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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 for Energy
The energy sector holds some of the longest-lived and highest-value PP&E of any industry. Power generation assets, transmission networks, pipeline infrastructure, and renewable energy installations represent billions in capital investment with useful lives spanning 20 to 50 years. Depreciation policy in the energy sector is not just an accounting decision — it directly affects regulated tariff calculations, investment returns, and the financial viability of the energy transition from fossil fuels to renewables.
Decommissioning obligations are a defining feature of energy sector PP&E. When an energy company builds a power station, wind farm, or offshore platform, it simultaneously creates an obligation to decommission and remediate the site at end of life. Under IAS 16.16(c) and IAS 37, the initial estimate of decommissioning costs is capitalised as part of the asset cost, creating a decommissioning asset component. This component is depreciated over the asset's useful life. Changes in the decommissioning estimate after initial recognition are accounted for under IFRIC 1: adjustments to the asset and provision, with the asset adjustment affecting future depreciation.
Renewable energy installations (wind, solar, biomass) have their own depreciation challenges. Wind turbines comprise the tower (20–25 years), nacelle and drivetrain (15–20 years), and blades (10–15 years) — a classic case for IAS 16.43 component depreciation. Solar installations require separation of panels (25–30 years), inverters (10–15 years), and mounting structures (25+ years). The extractive industries (oil and gas) use units-of-production depreciation for assets tied to reserves, though this is governed by IFRS 6 rather than IAS 16 for exploration assets.
Typical Asset Classes — Energy
| Asset | Useful Life | Method | Notes |
|---|---|---|---|
| Power generation plant | 20–30 years | Straight-line with components | Turbines, generators, transformers — each component life differs |
| Wind turbines | 20–25 years | Straight-line | Blades (10–15 years) may require separate component treatment |
| Solar panels | 25–30 years | Straight-line | Degradation curve is predictable; inverters (10–15 years) are separate component |
| Pipeline infrastructure | 30–50 years | Straight-line | Very long lives; decommissioning asset component (IFRIC 1) |
| Transmission and distribution networks | 25–40 years | Straight-line | Regulated asset base; component approach for transformers vs lines |
Key IAS 16 Considerations — Energy
Decommissioning obligations create a capitalised asset component (IAS 16.16(c), IAS 37, IFRIC 1)
Component depreciation essential for wind turbines and power generation plant (IAS 16.43)
Energy transition may require useful life reassessment for fossil fuel assets
UOP method appropriate for extractive assets linked to reserves (IFRS 6 reference)
Renewable energy installations have distinct component profiles (panels vs inverters vs structure)
Worked Example: Onshore Wind Farm
An energy company constructs a 10-turbine onshore wind farm commissioned in January 2025 for €5,000,000 per turbine (€50M total). Each turbine is split: tower €2,000,000 (25 years), nacelle €2,000,000 (20 years), blades €1,000,000 (12 years). Decommissioning provision: €500,000 per turbine (depreciated over 25 years). Residual values: tower €100,000, nacelle €50,000, blades €0, decommissioning €0.
Cost: €5,000,000 per turbine (excluding decommissioning asset)
Residual value: €150,000 per turbine (across components)
Depreciable amount: €4,850,000 per turbine + €500,000 decommissioning
Annual depreciation: €197,333 per turbine (aggregate of all components + decommissioning)
First year depreciation: €197,333 (full year — January commissioning)
Audit Considerations
Energy sector auditors should focus on decommissioning provision estimates and their IAS 16/IFRIC 1 interactions, component depreciation for complex generation assets, and the impact of energy transition on useful life assumptions. Regulated utilities may have specific tariff-related depreciation requirements that differ from IAS 16 — ensure the IFRS financial statements are not influenced by regulatory accounting.