, when the straight-line charge on the remaining depreciable amount exceeds the DB charge, triggering the automatic switch to straight-line for the remaining periods.

The method comparison view in this calculator shows SL, DB, and SYD side-by-side for the same asset — letting you instantly see the impact of method choice on annual charges and NBV decline patterns.

Frequently Asked Questions

What depreciation methods does IAS 16 allow?
IAS 16.62 explicitly mentions three methods: straight-line, diminishing (reducing) balance, and units of production. Any other method that reflects the pattern of consumption of economic benefits is also acceptable, such as sum-of-years-digits. However, IAS 16.62A explicitly prohibits revenue-based depreciation methods, as revenue reflects factors other than the consumption of economic benefits embodied in the asset.
When does depreciation begin and end under IAS 16?
Depreciation begins when the asset is available for use — that is, when it is in the location and condition necessary for it to be capable of operating in the manner intended by management (IAS 16.55). Depreciation ceases at the earlier of the date the asset is classified as held for sale under IFRS 5 or the date the asset is derecognised. Depreciation does not cease when the asset becomes idle or is retired from active use.
What is component depreciation and when is it required?
IAS 16.43 requires that each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. This is mandatory, not optional. For example, an aircraft must depreciate the airframe and engines separately because they have significantly different useful lives. A building should separate the structure from the roof, HVAC systems, and elevators.
How do I handle a change in useful life or residual value?
Changes in useful life, residual value, or depreciation method are changes in accounting estimates under IAS 8 and are applied prospectively from the date of the change (IAS 16.51). The remaining carrying amount (less any updated residual value) is depreciated over the new remaining useful life. No retrospective adjustment or restatement is required.
What happens when the residual value exceeds the carrying amount?
Under IAS 16.54, if the residual value equals or exceeds the asset's carrying amount, the depreciation charge is zero. Depreciation resumes if the residual value subsequently decreases below the carrying amount — for example, after an impairment loss is recognised that reduces the carrying amount below the residual value.
Is land depreciated under IAS 16?
No. IAS 16.58 explicitly states that land has an unlimited useful life and therefore is not depreciated. When land and buildings are acquired together (even as a single transaction), they must be separated for accounting purposes, with only the building component subject to depreciation. Land improvements (fencing, drainage, roads) are separate depreciable assets.
How does reducing balance depreciation work with the automatic switch to straight-line?
Under reducing (diminishing) balance, the depreciation charge declines each year as the NBV decreases. At some point, the straight-line charge on the remaining depreciable amount over the remaining useful life exceeds the reducing balance charge. Standard practice is to switch to straight-line at that point, ensuring the asset reaches exactly its residual value by the end of the useful life. This calculator implements the switch automatically.
What is the difference between IAS 16 and IAS 40 for property?
IAS 16 applies to owner-occupied property — property used by the entity in its operations or administration. IAS 40 applies to investment property — property held to earn rentals or for capital appreciation. Under IAS 40, entities can choose the fair value model (no depreciation, with gains and losses in profit or loss) or the cost model (which applies IAS 16 depreciation rules). The classification depends on the entity's use of the property.
Can I use tax depreciation rates for IAS 16 accounting depreciation?
No. Tax depreciation rates (capital allowances, AfA-Tabellen, CCA classes) are determined by tax legislation and may not reflect the entity-specific consumption pattern required by IAS 16.60. While tax rates can be a starting point, IAS 16.51 requires entity-specific useful life estimates. Using tax rates without independent justification is a common compliance deficiency identified by regulators.
How does this calculator handle mid-year acquisitions?
The calculator supports three pro-rata conventions for mid-year acquisitions: full-month convention (depreciation starts from the first day of the acquisition month), half-month convention (assets acquired before the 16th get a full month, after the 15th get a half month), and exact-day convention (actual days / 365). The default is full-month convention, which is the most common practice.

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