Key Points
- The annual charge equals cost minus residual value, divided by the useful life in years.
- IAS 16.61 requires the depreciation method to be reviewed at least annually and changed prospectively if the pattern of expected benefits shifts.
- Straight-line is the most common method in European financial statements, used by over 80% of IFRS reporters for property, plant, and equipment.
- Choosing straight-line when consumption is clearly front-loaded misstates the carrying amount and triggers inspection findings.
What is Straight-Line Depreciation?
IAS 16.60 permits three depreciation methods (straight-line, diminishing balance, units of production) and requires the method chosen to reflect the pattern in which the asset's future economic benefits are expected to be consumed. Straight-line assumes that pattern is uniform. The formula is straightforward: depreciable amount (cost minus residual value) divided by useful life in years.
The method applies from the date the asset is available for use, not the date it is purchased or installed (IAS 16.55). When an entity applies component depreciation, each significant component with a different useful life or consumption pattern is depreciated separately, though the straight-line method can still apply to each component individually. IAS 16.51 requires both the residual value and useful life to be reviewed at least at each financial year-end. If expectations differ from previous estimates, the change is accounted for as a change in accounting estimate under IAS 8.36, applied prospectively. ISA 540.13(a) requires the auditor to evaluate whether management's method for the estimate (here, useful life and residual value) is appropriate for the asset in question.
Worked example: Hoffmann Maschinenbau GmbH
Client: German engineering company, FY2025, revenue EUR 28M, HGB reporter also preparing IFRS group reporting. Hoffmann acquires a CNC milling machine on 1 March 2025 for EUR 480,000 (including EUR 12,000 of directly attributable installation costs per IAS 16.16(b)). The machine has an estimated useful life of eight years and a residual value of EUR 40,000.
Step 1 — Calculate the depreciable amount
Cost of EUR 480,000 minus residual value of EUR 40,000 equals a depreciable amount of EUR 440,000.
Documentation note: record cost components (purchase price EUR 468,000, installation EUR 12,000), residual value estimate, and the basis for the residual value (resale quotes for comparable second-hand CNC machines from two German dealers).
Step 2 — Determine the annual depreciation charge
EUR 440,000 divided by eight years produces an annual charge of EUR 55,000.
Documentation note: record the depreciation method selected (straight-line), confirm it reflects the expected pattern of economic benefit consumption per IAS 16.60, and note that the machine runs a consistent number of production hours per year based on the current shift pattern.
Step 3 — Pro-rate for the first year
The machine is available for use from 1 March 2025. For the ten months to 31 December 2025, the charge is EUR 55,000 multiplied by 10/12, producing EUR 45,833.
Documentation note: record the date the asset became available for use (not the purchase order date of 15 January 2025), the pro-rata calculation, and the carrying amount at 31 December 2025 of EUR 434,167 (EUR 480,000 minus EUR 45,833).
Step 4 — Year-end review of estimates
Management reviews the useful life and residual value at 31 December 2025. Order volumes remain consistent with the initial assessment. No change is required.
Documentation note: record the annual review under IAS 16.51, state that the useful life of eight years and residual value of EUR 40,000 remain appropriate, and cross-reference to the production schedule showing expected machine utilisation through 2033.
Conclusion: the first-year depreciation charge of EUR 45,833 is defensible because the straight-line method matches the asset's even utilisation pattern, the residual value ties to external dealer quotes, and the year-end estimate review is documented.
Why it matters in practice
Teams apply straight-line depreciation as a default without documenting why the method reflects the actual consumption pattern of economic benefits. IAS 16.60 requires the method to reflect the pattern, not merely to be convenient. Where an asset's output declines sharply after the first few years (common with specialised tooling or technology), straight-line overstates the carrying amount in early periods. ISA 540.13(b) requires the auditor to evaluate whether the data and assumptions support the method selected.
The annual review of useful life and residual value under IAS 16.51 is frequently treated as a tick-box exercise. Reviewers see identical estimates carried forward year after year without evidence that management reconsidered them. A one-line note reading "no change" does not satisfy the standard; the file should show what evidence management assessed before reaching that conclusion.
Straight-line depreciation vs. declining balance depreciation
| Dimension | Straight-line | Declining balance |
|---|---|---|
| Annual charge pattern | Constant amount each year | Higher in early years, decreasing over time |
| When it fits | Asset provides roughly equal benefits each period (buildings, standard machinery on stable shift patterns) | Asset's economic benefits are consumed more rapidly in early years (vehicles, IT equipment with rapid obsolescence) |
| Effect on profit | Even expense profile across the asset's life | Front-loaded expense reduces profit in early years, increases it later |
| Carrying amount trajectory | Linear decline toward residual value | Exponential decline; carrying amount drops steeply then flattens |
| Common audit issue | Applied as a default without justification for the even-benefit assumption | Rate selection not linked to the asset's actual consumption pattern |
The practical difference surfaces when an entity switches between methods mid-life. IAS 16.61 treats a method change as a change in accounting estimate under IAS 8, applied prospectively. The auditor needs to verify that the switch is driven by a genuine change in expected benefit consumption, not by a desire to manage reported profit.
Related terms
Frequently asked questions
When does straight-line depreciation start?
Depreciation begins when the asset is available for its intended use, not when it is physically delivered or paid for. IAS 16.55 is explicit: the asset must be in the location and condition necessary for operation. If a machine is installed in November but commissioned in January, depreciation starts in January.
Do I need to review the depreciation method every year?
Yes. IAS 16.61 requires the depreciation method to be reviewed at least at each financial year-end. If the expected pattern of consumption has changed (for example, a machine previously running two shifts is now running one), the entity changes the method or adjusts the useful life prospectively under IAS 8.36. The auditor verifies that management performed this review and documented the conclusion.