Depreciation is the systematic allocation of an asset’s depreciable amount, its cost less its residual value, over its useful life. Under IAS 16 it starts when the asset is available for use, follows the pattern in which the asset’s benefits are used up, and is reviewed at least every year end.
What is depreciation?
A machine, a vehicle or a fit-out serves the business for several years, so its cost should not hit the income statement in the month it is bought. IAS 16 defines depreciation as the systematic allocation of the depreciable amount of an asset over its useful life (paragraph 6). The depreciable amount is the cost less the residual value: what the company expects to get for the asset at the end of its life, after disposal costs.
A few rules shape the charge. Depreciation begins when the asset is available for use, not when it is paid for (paragraph 55). Each part with a cost that is significant to the whole is depreciated separately (paragraph 43). Land generally has an unlimited useful life and is not depreciated, while buildings are (paragraph 58). Intangible assets with a finite useful life are amortised under IAS 38, which works the same way.
How is depreciation calculated?
| Method | How the charge is worked out | Suits |
|---|---|---|
| Straight-line | (Cost less residual value) divided by useful life, the same each period | Assets used evenly, such as office fit-outs |
| Diminishing balance | A fixed rate applied to the carrying amount, so the charge falls each year | Assets that give more benefit early |
| Units of production | Depreciable amount times the units used in the period, divided by total expected units | Machines whose wear follows output |
The method must reflect the pattern in which the asset’s benefits are consumed (paragraph 60). The residual value and useful life are reviewed at least at each financial year end, and any change is a change in accounting estimate, applied from then on rather than restated (paragraph 51).
What does a depreciation calculation look like?
Why does depreciation matter for finance teams in the GCC?
Depreciation is usually the largest recurring journal that no invoice triggers, so it is easy to miss in a busy close, and a missed month flatters profit. It also sits below EBITDA, so a change in depreciation moves profit but leaves EBITDA where it was. Depreciation for zakat or income tax follows the tax rules, which this page does not cover; confirm those with your adviser. The detail behind the charge lives in the fixed asset register.
Questions people ask
What is the difference between depreciation and amortisation?
Both spread a cost over a useful life. Depreciation applies to tangible assets such as equipment under IAS 16. Amortisation applies to intangible assets with a finite useful life, such as software licences, under IAS 38.
Does an asset stop being depreciated when it is idle?
Not under IAS 16. Depreciation continues while the asset is idle or retired from active use, unless it is fully depreciated, classified as held for sale or derecognised. Under a usage-based method, though, the charge can be zero when there is no production.
Is depreciation a cash cost?
No. The cash leaves when the asset is bought. Depreciation spreads that cost over later periods, which is why it is added back when moving from profit to operating cash flow.
Official and primary sources, read on the date shown. Rules change: confirm with the authority or your adviser before you act.
- AASB 116 Property, Plant and Equipment (compiled December 2016), which incorporates IAS 16: paragraphs 6, 43, 50, 51, 55, 58, 60 and 62 (read 9 October 2026)
- IFRS Foundation: IAS 16 Property, Plant and Equipment (standard page) (read 9 October 2026)
- IFRS Foundation: IAS 38 Intangible Assets (standard page) (read 9 October 2026)