10.1: Definition
IAS 16.50 indicates that the depreciable amount of an asset should be allocated on a systematic basis over its useful life. This description captures one of the key elements of depreciation concept: it is an allocation of the asset's cost.
Many people often associate the idea of depreciation with a decline in value of the asset. Although it is possible that the depreciation calculated approximates the loss in value of the asset as it is used, there is no guarantee that this will be true. It is important to appreciate that the purpose of accounting depreciation is to match the initial cost of the PPE asset to the periods that benefit from its use. Depreciation does not provide an estimate of the change in an asset's fair value. Rather, it simply provides a way to allocate asset costs to the correct accounting periods.
The description above also identifies three key concepts:
- The depreciable amount
- The useful life of the asset
- The basis (method) used to calculate depreciation.
A further requirement of the standard is that significant components be depreciated separately. We will deal with each of these elements separately.