Partial year depreciation conventions

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marea
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Partial year depreciation conventions

Post by marea »

I have a question regarding the calculation of the depreciation in practice. Do you start to depreciate an asset based on the day when it is available for use, or you use some conventions (e.g., from the first day of the following month...) or some other ones.

"However, if individual assets in a relatively homogeneous group are regularly acquired and disposed of, one of several conventions can be adopted, as follows:
1. Record a full year’s depreciation in the year of acquisition and none in the year of
disposal.
2. Record one-half year’s depreciation in the year of acquisition and one-half year’s
depreciation in the year of disposal."

From the book: Whiley Interpretation and 2018 Application of IFRS Standards.
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exIFRS
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Re: Partial year depreciation conventions

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My experience is it depends on the sophistication of the system used to record assets. Some good ones will go to the day, but to the nearest month is not uncommon.
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Marek Muc
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Re: Partial year depreciation conventions

Post by Marek Muc »

I've read about those conversations in books but never seen in practice. I can't imagine that even simple accounting software would not be able to recognise depreciation at least starting from the neatest full month
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Marek Muc
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Re: Partial year depreciation conventions

Post by Marek Muc »

Ps. Are you considering using one of those simplifications?
marea
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Re: Partial year depreciation conventions

Post by marea »

Thank you both for your reply.

Not thinking to implement it. I was just wondering whether this was frequently used in practice.
I have seen applying "nearest full monthth" for depreciation only so far.
pub_acco
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Re: Partial year depreciation conventions

Post by pub_acco »

I've seen something similar to the second one, but on a quarterly basis. I.e. 1.5 month depreciation in the quarter of acquisition and disposal.
JRSB
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Re: Partial year depreciation conventions

Post by JRSB »

Have seen anything from the day, to the quarter. Even using quarters, would have to be pretty large (or short-life) to be material?
marea
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Re: Partial year depreciation conventions

Post by marea »

Interesting.

Thank you very much. It is interesting to hear the different approaches that companies use in practice.
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Marek Muc
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Re: Partial year depreciation conventions

Post by Marek Muc »

I wonder whether the quarterly approach makes anything easier for an entity?
JRSB
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Re: Partial year depreciation conventions

Post by JRSB »

It's common for smaller entities to do quarterly management accounts for VAT purposes, and therefore start depreciation from the following quarter for ease.
marea
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Re: Partial year depreciation conventions

Post by marea »

Do they use this approach for all classes of assets or only as stated above :......."individual assets in a relatively homogeneous group are regularly acquired and disposed"....
pub_acco
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Re: Partial year depreciation conventions

Post by pub_acco »

In the quarterly approach case, the entity uses it for all pieces of PP&E, ROU, and intangibles. It reduces some paperwork for starting depreciation to once a quarter in the idle months, and it makes the budgeting process easier because, in the busy months, the entity runs dozens of construction simultaneously and the exact date/month of completion isn't fully predictable.
marea
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Re: Partial year depreciation conventions

Post by marea »

I see. Thank you
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