102.5 - Statewide Accounting Policy - Depreciation
Policy Area: Accounting and Financial Reporting
Policy Sub Area: Capital Assets
Authority: GASB Codification Section 1400
Effective Date: 7/1/1995
Last Revision Date: 7/11/22
Policy Owner/Division: Statewide Accounting
The straight-line and units of output methods of depreciation, with an assumed salvage value of zero, are the recommended methods of depreciation. It is also recommended that depreciation for partial periods be computed using either the half-year convention or on the basis of the nearest full month. Straight-line is a time-based method used when the service life of the asset is affected primarily by the passage of time. Units of output should be used when the service life of the asset is affected primarily by the amount the asset is used. See table below for depreciation method guidelines.
Useful Life Ranges:
Depreciation is the allocation of the total acquisition cost of a capital asset over its estimated useful life. Capital asset depreciation should not be recorded at the fund level in the accounts of governmental funds. Depreciation of capital assets accounted for in a proprietary fund should be recorded in the accounts of that fund.
The tangible asset of land, certain land improvements, construction-in-progress, and inexhaustible works of art, historical treasures and similar assets are not depreciated. Land is considered to have an unlimited useful life and its salvage value is unlikely to be less than its acquisition cost. Certain land improvements may be considered to have an unlimited useful life and therefore not be depreciated. An example of a non-depreciable land improvement would include the movement or grading of dirt to prepare the land for its intended use. A non-depreciable land improvement should have permanent benefits. The right-to-use lease asset of land is depreciable for lessees. It will be depreciated over the lease term since the useful life of land is indefinite, unless the lease contains a purchase option that the lessee has determined is reasonably certain of being exercised. In this situation, the lease asset land should not be depreciated
For lessors of land, the underlying asset should not be derecognized, and the lessor should continue to apply existing guidance for capital assets.
Calculation of Depreciation for Assets Except for Right-to-Use Lease Assets
Straight-line depreciation is calculated by dividing total asset cost by estimated useful life in years. Total asset cost includes purchase price or cost of construction plus any other charges incurred to place the asset in its intended location and condition for use. Donated capital assets should be recorded at their acquisition value at the date of donation plus ancillary charges with the following exception. Capital assets donated prior to July 1, 2015 are recorded at their estimated fair value at the date of donation. Acquisition value is the price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the acquisition date. Acquisition value is a market-based entry price. Acquisition value may be calculated from manufacturers’ catalogs or price quotes in periodicals, recent sales of comparable assets, or other reliable information. Professional assistance may be helpful but is not required. For lessors of capital assets, the asset underlying the lease should not be derecognized and the lessor should continue to apply existing guidance for capital assets including depreciation and impairment. However, if the lease contract requires the lessee to return the asset in its original or enhanced condition, a lessor should not depreciate the asset during the lease term.
Calculation of Depreciation for Right-to-Use Lease Assets
Right-to-use lease assets are recorded at the present value of payments expected to be made during the lease term plus any upfront payments and ancillary charges paid to place the lease asset in service (“value of the right-to-use lease asset”). Straight-line depreciation for right-to-use lease assets (except for right-to-use lease asset – land) is calculated by dividing the value of the right-to-use lease asset by the shorter of the lease term or the useful life, unless the lease contains a purchase option that the lessee has determined is reasonably certain of being exercised. In this situation, the lease asset should be depreciated over the asset’s useful life. When applicable, straight-line depreciation for right-to-use lease asset land is calculated by dividing the present value of the payments expected to be made during the lease term by the lease term.
Estimated Useful Life
The estimated useful life of a depreciable capital asset is the period over which services are expected to be rendered by the asset. An asset's estimated useful life may differ from agency to agency. An agency's maintenance policy will affect the longevity of a depreciable asset. See table above for estimated useful life guidelines. Periodically, the estimated useful lives of depreciable capital assets should be re-evaluated for reasonableness. An estimated useful life is not reasonable if the associated capital asset is near full depreciation but will remain in use significantly longer than originally estimated. The general rule is that careful estimates of useful lives that later prove to be incorrect based on new information should be considered changes in estimates. Changes in estimates must be handled prospectively (i.e., restatement of prior years is prohibited). However, estimates of useful lives that are computed incorrectly because of lack of historical useful life experience or failure to use available information should be considered accounting errors. Corrections of errors must be treated as prior period adjustments (i.e., restatements).
Units of output depreciation are calculated by dividing total asset cost by the assets total lifetime number of hours worked or output produced. The calculation of depreciation rate per hour or per output produced is then multiplied by the number of hours used or units produced per period. For example, if a $100,000 asset has an expected lifetime production of 20,000 units, the depreciation rate is $5 per unit produced. The $5 depreciation rate is then multiplied by the units produced in the period to calculate depreciation expense.
Intangible Assets, other than leases, are classified as capital assets. For additional guidance on amortization of intangible assets, other than leases, see the Intangible Assets Policy. For additional guidance on Leases, see the Statewide Accounting Policy – Leases.
Fully Depreciated Capital Assets
Because depreciation is intended to allocate the cost of a capital asset over its entire useful life, it normally is not appropriate to report assets still in service as fully depreciated. However, because differences may occur between estimated useful lives used for depreciation computations and actual useful lives, agencies may, in limited cases; report capital assets that are fully depreciated, but only if such balances are immaterial. If the balances of fully depreciated capital assets that remain in use are material, the related estimated useful lives should be changed. Buildings are not considered fully depreciated if renovations and improvements have been capitalized as separate assets and the combined amounts (initial costs plus renovations/improvements) are not fully depreciated.
Related Documents (Memos/Forms)
- 7/1/2010 - Adjusted useful life ranges
- 1/26/2017 - Updated links
- 6/30/2017 - Updated for GASB 72 (added requirement to prospectively report donated capital assets at acquisition value); minor edits.
- 7/11/2022 – Updated for GASB 87 Leases