Book depreciation: spreading the value of your assets over time

Your machines wear out with production, your software becomes obsolete with new technologies, your buildings age... It's an unavoidable economic reality: most of the assets your business uses lose value over time. Your accounts need to reflect this gradual decline in value. This is the role of accounting depreciation: a technique that spreads the initial cost of an asset over its expected useful life. Far from being a simple entry, depreciation has a tangible impact on your results, your balance sheet and your tax position. How do you know which assets to depreciate? On what basis should depreciation be calculated? For how long and at what rate? The General Chart of Accounts provides a precise framework for answering these questions. Understanding asset depreciation is essential for sound financial management. By mastering this technique, you can better anticipate the impact on your cash flow and optimise your investment strategy. What's more, an in-depth knowledge of depreciation can help you avoid mistakes that could cost your company dearly in a tax audit.

Identifying depreciable assets

Not all assets on the balance sheet can be depreciated. The first step is therefore to identify those that must be depreciated. According to Article 214-1 of the French General Chart of Accounts, a depreciable assets is an asset for which use by the entity is determinable. What does this mean?

The use of an asset is considered to be determinable when the use that the company intends to make of it is limited in time. This limitation can result from several factors, often combined:

• Physical wear and tear : repeated use or exposure to the elements gradually degrades the asset (a machine, a vehicle).
• Technical obsolescence : technological advances render the asset less efficient or obsolete (a computer, software).
• Legal or contractual limits : the period of use is fixed by law or contract (a patent whose protection expires, a right of use limited in time).

The PCG specifies that these criteria are not exhaustive. If several factors limit the useful life, the shortest period should be used to determine whether the asset is depreciable and for how long.

The key analysis is that of consumption of expected economic benefits of the asset. If the company expects to consume these benefits over a limited period, then the asset is depreciable. This consumption can be measured in units of time (usually years) or, if this better reflects reality, in other units of work, such as the number of parts produced by a machine, the number of kilometres travelled by a vehicle, and so on.

As a result, certain assets are generally not depreciated because their useful life is considered to be indefinite. This is typically the case for land (with some exceptions such as mineral deposits - quarries, mines - whose contents are depleted). The commercial fund (non-identifiable items acquired in a takeover: customer base, reputation, etc.) is not depreciable in principle either, as it is assumed that it is maintained or even develops with the business. It can only be depreciated in exceptional cases where the company can demonstrate that its use is limited in time (for example, linked to a non-renewable fixed-term contract). Financial assets (equity interests, etc.) are not depreciable either, but may be written down.

Calculating the depreciable amount

Once an asset has been identified as depreciable, the amount to be allocated over its useful life must be determined. This amount is called the depreciable base.

The rule, defined in article 214-3 of the French General Chart of Accounts, is as follows: Depreciable Base = Gross value of asset - Residual value

La gross value is generally the asset's historical cost, i.e. the value at which it is recorded on the balance sheet (acquisition cost or production cost, as detailed in our previous article). If the asset has subsequently been revalued (a rare and regulated operation), the revalued value becomes the gross value. It is also essential to monitor the gross value over time, as it may no longer reflect the fair value of the asset due to wear and tear or market changes. In this context, assessment of impairment losses becomes crucial in determining whether a provision should be recorded in the accounts. A regular and rigorous assessment helps to ensure that the financial statements are presented fairly and in accordance with accounting standards. A analysis of valuation methods is essential to ensure that the gross value of assets is maintained at a representative level. This may involve examining the valuation approaches used, whether based on market comparables or discounted cash flow models. By incorporating this analysis, companies can better anticipate the impact of fluctuations in value on their financial position.

La residual value is an important concept, but is often neglected or non-existent in practice. It corresponds to the net amount that the company expects to obtain from the sale of the asset at the end of its estimated useful life, after deduction of disposal costs (costs of putting it up for sale, dismantling, etc.). Please note that the General Accounting Principles specify that this residual value is deducted from the gross value to calculate the depreciable amount only if it meets two cumulative conditions: it must be significant (i.e. not negligible in relation to the cost of the asset) AND reliably measurable from the outset. In practice, for many assets, the expected resale value at the end of their useful life is considered to be nil or insignificant, or difficult to estimate in advance. In this case, the depreciable amount is simply equal to the gross value. However, for certain assets such as vehicles or specific industrial equipment, a significant residual value may exist and must be taken into account.

Defining the depreciation schedule

The depreciation schedule is the roadmap that details how the depreciable base will be allocated over the useful life of the asset. It reflects the rate at which the company expects to consume the future economic benefits of the asset (PCG, art. 214-4). Defining this plan is the responsibility of the company's management and is based on two key elements: the useful life and the depreciation method.

La useful life (or depreciation period) is the period over which the company expects to use the asset. It must be estimated realistically when the asset is acquired. This accounting useful life may differ from the technical or physical life of the asset. For example, a company may plan to replace its computers every 4 years to keep up with the latest technology, even though the computers could technically operate for longer. This 4-year useful life will be used for depreciation purposes.

Le amortisation method defines the rate at which the depreciable amount is allocated over the useful life. The aim is to choose the method that best reflects the way in which the economic benefits are consumed (PCG, art. 214-14). The main provisions of the PCG are as follows:

• Linear mode : the depreciable amount is spread equally over each year of the useful life. This is the simplest and most common method. The PCG specifies that it is applied by defaultif no other method is deemed more appropriate to reflect the rate at which benefits are consumed.
• Unit-based mode : depreciation is not calculated on the basis of time but on the basis of the actual use of the asset (number of units produced, number of hours of operation, kilometres travelled, etc.). This method is more appropriate when the wear and tear of the asset depends more on its intensity of use than on the simple passage of time. For example, depreciating a machine according to the number of parts it produces.
• Degressive (or accelerated) mode : This method results in higher annual depreciation rates at the beginning of the asset's life, decreasing thereafter. Although it can sometimes reflect a more rapid consumption of benefits at the outset, it is best known as a tax systemThis is authorised by the General Tax Code for certain new assets in order to encourage investment. If a company uses the declining balance method for tax purposes when the straight-line method is considered to be more economically relevant (in accounting terms), it will have to record straight-line depreciation in its accounts and recognise the difference with the declining balance method via a specificaccelerated depreciation (which is a form of temporary "over-amortisation" for tax purposes, treated as an exceptional charge or write-back depending on the case).

The company must apply the depreciation method chosen consistently for all assets of the same nature with identical conditions of use, in order to ensure the comparability of the accounts.

Start date and accounting for depreciation

When should you start depreciating an asset? Article 214-11 of the French General Chart of Accounts (PCG) is clear: depreciation begins when date of commencement of consumption of economic benefits attached to it. This date usually corresponds to the date of commissioning This is not necessarily the date of purchase or the date of invoice. This is not necessarily the purchase date or the invoice date.

Once the depreciation schedule has been defined (basis, duration, method) and the start date has been set, the company must record a provision for impairment in the balance sheet. depreciation charge at the end of each financial year. This charge represents the portion of the asset's value consumed during the year. It is recorded as an expense in the income statement and deducted from taxable profit (except for accelerated depreciation, which is treated differently for tax purposes).

The French General Chart of Accounts (art. 214-10) insists on the mandatory nature of this recording: the depreciation charge must be entered in the accounts even if there is no or insufficient profit. Depreciation cannot be "deferred" on the grounds that the company is making a loss. Depreciation reflects the consumption of real economic value, independently of the result for the financial year. What's more, taking depreciation into account is all the more crucial in the context of carbon quotas and environmental issuesThis is an area where the value of assets can fluctuate according to regulations and societal expectations. Ignoring these depreciations could distort the company's economic vision and mask the true impact on its resources and sustainability. Rigorous, transparent management of depreciation is therefore essential if we are to navigate effectively in the current economic climate.

Revision of the depreciation schedule

A depreciation schedule is defined when the asset is acquired, based on the estimates and forecasts available at that time. However, reality may change. Article 214-15 of the French General Chart of Accounts therefore states that the depreciation schedule must be revised if any significant changes occur.

This review is mandatory in two main cases:

1. If there is a significant change in intended use of the asset. This may concern the period of use (for example, we decide to keep a machine longer than initially planned) or the rate of consumption of the benefits (for example, a machine produces much more or much less than expected, if we use the units of work method).
2. Following the recognition or reversal of an impairment loss on the asset. As we will see in a later article, an impairment loss reduces the carrying amount of the asset. This new value then becomes the new basis for depreciation over the remaining useful life.

The revision of the depreciation schedule is of a prospective. This means that it does not change the depreciation already booked in the past, but adjusts the charges for future years, from the date of the revision.

Information in appendix

Transparency is essential when it comes to depreciation. For this reason, the French General Chart of Accounts (PCG) requires that the notes to the annual accounts provide detailed information. For each significant category of fixed asset, the company must indicate :

• The depreciation periods or rates used.
• Depreciation methods used (straight-line, units of production, etc.).
• The item in the income statement where allocations are included.
• The nature and impact of any significant changes in accounting estimates (change in duration, method, residual value, etc.).
• If the component approach is used, details for each component (gross value, duration, mode, etc.).

In addition, the notes to the financial statements must include standard tables (provided for in Articles 832-1 and 832-2 of the French General Chart of Accounts) showing movements in the gross value of fixed assets and accumulated depreciation during the year (increases, decreases, charges).

Depreciation reflects the consumption of the value of your investments. A well-defined plan ensures reliable accounting and tax optimisation. Contact us to validate or adapt your depreciation methods.

Sources

• General Chart of Accounts (as issued in particular by ANC Regulation no. 2014-03 and subsequent updates), Articles 214-1, 214-3, 214-4, 214-6, 214-7, 214-8, 214-10, 214-11, 214-14, 214-15, 831-2, 832-1, 832-2.
• Code Général des Impôts (for specific tax rules such as degressive depreciation).