11.01 Rates and Methods of Depreciation
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Issued June 1998
Purpose
This section provides information on issues associated with measuring, calculating and recording
depreciation on B.C. Hydro assets.
Overview
Statement of Accounting Policy 10.02 Rates and Methods of Depreciation outlines B.C. Hydro's
accounting policies for depreciation and provides details on how depreciation is calculated and
maintained. This section outlines the basis for depreciation and reviews the various methods of
measuring and calculating depreciation in greater detail.
Depreciation is recorded on all capital assets in-service, except land, including assets which have
previously been in-service but are temporarily idle. Capital assets under construction, or assets
held for future use which do not currently provide service to B.C. Hydro, are normally not
depreciated.
For accounting purposes, it is commonly assumed that consumption occurs evenly over an asset's
productive life on a straight-line basis. The straight-line assumption is used for the majority of
B.C. Hydro's capital assets. However, for certain types of assets which produce in a distinctive
pattern, productive life may be more properly defined by the pattern of production rather than by
the span of productive life. This assumption is applied to depreciate vehicles on a modified
double declining balance method.
SAP 10.02 – Rates and Methods of Depreciation
1. The following methods are used to calculate depreciation expense:
a) straight-line for all categories of capital assets except vehicles
b) declining-balance for vehicles.
2. Under either the straight-line or declining-balance method, depreciation expense is calculated
by one of:
a) the broad-group procedure, which calculates depreciation on the cost of depreciable
assets in service at the beginning of each month.
b) the individual-unit procedure, which calculates depreciation on the cost of depreciable
assets from the date they are placed in service.
3. Using either the broad-group or individual-unit procedure, original depreciation rates are
determined by the whole-life technique, total-life basis:
When depreciation rates are revised, the remaining-life technique, total-life basis is used:
4. For assets sold or transferred to the Abandoned Capital Assets, Assets Held for Future Use,
or Capital Assets Held for Sale accounts which were previously depreciated by the broad-group
procedure, depreciation expense is recorded on the assets up to the end of the year in which the
asset was sold or transferred. For all other depreciable assets sold or transferred to these
accounts, depreciation expense is recorded up to the end of the month prior to the month of
transfer or sale.
5. Capital leases will be depreciated over the lease term unless ownership passes to BC Hydro
or the lease contains a bargain purchase option, in which case the lease will be depreciated over
its estimated service life.
6. A leasehold improvement will be depreciated over the term of the lease, unless the
improvement can be transferred and used at another location. Transferable leasehold
improvements will be depreciated over their estimated service lives.
Responsibility
1. The Controller's Division (CD) is responsible for:
(a) The co-ordination of depreciation studies for general assets and, ultimately, for the
selection of an appropriate depreciation policy.
(b) Establishing policies for the frequency of business units conducting depreciation studies.
(c) The establishment of appropriate depreciation rates based on recommendations by
business units. CD approves requests for revisions to the service life of an Asset Profile
ID prior to the implementation of the change by the Group Controller.
2. Business units are responsible for:
(a) The determination of appropriate depreciation rates and notification to CD when changes
in rates are required.
(b) Reporting and providing technical support for any recommended changes to be made to
the planned retirement date of an Individual Asset to CD.
(c) Conducting depreciation studies of Electic System assets and providing technical support
for the preparation of depreciation studies on general assets.
The balance of this section is for information purposes only.
Rates and Methods of Depreciation
The measurement of depreciation may be divided into three elements:
1. Estimating Service Life
Estimating service life involves choosing the unit for measuring service life, for example,
time or units of production, and then estimating how many units of service are represented by
the asset.
Service life is estimated by reference to depreciation studies which are discussed below.
Depreciation studies assist in the assessment of the productive life and capacity of that asset
under various assumptions related to obsolescence risk, maintenance patterns, risk of loss and
destruction and various other factors which may affect the ultimate productive capability of
the asset. For example, the estimated service life of an asset would normally be reduced if it
is anticipated that alternative technologies may result in the need to replace assets prior to
full service, capacity utilization of the asset.
2. Determination of Depreciable Base
Establishing the depreciable base involves determining the net cost of the asset by
considering factors such as disposal and restoration costs, and salvage values of the asset.
The total depreciable base of an asset or group of assets is normally based on the acquisition
cost of the asset. This includes all costs normally incurred to acquire and place the asset inservice. Determination of the depreciable base of an asset also considers the costs of
disposing of the asset at the end of its useful life, as well as amounts which may be recovered
through salvage. A depreciation method is then established to provide for periodic
depreciation charges, net of any salvage value or disposal costs.
(a) Salvage and Removal Costs
The estimated salvage value of an asset represents the estimated recovery value which
may be realized through disposal of a capital asset at the end of its useful life to B.C.
Hydro. Net salvage value is discussed in Section 12.01 Provision for Future Removal
and Site Restoration Costs of this manual. A salvage value arises when B.C. Hydro
anticipates proceeds from the disposal of assets when they still have service ability, or
otherwise through the scrap value received on the disposition of the asset.
Alternatively, costs may be incurred in the retirement of the asset. For example, costs
may result from the need to scrap or remove the asset, for site cleanup or for
demolition of assets. These costs are considered as a component of the cost of
receiving service from the asset, and therefore are included in the calculation of the
asset's depreciable base.
3. Method of Allocation
Choosing the method of allocation involves determining how service units are charged to
each accounting period, and determining whether each service unit should be given the same
value.
(a) Depreciation Methods
(i)
Straight-line method
Under this method, the service capacity of the capital asset unit is measured
by reference to periods of time. Periodic depreciation charges are computed
by dividing the total amount to be amortized by the number of accounting
periods included in the service life of the asset. The result is level periodic
charges over the life of the capital asset. The straight-line method is used for
all B.C. Hydro assets except for vehicles.
(ii)
Declining balance method
Under this method, a percentage depreciation rate is computed which, when
applied to the net book value of the asset at the beginning of each period,
results in writing the asset down to its salvage value over the service life of
the asset. The result is decreasing charges in the later years of service of the
asset. A modified double declining balance method is used at BC Hydro
whereby the depreciation method is automatically switched to straight-line at
the beginning of the year in which the straight line amount is greater than the
declining balance amount. At present this method is only applied to vehicles.
(b) Depreciation Procedures
(i)
Individual Unit Procedure
Under the individual unit procedure, depreciation charges related to each asset
are separately calculated and accumulated. Retirement of the asset may then
result in a gain or loss depending on salvage and removal costs. The
individual unit procedure is applied only to assets classified as Individual
Assets.
(ii)
Broad Group Procedure
Under the broad group concept, annual or accumulated depreciation charges
are not attributed to individual assets. Rather, each depreciable asset pool is
assumed to have an average service life. Every item in the pool is then
attributed with the life of the pool and is assumed to survive for its estimated
service life. The broad group procedure is used for all assets except those
classified as Individual Assets.
(c) Depreciation Techniques
(i) Whole-Life
Under the whole-life technique, depreciation rates are calculated using the
total average expected service life of the asset. Depreciation studies are
performed periodically to review past experience and future expectations in
order to determine the expected total service life of an asset or group of assets.
A depreciation rate is calculated which will result in allocation of the total
costs of the asset over its service life.
(ii) Remaining-Life
Under the remaining-life technique, depreciation rates are calculated using the
remaining service life of the asset, or group of assets. The undepreciated
balance of an assets, or pool of assets, is depreciated over the estimated
remaining service life of the asset or pool of assets. The remaining life method
rate allocates any excess or deficiency in depreciation over the remaining life
of the asset. The PeopleSoft Asset Management System (PS AM) uses the
remaining-life technique.
Depreciation Studies
1. Establish Appropriate Policies
B.C. Hydro periodically performs depreciation studies to determine the appropriate
depreciation policies for various assets or asset pools and to ensure that existing depreciation
policies continue to be appropriate. Depreciation studies will identify the mortality
characteristics of depreciable assets. In particular, the productive life, anticipated
maintenance, salvage value and removal costs of assets are analyzed through a review of
factors which may limit the usefulness of the asset. This information is used to determine
appropriate rates and methods of depreciation as well appropriate net salvage rates for
purposes of providing for future removal and site restoration costs over the service lives of
capital assets.
2. Assess Adequacy
Depreciation studies may also be used on an ongoing basis to test the adequacy of the
depreciation provision or to assess whether the assumed service capacity and life of an asset
is reasonable and the methods used for allocating the costs of the asset are fair. Mortality
characteristics of major depreciable assets, or classes of assets are reviewed periodically and,
if expectations are significantly different from previous estimates, depreciation rates are
adjusted for current and future periods.
3. Factors Considered
Factors which are often considered when performing depreciation studies include the effects
of physical deterioration, functional or economic factors such as obsolescence or inadequate
capacity, and risks attached to destruction or loss of assets. B.C. Hydro assesses these factors
based on the expectation of the service life, pattern of use, and maintenance schedule for the
assets. Reference is also made to engineering studies, to historical data for similar assets, and
to B.C. Hydro's in-house technical resources as well as those of suppliers and other utilities.
Accounting for Depreciation
1. Initiating Depreciation
The monthly charge to record depreciation is calculated based on the net depreciable balance
of assets in-service at the beginning of each month. Depreciation normally commences the
first full month after the asset is in service and detailed in PS AM
2. Calculation and Recording of Depreciation
Monthly depreciation provisions are calculated by PS AM and allocated to each Business
Unit based on the assets owned by the Business Unit. Depreciation charges are calculated
using appropriate rates which reflect the anticipated service life of the asset.
Accumulated depreciation balances are maintained by asset pool for Mass Assets, and on a
specific asset basis for Individual Assets.
Example: Depreciation/Amortization Calculation,
Remaining Life Technique
Annual Depreciation
Therefore if,
Original Cost
Accumulated Depreciation
Remaining Life
Then,
Annual Depreciation Expense would be
20X1
=
=
=
=
$100
0
10 years
=
$100 + 0
10 years
$10 / year
=
20X2
Original Cost + Accumulated Depreciation
Remaining Life (in years)
=
$100 + (-10)
9 years
=
$10 / year
The remaining life method treats all changes in estimated useful life prospectively:
Therefore if,
Original Cost
=
$100
Accumulated Depreciation
=
0
Remaining Life
=
10 years
Annual Depreciation Expense
=
$ 10 (as calculated above)
After 5 years.
Original Cost
Accumulated Depreciation
Remaining Life
=
=
=
$100
(50)
5 years
If the estimate of remaining life is now revised from 5 years to 7 years, annual depreciation
expense would be:
Original Cost
=
$100
Accumulated Depreciation
=
(50)
Remaining Life
=
7 years
Annual Depreciation Expense
=
$100 + (-50)
7 years
=
$ 7.14 / year
References
Capital Asset Accounting Manual 3.01
3.02
12.01
12.02
Statement of Accounting Policy 10.02
E-Mail inquiries to: CAAM Contact
Last Update: April 2003
Capital Asset Unit
Asset Types
Estimating the FRSR Provision
Amortization of FRSR Costs
Rates and Methods of Depreciation