Asset Details
€750.000
€75.000
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 Manufacturing
Manufacturing entities typically hold the most complex PP&E portfolios of any industry, with assets ranging from general-purpose factory buildings and office furniture to highly specialised production lines, CNC machines, automated assembly systems, and tooling. The capital-intensive nature of manufacturing means that depreciation is one of the largest expense items on the income statement and a primary driver of asset values on the balance sheet. Getting the depreciation calculation right is critical for accurate financial reporting and for meaningful comparison with industry peers.
Component depreciation under IAS 16.43 is particularly important in manufacturing. A production line is not a single asset — it consists of conveyors, robotic arms, control systems, safety enclosures, and foundations, each with different useful lives. An injection moulding machine has the frame (20+ years), the hydraulic system (10–15 years), and the mould itself (3–5 years or a specific number of cycles). Failure to apply component depreciation leads to understated depreciation in early years and overstated depreciation after major component replacements. Auditors should challenge management when a complex production asset is depreciated as a single unit.
The units of production method is widely used in manufacturing for assets whose consumption of economic benefits is directly tied to output volume rather than time. Examples include stamping dies (useful life measured in number of impressions), casting moulds, and certain specialised machinery. Under this method, depreciation per unit equals (cost minus residual value) divided by total estimated lifetime units, with annual depreciation calculated as the per-unit rate multiplied by actual production in the period. This method produces zero depreciation in idle periods, which aligns with IAS 16's requirement that the method reflect the consumption pattern — but remember that time-based depreciation does not cease when the asset is idle (IAS 16.55).
Typical Asset Classes — Manufacturing
| Asset | Useful Life | Method | Notes |
|---|---|---|---|
| General machinery | 5–15 years | Straight-line | Standard production equipment with predictable wear patterns |
| Heavy construction equipment | 8–20 years | Reducing balance or UOP | Higher early depreciation reflects intensive initial use |
| Production lines | 10–20 years | Straight-line with components | Component depreciation critical — conveyor, robotics, controls each have different lives |
| Factory buildings | 25–40 years | Straight-line | Separate land component; consider structure vs roof vs HVAC |
| Specialised tooling | 3–8 years | UOP | Tied to specific product runs, output-based depreciation common |
Key IAS 16 Considerations — Manufacturing
Component depreciation is critical for complex production assets (IAS 16.43)
Units of production method appropriate for output-linked assets (IAS 16.62)
Reducing balance reflects rapid early wear on machinery
Factory buildings must separate land (never depreciated) from structure (IAS 16.58)
Major overhauls and replacements may qualify for separate component treatment (IAS 16.13)
Worked Example: CNC Milling Machine
A manufacturing entity acquires a CNC milling machine on 1 March 2025 for €750,000. Estimated residual value is €75,000, useful life is 12 years. The entity uses straight-line depreciation with a December year-end. Pro-rata depreciation applies from the month of acquisition.
Cost: €750,000
Residual value: €75,000
Depreciable amount: €675,000
Annual depreciation: €56,250 (straight-line)
First year depreciation: €46,875 (pro-rata: 10 months — March to December)
Audit Considerations
ISA 540 requires auditors to challenge depreciation estimates including useful life, residual value, and method selection. For manufacturing entities, auditors should specifically evaluate whether component depreciation is applied where required (IAS 16.43), whether the depreciation method reflects the actual consumption pattern, and whether useful life estimates are supported by entity-specific evidence (maintenance records, replacement history).