Depreciation - Straight Line and Reducing Balance

[Seamus Wong]

Hello,

Given a scenario whereby a firm has used an incorrect depreciation method to depreciate one of their assets (e.g. they used Straight-line method of depreciation to depreciate a vehicle), can they change to an alternative method (from straight-line to Reducing Balance) during that assets useful life?


Here is how I would tackle a question relating to this, but I am unsure if it is correct.

A business shouldn't change depreciation methods because it undermines the demands of comparability, since the amount of depreciation that would be recorded in the different periods would be derived from different calculations - with straight-line using the historical cost of the asset while the reducing balance method uses the Carrying Value.
This inconsistency in the calculation of the depreciation expense between periods means that management cannot make effective comparisons between the profit reported at the end of each period, which can adversely affect the quality of their decision making, further breaching the demands of relevance.
However, provided that an incorrect method has been chosen initially, the business can switch the depreciation method so that a more accurate profit figure can be reported, and thus more informed decisions can be made by management - which upholds relevance.

thanks

[jurisprudence]

Hey, I really like the way you’ve tackled this question. Here are some things to consider:
 
• When writing answers about which depreciation method is more appropriate, I would recommend including the phrase ‘revenue-earning pattern’.

Here’s an example of how you would incorporate that into a question such as this one.

“Management should select the depreciation method that best matches the revenue-earning pattern of the asset, so that expenses and revenues are matched for the period. If an inappropriate method has been chosen initially, the business may be able to switch depreciation methods so that a more accurate profit figure can be determined under accrual accounting”.

• If a business does change depreciation methods, this must be disclosed in the notes of its financial reports.
• I would be wary about using terms such as ‘incorrect’ and ‘cannot’ in responses. In VCE, opting for phrases such as ‘more appropriate’ or ‘may not be able to’ are much safer alternatives when writing responses.

Other than that, this is a great response! Keep up the good work!