The straight-line method
This method is based on the cost of a property plant and equipment cost uniform distribution during its useful life.
That is, in this method, it is irrelevant if an entity uses the asset in a greater proportion in one year than in another.
In general, this type of method is used in assets in which the generation of future economic benefits is presumed to be similar throughout the useful life of an asset.
Some examples of assets that use this method are buildings, bridges, roads, and warehouses, among others.
The straight-line method example
Let’s consider the following example.
In January of year 1; a company buys a building for 15,000,000 with a useful life of 50 years and a salvage value of 20%.
What would the depreciation charge be at the end of year 10?
To perform depreciation calculation, first, we must find the depreciable amount.
Depreciable amount = Cost of an asset – residual value
It is important to remember that residual value is the amount that a company expects to receive from the sale of an asset after a certain period of use.
Depreciable amount = 15,000,000 – 3,000,000 (15,000,000 x20%)
Depreciable amount = 12,000,000
Annual depreciation = (9,100,000 / 50 years) = 240,000
Accumulated depreciation = Depreciable amount / Useful life X elapsed time
Accumulated depreciation = (12,000,000 / 50 years) x 10 years
Accumulated depreciation = 1,920,000
Carrying amount Asset year 8 = asset cost – accumulated depreciation
Carrying amount Asset year 8 = 15.000.000 – 1,920,000
Carrying amount Asset year 8 = 13,080,000
On the other hand, assets that use this method have the peculiarity that even if they are not in use, their depreciation must continue, as set out in paragraph 55 of IAS 16.
Something very different occurs in assets that use the units of production method since the generation of economic benefits associated with the asset is not based on its use but on its production.
Units of production method
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