depreciating the costs over time yields a better matching of costs to the periods in
which the related assets are used to generate revenues. Depreciation is essentially a
rational allocation of the costs over the estimated useful life of an asset. There are
many methods of depreciation used in the various countries, including straight-line,
units-of-output, sum-of-the-years’ digits, and accelerated methods. The major differ-
ence between the various methods lies in how the costs are allocated among the
years. The units-of-output method tries to match the costs against revenues gener-
ated. The accelerated method allocates more of the costs to expense in the early
years, on the theory that an asset will usually be more efficient and lose a higher per-
centage of its value in the early years of its life. In this way, higher revenue is
matched against higher costs. The simplest and most commonly used method of de-
preciation is the straight-line method. This method allocates cost equally over the es-
timated life of the asset. In many countries, a specific depreciation method is not re-
quired to be used. However, for countries with accounting standards that are heavily
influenced by tax rules, such as Japan, Germany, and France, the general rule is that
a company must use the same depreciation method for both book and tax purposes.
Depreciation schedules for a 10-year asset costing 1,000 ECUs under the straight-
line, sum-of-the-years’ digits, and double-declining-balance-depreciation methods
can be seen in Exhibit 12.4.
Another factor that must be considered in this area is whether a fixed asset should
be reflected in the balance sheet at historical cost or current fair value. Historical cost
comprises the original recorded cost less accumulated depreciation; no revaluation is
allowed under this approach for amounts in excess of the original cost. (However, if
the value of an asset has been impaired below its depreciated historical cost, a write-
down is required.) This usually is viewed as a conservative balance sheet approach
12.6 FINANCIAL STATEMENT EFFECTS 12 • 13SL SYDa DDBb
Year 1 100 182 200
Year 2 100 164 160
Year 3 100 145 128
Year 4 100 127 102
Year 5 100 109 82
Year 6 100 91 66
Year 7 100 73 66
Year 8 100 55 65
Year 9 100 36 65Year 10 ––––– (^100) ––––– (^18) ––––– 65
1,000 1,000 1,000
aSYD—calculates each year’s percent depreciation by divid-
ing the number of years remaining at the beginning of the
year by the sum of the years’ digits (e.g., in year one, the per-
cent is computed as 10 divided by 10 + 9 + 8 + 7... 1).
bDDB—completed by applying a rate of double the straight-
line rate to the remaining undepreciated balance. Once a
straight-line method for the remaining life yields a higher de-
preciation amount, a switch is usually made to straight-line.
Exhibit 12.4. Sensitivity of Depreciable Expense to Choice of Depreciation Method.