This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to understand how to deal with changes in depreciation and whether such changes are accounted for prospectively or retrospectively under FRS 102.

Whilst commonly referred to as a ‘depreciation policy’, the depreciation method used is actually an accounting estimate as detailed in FRS 102 paragraph 17.23. An entity changing from reducing balance to a straight line basis of depreciation, for example, should account for this as a change in accounting estimate in line with FRS 102 paragraph 10.16 by applying the change prospectively from the date of the change.

Both the useful life and residual value of an asset are accounting estimates. These estimates should be reviewed and updated where necessary in accordance with FRS 102 paragraph 17.19. Any amendments to either useful life or residual value are also applied prospectively from the date of change.

When an entity decides to change where a depreciation charge is presented in the accounts, for instance changing its classification from cost of sales to administrative expenses, this would be a change of accounting policy (unless, for example, there is a change in circumstance meaning that the asset is now being used in a different way – in which case the change in presentation would be actioned prospectively from the date of change). Under FRS paragraph 102 10.8, this change must result in the financial statements providing reliable and more relevant information about the effects of transactions on the entity’s financial position or performance. When this criteria is met, entities should account for this change in accounting policy retrospectively and therefore the relevant depreciation charge for the prior period should also be reclassified.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.