Key Takeaways
- The depreciation charge rises and falls with production volume, making cost-of-goods-sold more reflective of actual asset consumption.
- IAS 16.61 permits three depreciation methods (straight-line, diminishing balance, units of production) and requires the one that best reflects the pattern of economic benefit consumption.
- A method change from straight-line to units of production (or vice versa) is a change in accounting estimate under IAS 8.32, applied prospectively with no restatement.
- Periods of zero production produce a zero depreciation charge, which can inflate reported profit if the asset's decline in value is partly time-driven.
What is Units of Production Depreciation?
IAS 16.62 states that the units of production method results in a charge based on expected use or output. The entity estimates total lifetime output (in units, hours, kilometres, or another physical measure), then divides the depreciable amount by that total to get a per-unit rate. Each period's charge equals the per-unit rate multiplied by actual output for the period. The depreciable amount is cost minus residual value, and IAS 16.51 requires that both the residual value and useful life be reviewed at least at each financial year-end.
This method works well when the asset's wear correlates strongly with production volume. Quarry trucks, injection-moulding dies, printing presses with rated impression counts, and mining haul roads all fit. It works poorly when deterioration is primarily time-based (technology obsolescence, weather exposure) because zero-output periods still erode the asset's future economic benefits. ISA 540.13(a) requires the auditor to evaluate whether the entity's chosen depreciation method is appropriate for the asset, which means testing whether output genuinely drives consumption rather than accepting management's preference at face value.
Worked example: Hoffmann Maschinenbau GmbH
Client: German engineering company, FY2025, revenue EUR 28M, HGB reporter also preparing an IFRS reporting package for the group. Hoffmann owns a CNC milling centre purchased on 1 January 2023 for EUR 480,000. The machine has an estimated total output of 600,000 machining hours over its useful life. Residual value is estimated at EUR 30,000.
Step 1 — Calculate the depreciable amount and per-unit rate
Depreciable amount is EUR 480,000 minus EUR 30,000, giving EUR 450,000. The per-unit depreciation rate is EUR 450,000 divided by 600,000 hours, giving EUR 0.75 per machining hour.
Documentation note: record the cost, residual value, and total estimated machining hours. Cross-reference the machine's technical specification sheet for the manufacturer's rated lifetime hours. Note the basis for the residual value estimate (recent resale data for comparable CNC equipment) under IAS 16.51.
Step 2 — Determine actual output for FY2025
Hoffmann's production logs show 78,400 machining hours in FY2025. Prior-year hours were 81,200 (FY2023) and 76,900 (FY2024), giving cumulative hours of 236,500.
Documentation note: record the source of actual hours (integrated machine-hour counter, reconciled to the production planning system). File a screenshot or extract of the counter reading at 31 December 2025.
Step 3 — Calculate FY2025 depreciation
FY2025 depreciation is 78,400 hours multiplied by EUR 0.75, giving EUR 58,800. Cumulative depreciation through FY2025 is 236,500 hours multiplied by EUR 0.75, giving EUR 177,375. The carrying amount at 31 December 2025 is EUR 480,000 minus EUR 177,375, giving EUR 302,625.
Documentation note: record the period charge, cumulative depreciation, and carrying amount in the fixed asset register. Verify that accumulated depreciation does not exceed the depreciable amount of EUR 450,000.
Step 4 — Reassess the total estimated output
Hoffmann's maintenance team reports no material change to the machine's expected total lifetime hours. If the estimate had changed (for example, to 550,000 hours because of accelerated wear), the per-unit rate would be recalculated prospectively from 1 January 2026 using the remaining depreciable amount and remaining estimated hours under IAS 8.36.
Documentation note: record management's year-end review of total lifetime hours per IAS 16.51. If the estimate changes, document the reason, the revised per-unit rate, and the prospective effect on future depreciation charges.
Conclusion: the FY2025 depreciation charge of EUR 58,800 is defensible because the per-unit rate ties to the manufacturer's rated lifetime, actual hours are verifiable from the machine counter, and the year-end estimate review is documented.
Why it matters in practice
Teams apply the units of production method without verifying that actual output data is reliable. IAS 16.60 requires the method to reflect the pattern of future economic benefits. If the entity tracks output manually or uses estimated production rather than metered readings, the depreciation charge becomes a soft number. ISA 500.9 requires the auditor to evaluate the reliability of information used as audit evidence, which includes production data feeding the depreciation calculation.
The year-end review of total estimated lifetime output is frequently omitted. IAS 16.51 requires review at least annually, and a significant change in estimated total output changes the per-unit rate prospectively. Failing to update the denominator when operating conditions change (new shift patterns, accelerated wear from harder material) causes systematic over- or under-depreciation that compounds each period.
Units of production vs. straight-line depreciation
| Dimension | Units of production (IAS 16.62) | Straight-line (IAS 16.62) |
|---|---|---|
| Charge driver | Actual output or usage in the period | Passage of time (equal charge each period) |
| Best fit | Assets whose wear correlates with volume (mining equipment, presses, moulds) | Assets that deteriorate with time regardless of usage (buildings, furniture, leasehold improvements) |
| Idle-period effect | Zero depreciation charge | Depreciation continues unchanged |
| Volatility | Period charge fluctuates with production volume | Period charge is constant, simplifying budgets and forecasts |
| Data requirement | Reliable measurement of actual output each period | Only the useful life estimate and residual value |
The choice matters on engagements because switching methods changes the profit profile without any change in the underlying asset. An entity moving from straight-line to units of production during a low-output year will report a lower depreciation charge and higher profit. Auditors should verify that the switch reflects a genuine change in the pattern of economic benefit consumption under IAS 16.61, not a profit management exercise.
Related terms
Frequently asked questions
Can I use units of production depreciation for all fixed assets?
IAS 16.62 permits it for any item of property, plant, and equipment, but only where the method reflects the pattern in which the asset's future economic benefits are consumed. Assets whose decline is primarily time-driven (office buildings, IT infrastructure with a fixed obsolescence horizon) are better served by straight-line depreciation. The auditor should challenge the method selection per ISA 540.13(a) when production volume and economic benefit consumption do not correlate.
What happens during periods when the asset is idle?
The depreciation charge is zero because no units are produced. IAS 16.55 confirms that depreciation does not cease when the asset is idle unless the entity applies the straight-line or diminishing balance method. However, an extended idle period may trigger an impairment indicator under IAS 36.12(f), requiring a separate recoverable amount assessment.
How do I change from units of production to straight-line depreciation?
A change in depreciation method is a change in accounting estimate under IAS 8.32. Apply the new method prospectively from the date of change. No retrospective restatement is required. Document why the pattern of economic benefit consumption has changed (for example, the asset moved from variable production runs to continuous fixed-output operation) and record the revised depreciation schedule per IAS 16.61.