Asset Details
€400.000
€80.000
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 for Construction
Construction and engineering entities rely heavily on physical assets: excavators, cranes, formwork systems, concrete plant, and a fleet of specialist vehicles. PP&E is one of the largest balance sheet items for construction companies, and the depreciation charge is a critical component of project costing and tender pricing. Unlike manufacturing, where assets remain in one location, construction equipment moves between project sites, operates in varying conditions, and may sit idle between projects.
The choice of depreciation method in construction is more varied than in most industries. Straight-line is common for assets with time-based wear (buildings, offices), but reducing balance is widely used for earthmoving equipment and vehicles that lose value rapidly in the first few years but retain significant residual value. Units of production is appropriate for equipment where wear is directly proportional to operating hours — concrete pumps, piling rigs, and tunnel boring machines. The choice should reflect the actual consumption pattern (IAS 16.60) supported by the entity's historical data on asset utilisation and disposal values.
Residual values in construction tend to be higher than in other industries because well-maintained construction equipment has an active secondary market. A 10-year-old excavator from a reputable manufacturer may retain 25–40% of its original cost. IAS 16.51 requires residual values to be reviewed at each year-end. Construction companies should base residual value estimates on their actual disposal experience and current market data. If residual values increase to the point where they equal or exceed the carrying amount, depreciation ceases until the carrying amount once again exceeds the residual value (IAS 16.54).
Typical Asset Classes — Construction
| Asset | Useful Life | Method | Notes |
|---|---|---|---|
| Excavators and earthmoving equipment | 8–15 years | Reducing balance or UOP | High residual values when well-maintained |
| Tower cranes | 15–25 years | Straight-line | Long lives with regular overhauls |
| Scaffolding and formwork | 5–10 years | Straight-line | Repeated use across projects; damage and loss common |
| Concrete batching plant | 10–20 years | Straight-line or UOP | Mobile plants may have shorter life than fixed installations |
| Construction vehicles (trucks, mixers) | 5–10 years | Reducing balance | Significant market for used construction vehicles |
Key IAS 16 Considerations — Construction
Method choice (SL, DB, UOP) varies by asset type more than in other industries
High residual values common — review annually per IAS 16.51
UOP method useful for assets tracked by operating hours
Depreciation does NOT cease when equipment is idle (IAS 16.55)
Active secondary market supports residual value estimates
Worked Example: Hydraulic Excavator
A construction company acquires a hydraulic excavator in April 2025 for €400,000. Estimated residual value is €80,000 (20% — reflecting strong secondary market), useful life is 10 years. The entity uses double declining balance depreciation with a December year-end.
Cost: €400,000
Residual value: €80,000
Depreciable amount: €320,000
Annual depreciation: €80,000 first full year (20% of opening NBV under DDB)
First year depreciation: €60,000 (pro-rata: 9 months — April to December at DDB rate)
Audit Considerations
Construction entity auditors should focus on the appropriateness of the depreciation method given actual utilisation patterns, the reasonableness of residual value estimates against market data, and whether the entity has appropriate systems to track operating hours for UOP assets. Project costing models should use depreciation rates consistent with the financial statements.