9.10 Applying Depreciation to Asset Components
The valuation process is used to determine the DRC and annual depreciation expense for the asset component using the same approach as to an asset as a whole, i.e. in terms of its future economic benefits, a theme running through other authoritative sources such as IPWEA (2015b). The DRC is the value of the component’s remaining future economic benefits. For infrastructure assets, DRC is the component’s fair value.
DRC is determined by calculating (see IPWEA 2015b for illustrations of these concepts):
- depreciable amount – the amount of current replacement cost that is depreciated over the component’s useful life, less residual value
- accumulated depreciation – the value of consumed future economic benefits; for a straight line depreciation method, the accumulated depreciation is current replacement cost divided by useful life multiplied by the age of the component
- DRC – DRC equals current replacement cost less accumulated depreciation
- annual depreciation expense – annual depreciation expense is the difference between the depreciated replacement cost (carrying amount) of the asset at the start and end of the reporting period. For the straight line method of depreciation, annual depreciation expense is current replacement cost divided by useful life.