Accounting Depreciation: Legal Methods and Practices

Depreciation is not an arbitrary spreading of an expense. It is the accounting recognition of the consumption of the economic benefits expected from an asset. This definition governs everything else: the useful life adopted must reflect the actual use of the asset, not a tax optimum. The divergence between what accounting requires and what tax rules allow is precisely what makes the subject technical — and what produces most of the adjustments made on audit.

The depreciable base and the useful life

The depreciable base is the entry value of the asset reduced by its residual value, that is, the amount the company would obtain from disposing of it at the end of its use. This residual value is taken into account only if it is both significant and measurable — which, in practice, limits it to a few categories such as vehicles or certain equipment with an active secondary market.

The useful life is the period of use expected by the company, assessed asset by asset. It should not be confused with the technical service life of the equipment: a machine usable for fifteen years but which the company plans to replace after seven is depreciated over seven years.

An allowance exists for small businesses, which may adopt the useful lives accepted for tax purposes rather than the actual period of use. This simplification eases the justification burden, but it does not exempt the company from revising the depreciation schedule when the conditions of use change significantly.

Depreciation methods

Straight-line depreciation spreads the base evenly over the useful life. It is the default method, applicable to any depreciable asset, and the only one accepted in the absence of justification for a different pattern of consumption.

Declining-balance depreciation concentrates the deduction in the early financial years, by applying a coefficient to the straight-line rate. It is reserved for certain new assets listed exhaustively, and its nature is tax-driven before being accounting-driven: when it does not match the actual pattern of consumption, the gap with the accounting depreciation results in an excess tax depreciation (amortissement dérogatoire).

Units-of-production depreciation, calculated on units of activity — machine hours, kilometres, units produced — is the method that is economically the most faithful when use is irregular. It requires effective tracking of these units, failing which it cannot be justified.

The component-based approach

This is the obligation most frequently overlooked by small businesses, and it is not optional.

When an asset comprises significant elements with different useful lives, these elements must be recognised and depreciated separately. A building is thus broken down into shell and structure, façade and waterproofing, technical installations, and fittings — each with its own useful life.

The issue is not merely one of compliance. The replacement of a component is capitalised and depreciated over its new useful life, while the net residual value of the replaced component is removed from the balance sheet. Without decomposition, that same replacement is expensed, and a tax audit will reclassify it as a fixed asset, with the usual consequences described in our article on the tax audit.

What is not depreciable

Three categories come up systematically:

• Land, the value of which is not consumed. When acquiring a built property, the split between land and construction is mandatory, and a clearly unbalanced split will be corrected on audit.
• Goodwill (fonds commercial), not depreciable in principle, except where its useful life is limited and determinable. A regulated exception exists for small businesses.
• Financial fixed assets, which are subject to impairment rather than depreciation.

The distinction between depreciation and impairment is fundamental: depreciation recognises an expected, planned consumption, while impairment recognises an unforeseen loss of value. An asset may be subject to both — the reasoning is the same as that set out for provisions.

Tax limits

Three rules limit the deduction, independently of the accounting treatment adopted.

The starting point is the date of commissioning for straight-line depreciation, whereas declining-balance depreciation runs from the first day of the month of acquisition. Depreciating an asset that has been acquired but not yet commissioned is a classic mistake.

Passenger vehicles are subject to a cap on the deductible depreciation, the amount of which varies according to the vehicle's emissions. The excess portion is added back outside the accounts each year.

Minimum depreciation is the least well-known and most costly rule. A company must have recognised, at the close of each financial year, a cumulative amount of depreciation at least equal to the cumulative amount that would result from the straight-line method. Depreciation irregularly deferred — that which was not recognised when it should have been — is permanently lost for deduction purposes. Deferring depreciation to improve a loss-making result does not postpone it: it eliminates it.

Usage scenarios

Acquisition of a building. Split land and construction, then break down the construction into components. This is the point at which decomposition is straightforward; reconstructing it five years later at the time of works is considerably harder.

Loss-making financial year. Do not suspend depreciation. The minimum depreciation rule turns an apparent deferral into a permanent loss of the right to deduct.

Replacement of equipment. Check whether the replaced asset constituted an identified component. If so, the replacement is capitalised and the residual value of the outgoing component is recognised as an expense. The corresponding record-keeping discipline falls under bookkeeping.

Frequently asked questions

Which useful life should be adopted? The actual period of use expected by the company, assessed asset by asset. Small businesses may adopt the useful lives accepted for tax purposes, which simplifies the justification without exempting them from revising the schedule if usage changes.

Straight-line or declining-balance? Straight-line is the default method. Declining-balance is reserved for certain new assets and follows a tax-driven logic: when it diverges from the actual pattern of consumption, the gap results in an excess tax depreciation (amortissement dérogatoire).

Is land depreciable? No. When purchasing a built property, the split between land and construction is mandatory, and an unbalanced allocation will be corrected on audit.

Can depreciation be suspended in a loss-making year? Not without consequence. The cumulative amount recognised must remain at least equal to the straight-line cumulative amount, failing which the deferred portion is permanently lost for deduction purposes.

What is component-based depreciation? The separate recognition and depreciation of the significant elements of an asset that have different useful lives. It is mandatory as soon as these conditions are met, and is not optional.

How should a vehicle be depreciated? Like any other asset, but the deductible portion is capped for passenger vehicles, according to a scale linked to emissions. The excess is added back each year.

Key takeaways

Depreciation is justified by the actual use of the asset, never by a profit target. Three points account for most adjustments, and all of them are settled at the time the asset is capitalised rather than at the time of the audit.

The allocation first — land and construction, then components — which determines the treatment of all subsequent replacements. The consistency of the useful life next, which must be explainable other than by reference to a table. And, lastly, minimum depreciation, which means that depreciation not recognised in time is not deferred but lost. These choices fall within the broader framework of corporate taxation, where the quality of the documentation determines what survives an audit.