An Introduction to Useful Life and Depreciation

For many entities, capital assets represent a significant investment of resources. As such, to make the most of your investment, these assets need to be actively accounted for and managed. Depreciating assets over their useful life is not only beneficial to your organization but is required by GASB 34. This overview is intended to get you started on your way to understanding these topics and more.


WHAT IS DEPRECIATION?

Depreciation is “the systematic and rational allocation of the acquisition cost of an asset, less its estimated salvage value or residual value, over the assets estimated useful life.”1 Simply said, it’s a way of allocating a portion of the cost of an asset over the period it can be used.


WHAT IS USEFUL LIFE?

Useful life is “an estimate of the average number of years an asset is considered useable before its value is fully depreciated.”1


HOW IS USEFUL LIFE DETERMINED?

According to GASB 34, to estimate useful life, “governments can use (a) general guidelines obtained from professional or industry organizations, (b) information for comparable assets of other governments, or (c) internal information.”2 If not strictly following guidelines obtained from an organization, you may find it helpful to consider an assets current condition, the quality of the asset, or how the asset will be used when estimating its useful life. Regardless, we recommend that all organizations have guidelines in place for how they plan to estimate useful life.


USEFUL LIFE ESTIMATES

Here are some examples of the useful life estimates recommended by AssetWorks.

CATEGORYDESCRIPTIONUSEFUL LIFE (yrs)
  Machinery and Equipment  Books and Multimedia Materials

5

  Machinery and Equipment  Computer Equipment

5

  Licensed Vehicles  General Automobile

8

  Machinery and Equipment  Science and Engineering Equipment

10

  Machinery and Equipment  Audiovisual Equipment

10

  Machinery and Equipment  Athletic Equipment

10

  Machinery and Equipment  Grounds and Maintenance Equipment

15

  Land Improvements  Fencing

20

  Machinery and Equipment  Playground Structures

20


HOW IS DEPRECIATION CALCULATED?

While there are several forms of depreciation including straight-line and various accelerated methods, many entities choose to apply straight line depreciation. Below is an example of how straight-line depreciation can be calculated for a playground structure.

1. To calculate depreciation, we must first identify the acquisition cost, salvage value, and useful life. For our playground structure, let’s say the cost was $21,500. We’ll use a salvage value of 0 and based on the chart above, a useful life of 20 years.

2. If we apply the equation for straight line depreciation, we would subtract the salvage value from the cost and then divide by the useful life.
The result would look something like this: ($21,500 – $0) / 20 years = $1075 annual depreciation.


Of course, there are many software programs out there that will not only help you track your organizations assets but will also calculate depreciation and produce reports for you.

How does your organization currently calculate depreciation and account for capital assets? Stay tuned for a more in depth look at topics like GASB  34, useful life and depreciation.

References:

1. http://www.irs.gov/irm/part1/irm_01-035-006.html

2. Statement No. 34 of the Governmental Accounting Standards Board (June 1999)

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