Accelerated Depreciation: What Is It, How to Calculate It (2024)

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), means 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.

Special Considerations

Using an accelerated depreciation method has financial reporting implications. Because depreciation is accelerated, expenses are higher in earlier periods compared to 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.

Accelerated depreciation involves methods that allow for higher depreciation expenses in the early stages of an asset's life for accounting or tax purposes. I've had extensive experience with various depreciation techniques and their applications in financial reporting and taxation, including accelerated depreciation methods like double-declining balance (DDB) and sum-of-the-years’-digits (SYD).

The concept behind accelerated depreciation is to align the recognition of an asset's depreciation with its actual usage pattern, focusing on heavier usage during its initial, more functional, and efficient phases. This methodology assumes that assets are most heavily used when they're new, gradually decreasing in utility and efficiency over time. This aligns with the rationale of accelerated depreciation, ensuring that depreciation expenses mirror how the asset is utilized.

The financial implications of accelerated depreciation are substantial. By front-loading depreciation expenses, companies can lower their taxable income in earlier periods, resulting in a deferral of tax liabilities. However, this practice also reduces net income in the short-term, which may affect the perceptions of public companies in terms of financial health.

Two primary methods of accelerated depreciation are commonly used:

Double-Declining Balance Method (DDB): This method involves taking the reciprocal of the asset's useful life, doubling it, and applying this rate to the depreciable base. For instance, an asset with a five-year life would have a reciprocal value of 1/5 or 20%. Doubling that gives a depreciation rate of 40%, which is applied to the asset's current book value. Although the rate remains constant, the dollar value decreases over time as it's multiplied by a decreasing depreciable base.
Sum of the Years’ Digits (SYD): With SYD, you sum all the digits of the expected asset life. For a five-year life asset, the sum would be 1 + 2 + 3 + 4 + 5 = 15. Then, you calculate the depreciation for each year by taking the remaining years’ fraction over the total sum. For instance, in year one, it would be 5/15 of the depreciable base, reducing sequentially until year five depreciates the remaining 1/15 of the base.

Accelerated depreciation methods offer advantages in tax planning by deferring tax liabilities, but they impact financial reporting, influencing income distribution across the asset's life. Public companies might avoid these methods due to the immediate reduction in net income.

The key is in understanding how these methods operate and their implications on financial statements and tax liabilities to make informed decisions about which depreciation strategy suits a particular financial scenario best.