DEPRECIATION METHODS:
The depreciation
1. Straight-line method: constant use of the asset over its useful life + the
total amount od depreciation is divided by the number of years = constant
deprecation over the years
2. Diminishing balance method: a depreciation change that is higher in the
early years of the asset, and that is less in the last years-> it is useful for
assets that have higher revenue generate, or where the maintenance charges
tend to increase during later years = in those cases, this method may provide
the most satisfactory allocation of cost
Fixed percentage to be applied over the year = 100 * (1 radice quadrata con
elevato il numero degli anni S/C)
3. Units of production method (the sum-of-the-units method): a charge
based on the expected use or output of the asset. In case the company has
big orders by important clients (costumized depreciations) or for aircrafts
Depreciation charge per unit produced = (cost-residual value) / number of units
produced
Moltiply this unit amount for the Net book value of each year
—> the depreciation of the last year will be higher than the earlier ones because
the net book value for the last years is higher
Tradition sometimes leads an enterprise to select the method used by
companies in its industry to enhance comparability
• sometimes one method provides far superior matching of expense and
revenue
• Sometimes the method is chosen to present the life-cycle cost of the asset
• sometimes, companies use different method for depreciation for different parts
of the aircrafts-> it is allowed = enterprises do not necessarily use the same
depreciation methods for all types of depreciable assets
The higher the life-value, the less is the depreciation of each year
IFRS said that the company can changes the method but with the justification in
the notes of the method and eventual changes in the used methods
REVIEW OF DEPRECIATION METHODS
The deprecation method applied to an item of PP&E should be reviewed at least
at the end of each financial year
-> if the usage pattern of the asset has changed, the depreciation method
should be change accordingly = changes in the calculations
—> a change in depreciation method is accounted for as a change in an
accounting estimate in accordance with the requirements of IAS 8
Lufthansa:
• extension of depreciation period = increase the profitability (reducing the year
depreciation)
• Reduction of the book value = increase the depreciable amount, increase the
depreciation charges = reduction of profitability
At the end, the results are: positive operating profit impact + effects on the
dividends policy
