What Is Accelerated Depreciation?
Accelerated depreciation is any method of depreciation used for accounting or income tax purposes that allows greater depreciation expenses in the early years of the life of an asset.
Accelerated depreciation methods, such as double-declining balance (DDB), mean there will be higher depreciation expenses in the first few years and lower expenses as the asset ages. This is unlike the straight-line depreciation method, which spreads the cost evenly over the life of an asset.
Key Takeaways
- Accelerated depreciation is any depreciation method that allows for the recognition of higher depreciation expenses during the earlier years.
- The key accelerated depreciation methods include double-declining balance and sum of the years’ digits (SYD).
- Accelerated depreciation is unlike the straight-line depreciation method, where the latter spreads the depreciation expenses evenly over the life of the asset.
- Companies may use accelerated depreciation for tax purposes, as these methods result in a deferment of tax liabilities since income is lower in earlier periods.
Understanding Accelerated Depreciation
Accelerated depreciation methods tend to align the recognized rate of an asset’s depreciation with its actual use, although this isn’t technically required. This alignment tends to occur because an asset is most heavily used when it’s new, functional, and most efficient.
Because this tends to occur at the beginning of the asset’s life, the rationale behind an accelerated method of depreciation is that it appropriately matches how the underlying asset is used. As an asset ages, it is not used as heavily, since it is slowly phased out for newer assets.
Special Considerations
Using an accelerated depreciation method has financial reporting implications. Because depreciation is accelerated, expenses are higher in earlier periods than in later periods. Companies may utilize this strategy for taxation purposes, as an accelerated depreciation method will result in a deferment of tax liabilities since income is lower in earlier periods.
Alternatively, public companies tend to shy away from accelerated depreciation methods, as net income is reduced in the short term.
Types of Accelerated Depreciation Methods
Double-Declining Balance Method
The double-declining balance (DDB) method is an accelerated depreciation method. After taking the reciprocal of the useful life of the asset and doubling it, this rate is applied to the depreciable base—also known as the book value, for the remainder of the asset’s expected life.
For example, an asset with a useful life of five years would have a reciprocal value of 1/5 or 20%. Double the rate, or 40%, is applied to the asset’s current book value for depreciation. Although the rate remains constant, the dollar value will decrease over time because the rate is multiplied by a smaller depreciable base each period.
Sum of the Years’ Digits (SYD)
The sum-of-the-years’-digits (SYD) method also allows for accelerated depreciation. To start, combine all the digits of the expected life of the asset. For example, an asset with a five-year life would have a base of the sum of the digits one through five, or 1 + 2 + 3 + 4 + 5 = 15.
In the first depreciation year, 5/15 of the depreciable base would be depreciated. In the second year, only 4/15 of the depreciable base would be depreciated. This continues until year five depreciates the remaining 1/15 of the base.
What Do Accelerated Depreciation Methods Do?
Accelerated depreciation methods usually align the recognized rate of an asset’s depreciation with its actual use, but this isn’t technically required. This alignment usually occurs because an asset is most heavily used when it’s new, functional, and at its most efficient.
What Is the Rationale Behind Accelerated Depreciation Methods?
The rationale behind an accelerated depreciation method is that it appropriately matches how the asset is used. As an asset ages, it is not used as heavily—it is slowly being phased out for newer assets.
How Does the Accelerated Depreciation Method Affect Financial Reporting?
Because depreciation is accelerated, expenses are higher in earlier periods compared to later periods. Companies may utilize this strategy for taxation purposes, because an accelerated depreciation method will result in deferred tax liabilities since income is lower in earlier periods.
What Are the Types of Accelerated Depreciation Methods?
There are two main types:
- Double-declining balance(DDB), also known as the reducing balance method. It counts an expense more rapidly than straight-line depreciation, which uses the same amount of depreciation each year over an asset’s useful life. It also depreciates assets twice as quickly as the standarddeclining balance method.
- Sum of the years’ digits (SYD), which takes an asset’s expected life and adds together the digits for each year. Each digit is then divided by this sum to determine the percentage by which the asset should be depreciated each year, starting with the highest number in year one.
The Bottom Line
Accelerated depreciation refers to any depreciation method used for accounting or income tax purposes that allows greater depreciation expenses in an asset’s early years. Accelerated depreciation methods mean higher depreciation expenses in the first few years and lower expenses as the asset gets older.
