Comparison of Depreciation Methods in “International Accounting Standard 16 Property, Plant and Equipment” and an Application

Abstract

As property, plant and equipment are used, their values decrease; they wear out and become outmoded. Expensing of the impairment of property, plant and equipment is called depreciation. To spread depreciation expenses over periods, to assist in the calculation of production costs, to provide auto financing, and to ensure that property, plant and equipment are seen at a fair value on the financial statements are the functions of depreciation. According to IAS 16, the objective of that standard is “to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment.” Depreciation methods stated in IAS 16 are the straight-line method, the diminishing balance method and the units of production method. In this study, a hypothetical example is developed and depreciation calculations are made based on these depreciation methods and the results obtained are compared.