What is meant by accelerated depreciation method? When such method is used and how many types are there for this method? And what is the position of accounting standards on such depreciation method?
As the name suggests, the accelerated depreciation method accelerates the the recognition of depreciation charge in the profit and loss account of the entity. Under this method the depreciation expense recognized is higher at the start of the useful life of the asset and lesser amount of depreciation is expensed near the end of the useful life of the asset.
It is the rate of recognition that will be effected by this method and not the overall amount to be recognized as an expense. The total depreciation estimated and recognized over the useful life of the asset using one of the accelerated technique and non-accelerated technique (e.g. straight-line basis) will be the same but the depreciation charge in a particular accounting period will be different.
There are two famous types of depreciation estimation techniques which employes the accelerated depreciation mechanism which are as follows:
- Reducing balance method (a.k.a declining balance method and diminishing balance method)
- Sum of years’ digits method
Under both of these techniques the depreciation charge for the starting years is higher as compared to the last few years of useful life due to the reason that depreciation is recognized at the start at accelerated rate and less and less is available to apportion over the remaining useful life of the asset. In other words decreasing charge over the useful life of the asset.
Accelerated depreciation method is applied by such entities who are of the opinion that their assets show better performance when they are new and the performance drops due to use over the useful life of the asset. Therefore, they are of the opinion that more performance means more consumption of the economic benefits embodied in the asset and thus more depreciation in the starting years and low performance results in lesser extraction of economic benefits from the assets and thus smaller charge for depreciation in the ending years of useful life of the asset.
International Accounting Standards in general and IAS 16 in particular has placed no specific method to measure and recognize depreciation charge.
According to IAS 16 para 60:
The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity
IAS 16 recognizes that there are several depreciation methods used by entities around the world that includes:
- straight-line method
- reducing balance method
- units of production method
Entities can use any of the above depreciation estimation technique or any other beside them that correctly reflect the pattern of consumption of economic benefits in the asset.