BLM15020 - Lease accounting: finance lease accounting: finance lessees: balance sheet depreciation (accounting)

FRS102 glossary has the following definitions:

• Depreciation: “The systematic allocation of the depreciable amount of an asset over its useful life”

• Depreciable amount: “The cost of an asset, or other amount substituted for cost, less its residual value”

• Useful life: “The period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by an entity.Example, if an asset is bought for £10,000 and is expected to have a useful life of 5 years it may be expected to have no value at the end of its life – or (say) £2,000.

  If the asset is expected to have no value after 5 years, depreciation will write off £10,000 over the five years.

  If it is expected to have a value of £2,000 after 5 years, depreciation will write off £8,000 over the 5 years.

  The depreciation must be written off in a systematic way to reflect how the economic benefit is consumed. In practice it is often written off on a straight-line basis (£2,000 or £1,600 a year in this example).

Note that the way in which depreciation is written off is important for tax purposes, see BLM32500. If you think the accounting is not in accordance with GAAP you should consult your local advisory accountant.