The Systematic Allocation of Capital Cost
Depreciation is the systematic and rational allocation of the depreciable amount of an asset over its estimated useful life. It represents the consumption of the asset’s service potential or economic benefits during the reporting period. It is a non-cash expense that is mandatory under full accrual frameworks.
Selecting a Depreciation Methodology
Public entities select a depreciation method that reflects the pattern in which the asset’s economic benefits or service potential are expected to be consumed:
  • Straight-Line Method: Allocates an equal financial charge across every year of the asset’s useful life. This is the default method for the vast majority of public assets (e.g., office buildings, administrative vehicles) due to its simplicity.
  • Units-of-Production Method: Allocates depreciation based on the expected use or physical output of the asset (e.g., hours flown for a military transport aircraft, or kilometers driven for specialized maintenance machinery).

Factors Governing Useful Life Estimation
Estimating the useful life of a public asset requires balancing technical engineering data with operational government realities. Accountants must evaluate:
  • Expected Physical Wear and Tear: Governed by operational intensity and the entity’s historical maintenance schedules.
  • Technical or Commercial Obsolescence: Highly critical for digital government assets, IT networks, and specialized healthcare equipment.
  • Legal or Regulatory Limits: Such as expiration dates on underlying land leases or safety certifications. 
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