Corporate Financial Reporting · Property, Plant and Equipment (Ind AS 16)

Depreciation under Ind AS 16: Methods, Useful Life and Residual Value

Updated 11 October 2026 · Fact-checked

Depreciation under Ind AS 16 is the systematic allocation of an asset's depreciable amount (cost less residual value) over its useful life. To solve a question, identify components, find the depreciable amount, pick the method that matches the pattern of benefits, charge from the date the asset is available for use, and apply estimate changes prospectively.

Understand Depreciation under Ind AS 16

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is cost (or other amount substituted for cost) less residual value. The aim is not to show market value. The aim is to spread the cost over the periods that benefit from the asset.

Useful life is the period over which the asset is expected to be available for use by the entity, or the number of production or similar units expected from it. It is based on the asset's expected utility to your entity, so it can be shorter than the asset's economic life. If the entity's policy is to sell machines after five years, the useful life is five years, even if the machine could run for fifteen. Estimating it is a matter of judgement based on experience with similar assets.

Residual value is often insignificant and then ignored in the calculation. It can rise to equal or exceed the carrying amount. If it does, the depreciation charge is zero until residual value falls below the carrying amount again. Depreciation continues even if fair value exceeds carrying amount, as long as residual value does not exceed carrying amount. Repairs and maintenance do not remove the need to depreciate.

The standard lists the straight-line, diminishing balance and units of production methods. Straight-line gives a constant charge if residual value does not change. Diminishing balance gives a falling charge. Units of production gives a charge based on expected use or output. You choose the method that most closely reflects the expected pattern of consumption of the asset's future economic benefits, and apply it consistently unless that pattern changes. A revenue-based method is not appropriate for property, plant and equipment, because revenue reflects many factors besides consumption of the asset.

Land and buildings are separate assets even when bought together. Land normally has an unlimited life and is not depreciated (quarries and landfill sites are exceptions). Buildings are depreciated, and a rise in land value does not change the building's depreciable amount. Each part of an item whose cost is significant compared with the total cost is depreciated separately. Residual value and useful life are reviewed at least at each financial year-end. A change is a change in accounting estimate under Ind AS 8, applied prospectively, not a restatement of past years.

Key rules to remember

Depreciable amount: Depreciable amount = Cost (or substituted amount) − Residual value; Land is not depreciated. If residual value ≥ carrying amount, the charge is zero.
Straight-line method: Annual depreciation = (Cost − Residual value) ÷ Useful life in years; Constant charge while residual value and life do not change.
Diminishing balance method: Depreciation for the year = Opening carrying amount × Rate %; Charge falls each year. The rate is applied to the carrying amount, not to original cost.
Units of production method: Depreciation = (Cost − Residual value) × Units produced in the year ÷ Total expected units; Use when benefits are consumed by output or use.
Part-year charge: Depreciation for the period = Annual charge × Months in use ÷ 12; Starts when the asset is available for use, even if not yet used. Stops at the earlier of classification as held for sale or derecognition. It does not stop merely because the asset is idle.
Revision of estimates (prospective): Revised annual charge = (Carrying amount at review date − Revised residual value) ÷ Remaining useful life; Change in estimate under Ind AS 8. No restatement of earlier years. A method change is also treated as a change in estimate.
Review frequency: Residual value and useful life: review at least at each financial year-end; Disclose the nature and effect of a change that affects the current or later periods.

How to solve Depreciation under Ind AS 16 questions

Use this order for any numerical or theory question on depreciation under Ind AS 16.

1Split the asset into land, building and significant components. Do not depreciate land. Treat each significant component with its own cost, life and residual value.
2Write the cost of each item as recognised, and the residual value. Compute depreciable amount = cost − residual value.
3Read the question for the pattern of benefits. Choose straight-line, diminishing balance or units of production. Do not use a revenue-based method.
4Fix the start date: the date the asset is available for use, not the date it is first used or paid for. Fix the stop date: the earlier of held for sale or derecognition.
5Compute the charge for the period, with a time apportionment for part years.
6If a review changes useful life, residual value or method, take the carrying amount at the review date. Spread (carrying amount − new residual value) over the remaining life. Do not restate past years.
7Show the journal or the carrying amount at year-end, and state the Ind AS 8 and disclosure point in one line.

Quickest way: Carrying amount and remaining life shortcut

When to use it: Use this when a question changes useful life, residual value or method mid-life.

Compute the carrying amount at the review date: cost − accumulated depreciation so far.
Subtract the new residual value.
Divide by the remaining life (new total life − years already elapsed). This is the new annual charge.
For multi-component assets, run the same line for each component and add the totals.
Write one line: change in estimate, applied prospectively, disclosed under Ind AS 8.

Common mistakes in Depreciation under Ind AS 16

Depreciating land along with the building
The purchase price is a single lump sum and students depreciate the whole amount.
Fix: Split the price between land and building. Depreciate only the building. An increase in land value does not change the building's depreciable amount.
Restating past depreciation when useful life or residual value changes
Students confuse a change in estimate with a prior period error.
Fix: Treat it as a change in accounting estimate. Spread the carrying amount less new residual value over the remaining life. Past years stay as they were.
Using the original life instead of the remaining life after a revision
The revised total life is given and students divide by it directly.
Fix: Remaining life = revised total life − years already used. Check which one the question states.
Starting depreciation on the date of first use or of payment
Students link depreciation to use rather than availability.
Fix: Start from the date the asset is available for use in the manner management intends. Stop at the earlier of held for sale or derecognition. Idle assets continue to be depreciated unless a units-of-production method is used.
Selecting revenue-based depreciation because revenue falls with machine output
The method looks like units of production.
Fix: Revenue-based depreciation is not appropriate for PPE. Use output units if the benefits are consumed by output.
Applying the diminishing balance rate to original cost every year
Students copy the first-year workings forward.
Fix: Apply the rate to the opening carrying amount of each year.

Worked examples

Example 1

Kaveri Engineering Ltd bought a machine on 1 April 2023 for ₹50,00,000, with a useful life of 10 years and residual value of ₹5,00,000, depreciated on a straight-line basis. At the year-end review on 31 March 2026, management estimates the remaining useful life at 5 years (total 8 years) and the residual value at ₹2,00,000. Compute the depreciation for 2026-27 and explain the treatment.

Show the solution

Original annual depreciation = (50,00,000 − 5,00,000) ÷ 10 = ₹4,50,000.
Accumulated depreciation for 3 years (2023-24 to 2025-26) = 4,50,000 × 3 = ₹13,50,000.
Carrying amount at 31 March 2026 = 50,00,000 − 13,50,000 = ₹36,50,000.
Revised depreciable amount = 36,50,000 − 2,00,000 = ₹34,50,000.
Revised annual depreciation = 34,50,000 ÷ 5 = ₹6,90,000.
Treatment: the revisions are changes in accounting estimates under Ind AS 8. They are applied prospectively from 2026-27, and prior years are not restated. Disclose the nature and effect of the change.

Answer: Depreciation for 2026-27 and each of the next four years is ₹6,90,000, treated as a change in estimate applied prospectively and disclosed.

Example 2

Narmada Power Ltd acquired a plant for ₹1,20,00,000 that was available for use from 1 July 2026. Of the cost, ₹30,00,000 relates to a furnace lining with a useful life of 5 years and nil residual value. The remainder has a useful life of 15 years and a residual value of ₹9,00,000. Compute the depreciation for the year ended 31 March 2027 on a straight-line basis, charging each component separately.

Show the solution

Remaining part of the plant: cost = 1,20,00,000 − 30,00,000 = ₹90,00,000.
Lining: annual depreciation = 30,00,000 ÷ 5 = ₹6,00,000. For 9 months (1 July 2026 to 31 March 2027): 6,00,000 × 9 ÷ 12 = ₹4,50,000.
Remaining plant: depreciable amount = 90,00,000 − 9,00,000 = ₹81,00,000. Annual depreciation = 81,00,000 ÷ 15 = ₹5,40,000.
For 9 months: 5,40,000 × 9 ÷ 12 = ₹4,05,000.
Total depreciation = 4,50,000 + 4,05,000 = ₹8,55,000.

Answer: Depreciation for the year ended 31 March 2027 is ₹8,55,000 (lining ₹4,50,000 plus remaining plant ₹4,05,000).

Exam tips

In MCQs, watch for the traps: land is not depreciated, a change in estimate is prospective, and a revenue-based method is not appropriate for PPE.
In numericals, always show the carrying amount at the review date before the new charge. Marks go for the working, not just the final figure.
When the question gives dates, work out the months in use before computing anything. Depreciation starts when the asset is available for use.
In theory answers, name the Ind AS 8 link: a change in useful life, residual value or method is a change in estimate, and its nature and effect are disclosed.
End a decision-style answer with one line stating the method chosen and why it matches the pattern of consumption of benefits.

Practice questions from Property, Plant and Equipment (Ind AS 16)

Depreciation under Ind AS 16 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA FinalDepreciation and Component Accounting

Depreciation under Ind AS 16: frequently asked questions

Can revenue-based depreciation be used under Ind AS 16?

No. A revenue-based method is not appropriate for property, plant and equipment, because revenue is affected by price, sales volume and other factors, not only by consumption of the asset. If the asset's benefits are consumed by output, use the units of production method instead.

How is a change in useful life or residual value accounted for?

Residual value and useful life are reviewed at least at each financial year-end. If expectations differ from earlier estimates, the change is a change in accounting estimate under Ind AS 8. You apply it prospectively: carrying amount less revised residual value, spread over the remaining useful life.

Which depreciation method should I choose under Ind AS 16?

Choose the method that most closely reflects the expected pattern of consumption of the asset's future economic benefits. The standard lists straight-line, diminishing balance and units of production. Once chosen, apply it consistently unless the expected pattern changes.

Is land depreciated under Ind AS 16?

Generally no. Land has an unlimited useful life, so it is not depreciated, apart from exceptions such as quarries and landfill sites. Buildings on the land are depreciated, and a rise in land value does not change the building's depreciable amount.

Does depreciation stop when an asset is idle?

No. Depreciation does not stop merely because the asset is idle or retired from active use. It stops at the earlier of the date the asset is classified as held for sale and the date it is derecognised. The exception is a units of production method, where the charge is zero when there is no output.